Annual Activity Report

Transcription

1 2011 Annual Activity Report DG BUDGET BUDG_aar_2011_final Page 1 of 74

2 Table of Contents PART 1. POLICY ACHIEVEMENTS ACHIEVEMENTS FOR THE POLICY AREA OF DG BUDGET BY ABB ACTIVITIES (OPERATIONAL) ABB Activity: Budget execution, control and discharge ABB Activity: Accounting ABB Activity: Promotion of sound financial management ABB Activity: Financial framework and budget procedure PART 2. MANAGEMENT AND INTERNAL CONTROL SYSTEMS INTRODUCTION TO DG BUDGET DG Budget in Major events during the reporting year THE FUNCTIONING OF THE ENTIRE INTERNAL CONTROL SYSTEM Compliance with the requirements of the control standards Effectiveness of implementation of the prioritised control standards Conclusion INFORMATION TO THE COMMISSIONER PART 3. BUILDING BLOCKS TOWARDS THE DECLARATION OF ASSURANCE (AND POSSIBLE RESERVATIONS TO IT) BUILDING BLOCKS TOWARDS REASONABLE ASSURANCE Building block 1: Assessment by management Building block 2: Results from audits during the reporting year Building block 3: Follow-up of previous years' reservations and action plans for audits from previous years Building block 4: Assurance received from other Authorising Officers in cases of crossed sub-delegation Completeness and reliability of the information reported in the building blocks and conclusion on overall assurance RESERVATIONS OVERALL CONCLUSIONS ON THE COMBINED IMPACT OF THE RESERVATIONS ON THE DECLARATION AS A WHOLE PART 4. DECLARATION OF ASSURANCE ANNEX 1: STATEMENT OF THE RESOURCES DIRECTOR ANNEX 2: HUMAN AND FINANCIAL RESOURCES BY ABB ACTIVITY ANNEX 3: DRAFT ANNUAL ACCOUNTS AND FINANCIAL REPORTS ANNEX 4: MATERIALITY CRITERIA ANNEX 5: INTERNAL CONTROL TEMPLATE(S) FOR BUDGET IMPLEMENTATION (ICT) BUDG_aar_2011_final Page 2 of 74

3 PART 1. POLICY ACHIEVEMENTS 1.1 Achievements for the policy area of DG Budget by ABB Activities (operational) ABB Activity: Budget execution, control and discharge Specific Objective : Main Outputs : 1. Make sure that budgetary implementation follows forecasts and effective use of resources principles 1.1. Budgetary transfers and carry forward procedures 1.2. Produce budget implementation reports 1.3. Monitoring of decentralized agencies 1.4. Follow-up of ECA annual report on budgetary execution, agriculture and structural funds 1.5. Annual report on allocated expenditure 1.6. Contribute to the Annual Financial Report for 2010 In 2011, 53 DEC transfer proposals (transfers requiring a decision by the Budgetary Authority) have been submitted for decision to the Budgetary Authority, all of which have been approved. 3 INFO transfer proposals (transfers requiring notification to the Budgetary Authority) have been submitted to the Budgetary Authority, none was rejected. The procedure for the carry over of implementation from 2010 to 2011 was adopted on 11/02/2011 (Commission Implementing Regulation (EC) No984/2011) and transmitted to the Budgetary Authority. EUR in commitment appropriations and EUR in payment appropriations were carried over. Throughout 2011, DG Budget continued the reinforced monitoring of budget implementation. It kept the Budgetary Authority regularly informed on budget implementation, on a weekly basis since April The information was cross-checked with Budget Forecast Alert and comparison drawn with previous year implementation. It has been very useful to assess end-of-the year needs in connection with global transfers and amending budgets. Regarding the follow-up of the European Court of Auditors (ECA) Annual Report on budgetary execution, agriculture and structural funds, there has been no visit from ECA in The response to the questions were sent end of April. The Global Transfer was prepared end September in accordance with the timetable and approved mid-november by the Budgetary Authority without amendments as part of the management of payment shortfall. A second Global Transfer was launched mid-november and approved by the Budgetary Authority in order to fine-tune implementation. BUDG_aar_2011_final Page 3 of 74

