The National Audit Office of Denmark

Copenhagen, 9 January 2006 RN SEKR01/06

 

Factual memorandum to the Public Accounts Committee on the annual report, statement of assurance and special reports of the Court of Auditors concerning the financial year 2004

I. Summary

1. The purpose of this memorandum is to inform the Public Accounts Committee (PAC) about the annual report and special reports of the European Court of Auditors (hereinafter “the Court”) for the financial year 2004. In addition, the intention is to inform the PAC about the Commission’s communicationon a “Roadmap to an Integrated Internal Control Framework” issued in June 2005. Finally, I will inform the PAC about the cooperation between the Court and the audit institutions of the Member States.

2. The annual report provides an account of the financial audit performed by the Court and includes the Court’s statement of assurance regarding the financial year 2004. The special reports present the results of the Court’s performance audit and are published on an ongoing basis throughout the financial year.

3. The Court’s statement of assurance is divided into two parts – one dealing with the reliability of the accounts, the other with the legality and regularity of the underlying transactions. It appears from the overall statement of assurance that the Court generally finds the accounts for 2004 true and fair. Although the Court finds that certain areas are generally functioning efficiently, it also has a number of reservations. This means that the Court again issued a negative statement of assurance this year. One such reservation is that in the Court’s opinion, the Commission does not have efficient control procedures for revenues and advances. The Court also makes reservations in relation to agriculture, structural funds, internal policies and external actions.

4. Overall, the Court finds that the Commission’s systems have improved after the Commission initiated its administrative reform in 2000, although much still needs to be done.

The Court finds that the improvements in the Commission’s systems and controls have not filtered through to the systems and controls of the Member States.

5. The Court’snegative statement of assurance prompted a strong response on the part of the European Parliament. Encouraged by the European Parliament, the Commission therefore published a “Roadmap to an Integrated Internal Control Framework”in 2005. The roadmap constituted yet another element of the ongoing initiatives launched to provide a better basis for the Court’s issue of the statement of assurance. The NAOD is following the development closely.

I can discern two points of view in the debate about the negative statement of assurance (DAS is its French acronym): an administrative point of view and an audit point of view. The Commission and national authorities are prime proponents of the administrative point of viewwhile the Court and the national audit institutions are prime proponents of the audit point of view. Here, the NAOD participates actively in the cooperation with due respect for the different roles and independence of the institutions.

6. I find that the European Parliament’s criticism of the negative statement of assurance demands action and that it would be constructive if the Court were to base its audit on the work of other auditors, including that of the NAOD.

Accordingly, the NAOD will first work towards developing the audit of EU funds in Denmark, see the statement on the use of the EU funds in the report on the audit of the government accounts for 2004. Second, the NAOD will continue to develop and expand cooperation between the national audit institutions and the Court in order to improve the basis of the Court’s statement of assurance.

7. The Court’s annual report does not include any actual comments on Denmark, although Denmark is mentioned several times in connection with the Court’s examinations and in various tables and figures. In connection with the audit of the 2004 accounts, the Court visited Denmark twice. These visits did not give rise to comments.

II. Presentation of the annual report and approval of the accounts

8. The Austrian chairman of the Court presented the annual report for the financial year 2004 to the Committee on Budgetary Control of the European Parliament (hereinafter the EP Budgetary Control Committee) on 14 November 2005. The Court published the annual report on 15 November 2005.

The Court’s presentation of the annual report constitutes the first element of the approval of the annual accounts of the EU (see Figure 1). On the basis of the Council’s recommendation, the EP Budgetary Committee will present proposals to the European Parliament on discharge (approval) to the Commission regarding the 2004 accounts. The European Parliament must discharge the Commission of the implementation of the budget not later than on 30 April 2006.

