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Head of the National Audit Office Sir John Bourn has reported to Parliament on the financial management of European Union funds.

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Today’s report highlights the main findings of the latest Annual Report by the European Court of Auditors (November 2002) which covers the management of the General Budget of the European Union for 2001. The Commission has overall responsibility for implementing the Budget, which totalled £57.4 billion in 2001, but over 80 per cent of expenditure is managed by authorities within the 15 Member States of the European Union.

For the eighth year in succession the Court of Auditors qualified its opinion on the reliability of the Community’s accounts. The Court again criticised the persistent weaknesses in the Commission’s accounting systems, particularly the lack of reliable information on the completeness of assets held, and recommended urgent action be taken to address these problems.

The Court noted the fact that the Commission had made some progress in implementing its strategy of financial management reforms. In particular, the Court welcomed the introduction of individual declarations by the Commission’s Directors General (the heads of the main administrative units of the Commission) on the reliability of the financial controls in their areas which the Court considered offered “an unprecedented degree of openness as regards accountability”. But the Court also observed some weaknesses, such as a lack of consistency in the declarations of individual Directors General. The Commission has since issued guidance to clarify how Directors General should approach their declarations.

The Commission secured approval from the Council for a new Financial Regulation in June 2002 which came into force on 1 January 2003. Among the important changes this established were the transfer of responsibilities for checking and approving requests for commitment and payment to staff in individual Directorates General, the strengthening of the Commission’s internal audit capacity and requirements to comply with the principle of sound financial management and develop a system of evaluation using SMART (specific, measurable, achievable, relevant and timed) objectives.

The new Financial Regulation also provided for the introduction of full accruals accounting by 1 January 2005. However, the Commission does not have a comprehensive accounting framework nor an integrated computerised accounting system capable of automatically generating all the figures required for accruals-based financial statements. While supporting the Commission’s intention, therefore, Sir John considers that the Commission faces a very tight timetable to introduce the required improvements successfully, test them fully and train staff by the beginning of 2005.

The number and value of cases of suspected fraud or other irregularity detected and reported by Member States to the Commission in 2001 were substantially lower than in 2000, with the overall reported number of cases falling from 6,634 to 5,455 and the estimated value falling from £678 million to £364 million. However, no firm conclusions on trends can be drawn from this because cases of fraud and irregularity tend to be identified unevenly within programmes and reported levels can fluctuate considerably from year to year. Also different practices continue to exist between Member States in defining irregularity and fraud and reporting it to the Commission.

In December 2002, accession negotiations were completed with ten Candidate Countries due to become new Member States of the European Union on 1 May 2004 (namely, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, the Czech Republic, and Slovenia). While all ten have provisionally concluded negotiations on financial control, the Commission noted that most needed to accelerate the pace of reform or undertake significant administrative strengthening to ensure effective implementation of financial controls by the date of accession. Sir John recommends that the UK government continue to use its influence to ensure that financial management issues continued to be given a high priority in Candidate Countries.

"My report on the financial management of the European Union draws attention once again to continuing problems in the management of funds. It is a matter of concern that, for the eighth year in succession, the Court of Auditors has qualified its opinion on the reliability of the accounts. I also endorse the Court’s view that the Commission should take urgent, in-depth action to deal with the persistent weaknesses in its accounting system.

"It is vital that the UK government carries on doing all it can, through the Council of Ministers and its other links in the Community, to support the reform progress put into effect by the Commission. We in the National Audit Office will continue to give a high priority to examining how Community funds are managed by UK government departments."

Sir John Bourn


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