4 Three Budget Forecast Alert information notes were presented to the College in 2011, on 28 February, 22 June and 19 October and sent to the Budgetary Authority where they have been discussed as formal agenda points. The Budget Forecast Alert is the process in place since 2006 to monitor and improve budget implementation and the related forecasts minimise budget year-end surpluses. Every month the evolution of agricultural spending is followed through the EWS (Early Warning System) and the evolution of Cohesion expenditure through the monthly report to the Budgetary Authority. From September, this reporting became more formalised with the examination of the September "révision conjoncturelle" of the EAGF (European Agricultural Guarantee Fund) made in the context of the amending letter and the need to prepare a report on the execution of the Cohesion Policy for the end of September. At the end of the year there were monthly and finally bi-weekly reports on the execution and potential evolution. The Report on Budgetary and Financial Management was finalised and submitted to the Budgetary Authority and ECA at the same time as the Provisional Annual Accounts, end of March. Two reports on the budget execution of Pilot Projects (PP)/Preparatory Actions (PA) have been sent to the Budgetary Authority: a report on the execution of the new PA/PP sent in February 2011 and a report on the preliminary projects of the European Parliament (EP) for 2012 sent on 12 July. The annual report "Analysis of the Budgetary Implementation of the Structural Funds" was published on Europa web-site on 26 May and distributed to Council, EP, ECA and DGs. As a result of the monthly analysis of the evolution of the execution of the Cohesion Policy, actions were taken in cooperation with DG REGIO and EMPL to ensure execution of payment appropriations even for requests arriving late in December, leading to full execution of all appropriations for operational programmes of the Cohesion Policy. Regarding the monitoring of decentralised agencies, the working document was delivered with the draft budget (DB) 2012 and welcomed by the Budgetary Authority. Briefings were sent on request to the Cabinet and the DB was presented to the annual meeting of agencies on 30 May and mid-october. The guidelines were ready in due time and endorsed by the Cabinet, incorporating the needed impact of the multiannual staff reduction as far as the budget 2013 is concerned. The assistance given to DGs in case of extension of the mandate of existing agencies has undergone a net increase in preparation of the next programming period. DG Budget has actively participated in the different working groups set up, in order to prepare for a coordinated approach in line with the Multiannual Financial Framework simultaneous commitments to resort more to executive agencies and to reduce staff by 5% over 5 years. In cooperation with DG HR, DG BUDG regularly informed the Budgetary Authority on progress made on EU 12 recruitment targets, which were met in The annual report on allocated expenditure has been incorporated into the annual financial report since the year The graphic presentation of the allocated expenditure data was significantly modified to increase the user-friendliness. The Annual Financial Report 2010 was presented by Commissioner Lewandowski on 30 September. BUDG_aar_2011_final Page 4 of 74

5 Specific Objective : Main Outputs : 2. Improving other Institutions' assessment of financial management in the Commission 2.1. Coordination of relations with the ECA and the COCOBU 2.2. Supporting the discharge Commissioner in developing and implementing his discharge agenda Managing and following the discharge procedure 2.4. Providing information on Commission and Member State follow-up to ECA/Parliament and Council recommendations 2.5. Organising an inter-institutional conference on the discharge procedure and sound financial management 2.6. Coordinating within deadlines replies to Parliamentary questions 2.7. Coordinating within deadlines replies to National Parliaments 2.8. Enhance the cooperation with the ECA to ensure a more effective and efficient communication about the audit results and actions taken to address the weaknesses The discharge 2009 discussion in Council went well, allowing the discharge recommendation voted in ECOFIN with no opposition. However, three Member States (NL, SV & UK) abstained and also issued a joint declaration. The European Parliament, following intense contacts between EP Rapporteur Chatzimarkakis and the Commission, granted discharge for the financial year 2009 with large majority on 10 May The report on the Commission's follow-up on the 2009 EP discharge recommendations was adopted on 14 November The contradictory procedure of the Court of Auditors' Annual Report 2010 took place between 21/6 and 2/9/2011. This procedure was lengthy since additional meetings and/or discussions were required for chapters 1 and 3 in September. On 19/10/2011, the Cabinet of Commissioner Šemeta presented to the other Cabinets the state of play of Commission's replies to the Court of Auditors' 2010 Annual Report. Preliminary information was also given to the members of the Audit Progress Committee on 5/10/2011. The procedure for the 2010 Discharge in the EP: The Court's Annual Report was published in the Official Journal on 10/11/2011 and presented to Parliament (COCOBU) on the same date. The presentation to the EP Plenary and to ECOFIN (Council) took place at BUDG_aar_2011_final Page 5 of 74

