1. Presentation to COCOBU on 4 October 2007 by Josef Bonnici The Commission’s Annual Activity Reports A tool for improved governance European Court of Auditors

2. The Commission’s White Papers on the Reform Full recognition by ECA of the importance of the reform process launched by the Commission in 2000 and 2001 in its White Papers “on Reforming the Commission” and « on Reforming the European Governance ». In these documents, the EC stresses need for a stronger culture of accountability and evaluation and the introduction of performance oriented working methods. It is in this framework that the concept of the Annual Activity Reports (AARs) has been introduced to strengthen accountability and good governance. ECA incorporated the Annual Activity Reports (AARs) and the DGs’ Declarations of Assurance in its revised DAS approach as a further source of evidence.

3. Evaluation of supervisory and control systems Professional judgement and materiality Qualitative evaluation of results on work on systems Quantitative evaluation of results of substantive testing Analysis of coherence of audit results Audit conclusions – Specific Assessments Audit opinion – the DAS Analysis of Annual Activtivity Reports and declarations Substantive testing Examination of work of other auditors The Annual Activity Reports in the revised DAS approach Audit conclusions – Specific Assessments

4. Annual Activity Reports and the DAS The AARs have the potential to be an important tool for good governance. In the AARs’ declarations the Directors-General have to state whether they have maintained in operation throughout the year internal control systems that give reasonable assurance, in particular concerning legality and regularity of operations. The objective for the EC is to obtain assurance that the Annual Activity Reports and Declarations are based on correct, complete and adequate information. The Court evaluates whether the Annual Activity Reports can be used for the purposes of the DAS, and examines whether: 1) all significant weaknesses result in an appropriate reservation, 2) deficiencies identified by the Court are reflected in the reports, 3) reservations do not nullify the substance of the declaration (in extreme cases, Directors-General may not be in a position to give an assurance).

5. The monitoring of EC’s Annual Activity Reports Since 2001, ECA dedicated a section regarding the AARs in its DAS Chapters of its Annual Reports. In 2003, the European Commission assumed with its Synthesis of the AARs for the first time political responsibility for the implementation of the budget as provided in the Treaty (Article 274). In 2005 ECA dedicated for the first time a whole chapter (Chapter 2) on the Commission’s internal control system. It concluded: that «... significant weaknesses singled out by [the Court’s] audits, should have been included as reservations in the declarations of the Directors-General » and that «.....AARs do not yet provide sufficient evidence for its Statement of Assurance » (2.18-19).

6. Chart on the evolution of the evidence given by AARs for the Court’s Statement of Assurance Year Sector 200320042005 Own resources AAA Common agricultural policy IACS B CC non-IACS CCC Structural measures CCC Legend:A Clear and unambiguousB With some inaccuracies or missing information compared with Court’s analysis C With material inaccuracies or missing information of major importance

7. Chart on the evolution of the evidence given by AARs for the Court’s Statement of Assurance Legend: A Clear and unambiguous B With some inaccuracies or missing information compared with Court’s analysis C With material inaccuracies or missing information of major importance Year Sector 200320042005 Internal policies including research BBB External actions B CC Pre-accession strategyA BB Administrative expenditureAA B

8. Example of shortcomings in the AARs in the field of Structural Funds The chart singles out the fields of Structural Funds (SF) and Common Agricultural Policy (non IACS) as areas where no or only limited improvements have been achieved since 2003. For SF, the following are some examples of shortcomings: For 10 Member States (page 37) it is stated that “the opinion was qualified in relation to material deficiencies affecting key elements of the system”. However, there was only one reservation for one MS in the Director-General’s Declaration. The AAR should have highlighted instead that for all the above mentioned Member States the detected system weaknesses cannot lead to the assurance that the risk level is appropriately handled. Reservations mentioned in the AARs are sometimes so general that the programmes concerned cannot be identified. Comments on the Commission’s follow-up measures of previous years’ observations are too general to evaluate whether they have been properly carried out.

9. Material irregularities detected during 1994-99 closure audits are likely to have materialized in a great number of other cases not covered by audits but were not addressed by reservations. the AAR 2005 of DG EMPL mentions follow-up missions of only 11 out of 80 programmes audited the previous year, and which are affected by systems deficiencies. The AAR 2005 stresses in this context, that action plans have been implemented, and that the follow-up performed by DG EMPL or national control bodies has led to a partial assurance (prudence would have required the DGs to cover uncertain cases by a reservation). Furthermore, the AAR 2005 mentions that 284 (undefined) recommendations made in the previous year are still open and that the follow-up of these recommendations depends largely on the Member States concerned. It is not clear why only one reservation is maintained for the whole year 2005. Example of shortcomings in the AARs in the field of Structural Funds

10. An improved approach towards the application of reservations - DG Research An improved approach towards the application of reservations can be identified in the 2006 AAR of DG Research. Some shortcomings disclosed in the report are: Lack of assurance regarding the accuracy of cost claims under 5th Framework Programme of Research. Material level of errors regarding legality and regularity of payments based on cost claims under 6th Framework Programme of Research. These and other shortcomings have been adequately addressed by reservations and concrete remedies proposed.

11. The Annual Activity Reports (AARs) as a tool for good governance Conclusions A number of AARs ignore the Court’s audit results which identify major areas of risk. Results of the Court’s audits show that the reservations expressed by a number of DGs were clearly deficient. The inadequate treatment of qualifications reduces the value of the AAR and is incompatible with good governance. AARs should contain clear information on the follow-up concerning the shortcomings detected in previous years. A number of AARs cannot be used as further source of information for the Court’s Statement of Assurance. The above mentioned deficiencies prevent the achievement of the full benefit from what remains a positive initiative.