Figure 1. Timeline for the EP Budgetary Control Committee’s consideration of the Court’s annual report for 2004

 

As appears from Figure 1, the discharge procedure is based on the Court’s annual report. The EP Budgetary Control Committee hears EU Commissioners for relevant areas. On the basis of these and other hearings, the EP Budgetary Committee discusses the draft discharge. The Council provides its recommendation regarding discharge and the European Parliament finally adopts the decision on discharge for the 2004 accounts of the EU in plenum.

In the course of the discharge process, Member States reply to the Commission concerning the observations in the annual report that relate to their administration of the EU funds. In Denmark, it is the Ministry of Finance which calls for comments from the relevant ministries and presents an overall reply to the Commission regarding the coverage of Danish issues.

9. In the following, I will refer to the Court’s observations in the annual report on:

• the statement of assurance (DAS) 2004, page 4
• the Court’s observations on the Commission’s budget management, page 7
• the Court’s observations on the management of own resources, page 8
• the Court’s observations on the management of the Common Agricultural Policy, page 9
• the Court’s observations on the management of the structural fund area, page 10.

In addition, I describe the cooperation between the Court and the Member States’ audit institutions on page 10. On page 12, I review the Court’s special reports regarding the financial year 2004, and the memorandum closes on page 16.

10. The Court’s annual report contains no actual observations on Denmark, although Denmark is mentioned several times in connection with the Court’s examinations and in various tables and figures.

In connection with the audit of the 2004 accounts, the Court visited Denmark twice. The visits did not give rise to observations.

Audit subjects	Period
The Court’s visit to Danisco – Euroceptin	14/12-16/12 2004
DAS audit 2004	29/3-8/4 2005

The Court’s visit to Danisco concerned the audit of a grant for a Danisco research project. The grant was disbursed directly from the Commission to Danisco and therefore does not form part of the Danish government accounts.

III. Statement of assurance (DAS) 2004

11. The Court’s statement of assurance (DAS) contains two statements:

• one about the reliability of the accounts
• another about the legality and regularity of the underlying transactions.

12. In order to issue a statement on the reliability of the accounts the Court needs to obtain sufficient certainty to be able to draw a conclusion about the extent to which EU revenue, expenditure, assets and liabilities have been recorded correctly, and about whether the annual accounts give a true and fair view of the financial position at the end of the financial year. The Court looks for proof to support its conclusions on the reliability of the accounts in the Commission’s accounting system and internal control procedures.

It appears from the Court’s statement of assurance that the annual accounts for 2004 give a true and fair view of the revenue and expenditure for the financial year and of the financial position at the end of the year. However, the Court made reservations again this year, which means it again issued a negative statement of assurance this year. I will review the reservations in the following:

The Court’s general reservation regarding the reliability of the accounts:

• The Court finds that the Commission lacks effective procedures for internal control of miscellaneous revenue and advances.
• The Court finds that the Commission’s accounting system is not designed to ensure that all assets and liabilities are recorded. As mentioned in my previous memoranda on the Court’s annual reports for 2002 and 2003, the Commission’s accounting system is in the process of modernisation.

13. In order to issue a statement regarding the legality and regularity of the underlying transactionsthe Court needs to obtain direct or indirect audit evidence. Since the financial year 2002, the auditing on which the statement of assurance is issued has been based on the following four sources of audit evidence:

1. an examination of the way in which the supervisory and control systems work
2. sample testing of transactions for each major area by carrying out checks down to final beneficiary level
3. analysis of the annual activity reports and declarations of the Directors-General and of the procedures applied in drawing them up
4. where possible, an examination of the work carried out by other auditors who are independent of Community management procedures.

14. Overall, the Court finds that the transactions forming the basis of the accounts are legal and regular in terms of revenue, obligations, administrative expenses and pre-accession financial assistance. However, the Court stresses that risk still attaches to the implementation of the pre-accession assistance programmes in the new Member States andcandidate countries. As regards the Common Agricultural Policy (CAP) expenditure, the Court’s audit showed that when properly applied, the Integrated Administrative and Control System (IACS¹⁾) is an efficient system for limiting therisk of irregular expenses. However, the Court has several reservations regarding the other expenditure areas (agriculture in general, structural funds, internal policies and external actions).

