Court of Auditors' annual report

The annual report, published last week by the European Court of Auditors (ECA), is for the financial year 2003. Effectively it covers the last full year before enlargement; i.e. the year preceding Malta's accession to the EU.

Having made this qualification, it is possible that some might be inclined to consider the report as not being of particular concern to Malta. This is not the case because, over and above those specific observations that might be judged to pertain exclusively to particular situations encountered in 2003, the report touches upon many issues of a universal relevance.

Last week, I explained in brief the considerable significance of the publication of the ECA's annual report, which kicks off the budget discharge process by the European Parliament and the Council. This week I shall focus on the report's actual contents.

The bulk of the annual report is divided into 10 chapters which comment upon the activities financed directly from the EU general budget. In addition, the report includes another section on expenditure under the European Development Funds, which are allocated and approved outside the general budget.

However, in seeking to discuss the report's salient points, it is more pertinent to present its contents under three principal headings: (a) the Statement of Assurance, (b) a summary analysis and general comments on the overall management of the EU budget and (c) more detailed observations on the more important specific items of revenue and expenditure, grouped under their respective subject-description.

The first chapter of the report is dedicated to the Statement of Assurance, more commonly referred to by its French acronym DAS (declaration d' assurance). This formal declaration by the ECA represents the opinion of the Court on the reliability of the EU's financial statements and on the legality and regularity of the underlying transactions. The DAS is derived on the basis of detailed financial compliance audits carried out by Court's personnel in the 12 months preceding the publication of the report. It is based on the assessment of the underlying management and control systems supported by the substantive testing of a number of transactions, selected using appropriate sampling techniques.

This Statement of Assurance could be said to be quite similar in scope to the opinion formulated by an independent, external audit firm in conjunction with, and in support of, the publication of the annual accounts of a listed private sector company.

In the private sector example, the opinion of the external auditor is required and published to safeguard the interests of the company's shareholders. The ECA's annual report is published for the benefit of all EU citizens and for reference by their representatives (in the European Parliament and in the Council) to help them deliberate on the closure of the EU accounts, more commonly referred to as the budget discharge process.

The main objectives of the DAS are to establish (a) whether the consolidated financial statements of the general budget of the EU, as drawn up by the Commission, present a true and fair picture of the financial activities through the preceding year and of the year-end situation, and (b) whether legal and contractual provisions have been duly respected during the implementation of the budget.

The views of the Court, as presented in its annual report, are best summarised by reference to the following two paragraphs from the press release issued by the Court to coincide with the publication of its annual report. (The full text of this press release is available on the ECA's Website).

"The Court of Auditors is of the opinion that the 2003 consolidated accounts of the European Communities faithfully reflect the revenue and expenditure and the financial situation of the Communities at the year-end, except for one observation related to the recordings of the operations concerning the sundry debtors.

"As in previous years, the Court considers that the operations underlying the consolidated accounts are, as a whole, legal and regular in the case of revenue, commitments and administrative expenditure. The Court notes the progress made as regards the reform of the Commission's internal control system and its positive impact on the legality and regularity of the Commission's internal management of expenditure. However, in the area of shared or decentralised management, and indirect centralised management, where operations are materially subject to errors, a greater effort must be made to apply the supervisory systems and controls in an effective manner so as to improve the handling of the attendant risk."

As for the reliability of the accounts, it is expected that the implementation (in 2005) by the Commission of the new, accrual-based, accounting system will resolve the principal remaining issues, primarily concerning the full recording of assets. On the other hand, identified problems concerning the legality and regularity of transactions that affect a good part of the budget are likely to persist even in the future.

Such an assessment is being made in recognition of the complexity and variety of the pertinent expenditure, especially in the domain of agriculture and structural actions. In these areas of activity, overall responsibility for the relevant expenditure is shared between the Commission and the member states and, more to the point, effective implementation and control is spread among a large number of responsible entities, at the regional and local level, and touches a multitude of beneficiaries.

It would be unrealistic to discount the many inherent difficulties and to underestimate the challenge implied. However, this must not be construed as an excuse for accepting shortcomings in the proper management of the relevant expenditure. On the contrary, it should serve to engender an even greater effort to resolve the identified problems since the observed shortcomings detract from the full effectiveness of the funds being applied.

Most of these shortcomings are identified and amplified within the many chapters of the annual report that focus on specific areas of expenditure, grouped under the following headings: The Common Agricultural Policy, structural measures, internal policy, external actions, pre-accession aid, administrative expenditure and financial instruments and banking activities.

In contrast, chapter two focuses on the broader question of the overall composition and management of the EU budget. The underlying and long observed problem is the difficulty of the intended beneficiaries to absorb fully, within the foreseen timeframe, the resources allocated in the budget.

This repeated (one might say chronic) underspending is not a positive characteristic, as some might think. On the contrary, it great ply complicates the already tricky business of budget management because it has the effect of increasing the level of outstanding commitments, i.e. expenditure legally committed but not yet made.

In its latest annual report, the ECA acknowledges the significant effort made by the Commission to address this issue with the positive outcome that the extent of the surplus has been reduced significantly, although it remains substantial.

Finally, this year, the publication of the annual report has coincided with the publication of six special reports by the Court. These focus on a particular subject and are not linked to any specific financial year. Copies of the annual report and of the special reports (latest and past) can be accessed and downloaded from the ECA Website, www.eca.eu.int