The Court’s general reservations regarding the legality and regularity of the underlying transactions:

• CAP:Expenditure which is not subject to IACS, or where IACS has been applied incorrectly poses a greater risk because the control systems are less effective.
• Structural measures: Continued weaknesses in the supervisory and control systems of the Member States.
• Internal policies:Despite the progress made, internal supervisory and control systems are still insufficient.
• External actions:The improvements in the Commission’s supervisory and control systems have not yet had any impact in the organisations implementing the actions.
• Activity reports of Commission’s Directors-General:Progress has been made, but more is required.

15. Overall, the Court notes that the Commission’s systems have been improved since the Commission initiated its administrative reform in 2000. However, the Court finds that more measures are required. The Court regrets that the improvements in the Commission’s systems and controls have not filtered through to the systems and controls of the Member States. In the Court’s opinion it is crucial for the Commission and the Member States to cooperate to identify the weaknesses in the structure of the existing internal control systems and for both parties to assume responsibility for introducing the necessary system improvements. The enlargement to 25 Member States has made management more extensive and complex. Accordingly, the Court finds that supervisory and control systems must become more effective to keep the risk of illegalities and irregularities at an acceptable level.

IV. The Court’s observations on the Commission’s budgetary management

16. In the annual report for 2003 the Court recommended that the Commission provide more detailed information about the progress of the overall implementation of Community programmes. The Court now notes that the Commission implemented the recommendation, but would like the Commission to make a further effort to secure more complete information.

17. In 2004, budget payments increased from 98 billion euro to 105 billion euro, primarily as a result of the enlargement to 25 Member States on 1 May 2004.

18. For several years, the Commission’s failure to set a realistic budget affected its budgetary management, although this has been less evident in recent years. In 2001, the budget surplus amounted to 15.0 billion euro, in 2002 7.4 billion euro, and in 2003, the surplus amounted to 5.5 billion euro. In 2004, the surplus dropped even further, to 2.7 billion euro. The Court finds that the reduction in the surplus is partly attributable to better management by the Commission. However, the Court also suggests that another reasonable explanation could be that the surplus has become less visible, because structural fund disbursements are increasing. There reason for this increase is technical, namely that in 2004, the EU was about half-way through the 2000-2006 programming period.

19. Although implementation of the ongoing expenditure programmes is proceeding according to plan, the Court notes that the implementation of multi-annual expenditure programmes has been problematic for the Commission. The Commission experienced significant problems and numerous delays in closing the previous programme period (1994-1999). At the end of 2004, the Commission had yet to find application for 3.3 billion euro in order to close the 1994-1999 programming period. The problem is that the Commission has legally committed itself to pay the amount in future and that the demand for payment appropriations will therefore be greater in future years. At the end of 2004, the Commission had committed itself to pay 136 billion euro to the structural funds. According to the Court, this amount equals almost five years’ payments at the existing speed of payments.

The Court finds that in connection with budgets for the term of the expenditure programmes, the Commission is making insufficient allowance for the Member States’ ability to spend the funds within the stipulated time frame. In the Court’s opinion, the Commission can only to a limited extent manage the budget by multi-annual expenditure programmes.

V. The Court’s observations on the management of own resources

20. The European Union’s budget revenue consists of own resources and other revenue. Own resources are by far the main source of financing for budgetary expenditure (92%). There are three categories of own resources:

• traditional own resources (customs duties, agricultural duties and sugar levies) (13%)
• own resources calculated on the basis of value added tax collected by Member States (15%)
• own resources derived from the Member States’ gross national income (GNI) (72 %).

21. Traditional own resources are determined and collected by the Member States. Accordingly, in its audit the Court must focus on testing the customs declarations, accounting systems and supervisory and control systems of the Member States. Overall, the Court found the results of the testing satisfactory.

The result of the Court’s audit of whether the accounts of the traditional own resources of the EU are reliable and the underlying transactions legal and regular was generally satisfactory.

22. In contrast to the revenue from traditional own resources, the VAT and GNI resources reflect macroeconomic statistics whose underlying data cannot be directly audited. Therefore, the Court’s audit of VAT and GNI directly assesses the Commission’s data processing system. In addition, the Court has evaluated the Commission’s supervisory and control systems, which are intended to ensure that EU revenue has been correctly determined and estimated.

The Court’s audit of VAT and GNI resources showed that calculations and collections were correct and correctly recorded. However, the Court found weaknesses that may impact on the quality of the data on which the calculation of the Member States’ GNI contribution is based. The Court recommends that the Commission extend its control of the summaries of sources and methods used by Member States when preparing national accounts.

VI. The Court’s observations on the management of the Common Agricultural Policy

23. CAP expenditure in 2004, i.e. to the European Agricultural Guidance and Guarantee Fund (EAGGF, Guarantee section), totalled 43,579 million euro, which represents a slight drop compared to 2003 (44,379 million euro). Direct agricultural aid amounts to 59% of CAP expenditure. Virtually all this expenditure is effected by the paying agencies of the Member States.

24. In connection with its examination of IACS, the Court examined five paying agencies in four Member States. The Court notes that in general, IACS works satisfactorily, with the exception of Greece, which is still having problems more than seven years after expiry of the deadline for full compliance with IACS. The Court finds that when applied correctly, IACS is an effective control system which can limit the risk of irregular expenditure. Areas where IACS is not applied or is applied incorrectly pose a greater risk of irregularities. The Court finds that Member State control of agricultural aid not encompassed by IACS (some 37% of agricultural expenditure) does not provide reasonable certainty that the transactions comply with EU legislation.

The Court notes that the basis of the Commission’s decision regarding the closing of the accounts for 2004 – that is, the certifying authorities’ control of the reliability of the accounts – is basically sound.

The Court finds that the annual activity report and declaration from the Director-General for Agriculture was better structured than last year, but that it provides limited assurance of the legality and regularity of expenditure in 2004.

VII. The Court’s observations on the management of structural funds

25. The Court has examined the operation of the Member States’ systems for managing and controlling structural funds through sample checks. In addition, the Court has examined the measures taken by the Commission to close the programmes from the 1994-1999 period. Finally, the Court performed substantive tests of selected projects and analysed activity reports from the Commission’s relevant Directors-General.

26. The Court’s sample checks of the Member States’ management and control systems revealed numerous legality and regularity errors. The Court notes that the Commission’s closing of the 1994-1999 programme period has been delayed. In connection with the substantive testing of projects, the Court identified numerous examples of expenditure having been declared twice, failure to respect rules relating to state aid schemes and public procurement, and failure to provide adequate supporting documentation. The Court finds that the annual activity reports and declarations have improved in some areas but that further improvements are required, particularly as regards the scope of the reservations.

VIII. Cooperation between the Court and the Member States’ audit institutions

27. In my memorandum dated 26 May 2005 on discharge for 2003, I stated that the Court’s negative statement of assurance prompted a strong response on the part of the European Parliament. Accordingly, at the request of the European Parliament, the Commission published a “Roadmap to an Integrated Internal Control Framework” in June 2005. The roadmap encouraged all parties involved to make an effort to tighten their financial management and control of the EU budget. In the roadmap, the Commission proposed several activities undertaken from June – 8 November 2005, including

• consideration of the roadmap at ECOFIN (Council meeting of EU Finance Ministers), July 2005
• consideration of the roadmap by an expert panel at a meeting attended by participants from all Member States, 21 – 22 September 2005
• consideration of conclusions from the expert meeting by the Budget Committee of the Council and final processing by COREPER (committee consisting of the Member States’ permanent EU representatives, also called ambassadors to the European Union) October/November 2005
• discussion of final draft conclusions at ECOFIN, 8 November 2005.

At ECOFIN on 8 November 2005, the EU finance ministers adopted several conclusions²⁾ and decided that in connection with the discharge process for 2004, the Council ought to review the Commission’s action plan with a view to remedying the deficiencies of the existing control structure. It was also decided that the Council should examine the improvements of the internal control structure in 2006. The NAOD is following this initiative closely.

I can discern two points of view in the debate about the negative statement of assurance (DAS is its French acronym): an administrative point of view and an audit point of view. The Commission and national authorities are prime proponents of the administrative point of viewwhile the Court and the nation audit institutions are prime proponents of the audit point of view. Here, the NAOD participates actively in the cooperation with due respect for the different roles and independence of the institutions.

28. The framework of the cooperation between the Court and the audit institutions of the of the Member States is laid down in Article 248 of the Nice Treaty³⁾. Inspired by the words of the treaty about maintaining “the autonomy of each”, the Court and the Member States’ audit institutions cooperate in connection with the Court’s audit visits to the Member States. The cooperation also means that the Court and the audit institutions of the Member States get together at annual Contact Committee meetings. As I mentioned in my memorandum dated 26 May 2005 about the European Parliament’s decision regarding discharge for implementation of the budget for 2003 of the European Union, it is my opinion that cooperation in the Contact Committee is good.

Since 2002, the Court’s DAS method has involved basing its audit “where possible on an examination of work performed by other auditors who are independent in relation to the Community’s management procedures” (page 5, paragraph 10).However, nothing in the this year’s annual report seems to indicate that the Court incorporates the work of other auditors to any particular degree. In my opinion, it would be constructive if the Court were to base its audit to a higher degree on the work of other auditors, including that of the NAOD.

I find that the European Parliament’s criticism of the negative statement of assurance requires action. Therefore, the NAOD will first work towards developing the audit of EU funds in Denmark, see the statement on application of EU funds in the report on the audit of the government accounts for 2004. Second, the NAOD will continue to develop and expand the cooperation between the national audit institutions and the Court in order to improve the basis of the Court’s statement of assurance.

IX. The Court’s special reports regarding the financial year 2004

29. The Court of Auditors’ seven special reports for 2004 form part of the discharge procedure together with the annual report and the statement of assurance (see Figure 1, page 3). In the following, comments are attached to the individual special reports. Denmark is mentioned in some of the special reports, for example, in tables, but has not been examined separately.

No. 9/2004 on forestry measures in rural development policy

30. The purpose of the examination was to evaluate whether the forestry measures were based on forestry plans or the equivalent, how they were implemented and what their impact was. The Court visited Spain, Portugal, Italy, Ireland and France. Denmark does not directly form part of the examination, but is mentioned in certain places, Table 1, for example, according to which Denmark is expected to receive less than 50 million euro in the period 2000-2006 out of a total aid sum of 4,807 million euro, and that the greater part of the aid in Denmark is granted for afforestation.

The Court concludes that there is a need to clarify the responsibilities and roles of the Commission and the Member States in implementing the forestry strategy. The Court furthermore points out that the process of developing forestry programmes is slow, their formulation vague and their implementation fragmented.

No. 10/2004 concerning the devolution of EC external aid management to the Commission delegations

31. The purpose of the examination was to assess whether the management reform had led to faster implementation and quality improvements in EC external aid while ensuring robust financial procedures. The aim of the examination was to answer two main questions:

• Has the Commission managed the devolution process successfully?
• Is devolved management starting to achieve the intended results?

The Court visited ten delegations as well as the central services in Brussels. The Court concludes that the Commission’s management of the devolution process can be considered reasonably successful, at least as far as the delegations are concerned.

Regarding the results of the devolution, the Court concludes that after less than two years of devolved management it is still too early to determine whether the speed and quality of the EC external aid has improved as planned.

Visits were not made to Denmark in connection with drafting the special report.

No. 1/2005 concerning the management of the European Anti-Fraud Office (OLAF)

32. The aim of the examination was to appraise the quality of OLAF’s investigations management and

• assess how OLAF had discharged its investigative duties
• evaluate the contribution made by each OLAF department to the investigative function.

The Court concludes that it was not possible to evaluate the final effectiveness of OLAF’s work due to insufficiently reliable data on the specific follow-up on the investigations.

Denmarkwas not visited in connection with drafting the special report.

No. 2/2005 concerning EDF budget aid to ACP countries

33. The examination concerns EU aid for growth and poverty reduction to several African, Caribbean and Pacific States. Denmark is mentioned in only two tables concerning aid to a number of African states in Annex 1 to the examination.

The Court found that the Commission’s analytical and follow-up tools worked fairly satisfactorily, but the Court also offers a number of recommendations for further improvement.

No. 3/2005 concerning rural development: the verification of agri-environment expenditure

34. The objective of this examination was to assess whether the Commission has sufficient certainty that the farming practices and techniques for which agri-environment support is paid are verifiable and properly verified, and whether the recipients of agri-environment payments comply with their obligation to farm in an environmentally friendly manner. The Court made audit visits to Austria, France, Germany, Italy and Luxembourg. Denmark is mentioned in a table on agri-environment expenditure per Member State in 2000-2003. According to the table, Denmark receives only a very low share of the total support.

The Court found that the control in the Member States is extremely difficult to effect and that the Commission had gained only partial assurance that rural development plans were verifiable.

No. 4/2005 on the Commission’s management of the economic cooperation with countries in Asia

35. The examination concerns the economic cooperation between the EU and Asian countries.Aid to Asian countries is granted as bilateral aid and through regional programmes. Denmark is not mentioned in the report.

As regards bilateral projects, the Court found that they were often delayed in the identification phase, which reduced the projects’ output and impact in several cases. As regards regional programmes, the Court found that the application procedure was heavy and complex. The projects had produced positive results, but it was unclear whether they were sustainable.

No. 5/2005 on interpretation expenditure incurred by the Parliament, Commission and the Council

36. The purpose of the examination was to assess the soundness of the financial management of interpretation services at the Parliament, the Commission and the Council. In particular, the audit aimed to establish whether the audited institutions have adequate tools and procedures to ensure that

• the interpretation services provided do not exceed the real demand
• all the interpretation services needed can be provided
• interpretation services are provided at the lowest possible cost
• interpretation is of high quality.

The Court concludes that the interpretation quality generally meets user demand and expectations. The audited institutions have reduced interpretation expenditure, but the Court finds that further savings can be made. The Court recommends a number of potential initiatives to contain expenditure, especially in relation to interpretation services requested but not used.

Denmark was not visited in connection with drafting the special report.

X. Conclusion

37. In this memorandum I have briefed the PAC about the Court’s annual report, statement of assurance and special reports for the financial year 2004. With the exception of a few reservations, the Court is of the opinion that:

• the annual accounts provide a true and fair view of EU revenue and expenditure (subject to a reservation about the item revenue and advances)
• overall, the accounts are legal and regular (subject to a reservation regarding agriculture, structural funds, internal policies and external actions).

I have noted that the Court’s annual report does not contain any critical observations regarding the management in Denmark.

38. I have stated that the Court is positive about the improvements made by the Commission after the initiation of its administrative reform in 2000.However, the Court finds that much still needs to be done.

The Court finds that the improvements made in the Commission’s systems and controls have not filtered through to the systems and controls of the Member States.

39. Finally, I have informed the PAC about the initiative to provide a better basis for the Court’s issue of the statement of assurance. In this connection, I emphasised that the NAOD wishes to contribute actively to enhancing the financial management of the EU. Therefore, the NAOD will first work towards developing the audit of the EU funds in Denmark, see the statement on application of the EU funds in the report about the audit of the government accounts for 2004. Second, the NAOD will continue to develop and expand cooperation between the national audit institutions and the Court in order to improve the basis of the Court’s statement of assurance.

40. I will inform the PAC when the European Parliament has considered the 2004 accounts.

Henrik Otbo

 

 

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