6 15/11/2011 and 30/11/2011 respectively. Commissioner Šemeta attended the meetings in COCOBU (10/11/2011) and Plenary (15/11/2011) when President Caldeira presented the Court's Annual Report for These discussions took place in a positive atmosphere and were well received by the MEPs, in particular the Rapporteur. However, as usual, some critical comments were made. The Commission (both, services and the Commissioner) had also met the newly appointed Rapporteur on 20/09/2011 for an exchange of views on the forthcoming discharge procedure. In COCOBU, the hearings of "spending" Commissioners started in November with the hearings of Commissioners Hahn, Andor, Cioloş and Šemeta. According to the usual practice, numerous written questions were sent to the Commissioners before the hearings, to which replies were elaborated by the Commission services and reviewed by DG BUDG. The Annual Meeting between the College and the Court of Auditors took place at 16/6/2011 in Brussels. The discussion focused on the 2010 DAS (Declaration of Assurance) exercise and the preparation of the next Multiannual Financial Framework. The meeting provided the opportunity for multiple exchanges on the financial and economic crisis and the recent European initiatives. Both institutions agreed on the common objective of improved financial management and increased focus on the quality of spending and the ensuing European added value. The number of Special Reports produced by the ECA continued to be on rapid increase, which represents a heavy workload for the DG. For 2011, 18 Special Reports have been received as compared to 16 in More emphasis has been put on the quality of the drafting and the presentation of the replies, including editing advice. All replies have been sent within the timeframe agreed with the Court. Thanks to a better programming of the work on both sides, initiated by DG BUDG, the contradictory procedures for both, the Annual and the Special Reports, went rather smoothly in Contacts with national Supreme Audit Institutions (SAIs) have been steadily maintained in DG BUDG has contributed to several bilateral meetings between Commissioner Šemeta and national SAIs, notably SAIs from Lithuania, Hungary and Denmark. SAIs from Germany, Denmark and Slovenia have presented to the Commission results of their joint report on the costs of controls in the Cohesion area. In addition, DG BUDG has provided national SAIs with details of all payments made in their countries which can be used to support national risk assessments and audit work. DG BUDG also continued to systematically involve SAIs in the context of the Member States report (see point below) to receive their opinion on current budgetary control and audit issues. While fully respecting independence and national sovereignty, an enhanced cooperation with national SAIs is in the EU stakeholders' interest in order to make best use of existing audit evidence and to obtain more assurance on the use of EU funds in the Member States. The Commission report on Member States' replies to 2009 Annual Report was adopted on 26/02/2011 and transmitted to EP, Council and ECA. Several Member States provided extensive replies. The report illustrated the improvement of the performances of all actors involved in the management of EU funds in shared management. The report, however, concluded that there was a need for sustained improvement and firm commitment from both, Member States and Commission, in order to ensure even better results. DG Budget is running the IT application RAD - Recommendations/Actions/Discharge to follow-up requests made by the European Parliament and the Council in the course of the annual budgetary discharge procedure as well as to follow-up the recommendations from ECA. The database contains 3811 requests and recommendations in total. Every year, a further 500 requests and recommendations have to be added and to be followed up by the Commission services. Support has been given to users in order to assure proper utilisation by the Commission services. In 2011, this application was the subject of an audit made by different Commission IACs, and DG BUDG actively accompanied this exercise by providing extensive contributions and by engaging with the services a discussion on the main conclusions and recommendations of the different audit reports. In May 2011, the new SPF BUDG_aar_2011_final Page 6 of 74

7 (Statement of Preliminary Finding) module was launched. Five training courses on how to use the SPF module were organised jointly by DIGIT and BUDG 01. DGs were able to use the module for the first time during the period of the contradictory meetings. Regarding Parliamentary Questions: 92 'lead DG questions' and 249 'associated DG questions' were attributed to DG BUDG. Replies were sent within the deadline in 98% of the occurrences. The main subjects addressed were: Transparency of EU expenditure regarding NGOs and other beneficiaries; The review of the own resources system ; The contracts (beneficiaries and procedures); Control on the EU Agencies; Measures undertaken in the budget in view of the economic crisis; Infringement penalties imposed on Member States. BUDG_aar_2011_final Page 7 of 74

8 Specific Objective : Main Outputs : 3. Efficiently and effectively manage and control the Union's own resources 3.1. Efficiently manage the Union's own resources 3.2. Managing VAT recovery and identifying possible areas for simplification 3.3. Control of the Union's traditional own resources 3.4. Treatment of Member State's write-off reports 3.5. Control of the Union's GNI/GDP own resource 3.6. Control of the Union's VAT own resource 3.7. Organize ACOR meeting, participating in GNI meetings and reporting All monthly calls for funds were sent out on time. The call for funds letters for the VAT/GNI balances and the opt-out were also sent on time (mid November 2011), as were all associated recovery orders (RO). All financial and accounting follow-up of own resources control observations files (call for funds letters for interest due for late payment and accounting actions for outstanding amounts of principal/interest, follow-up and reporting of payments) were processed within the applicable regulatory deadlines. All budgetary actions for San Marino's reimbursements were executed on time and duly supported by the related accounting actions. The EFTA (European Free Trade Association) call for funds was sent out on time (August 2011). Regarding the management of infringement cases in the field of own resources, the infringement database has been kept updated. The contribution to the Annual Report on the application of EU law was provided on time. Follow-up has been given to the military cases (in preparation of the closure in January 2012), and all other ongoing cases were treated. DG Budget has been involved concerning the Balance of Payments Facility (BoP) (e.g. disbursement of BoP loan tranches) and the EFSM (European Financial Stabilisation Mechanism) (e.g. making the mechanism operational), and it manages the potential impact of the two instruments on own resources. Constant monitoring of budgetary risks stemming from existing and new decisions for financial assistance took place during 2011 (including monitoring of BoP & EFSM loan portfolio, as well as current and future transfers/payments by beneficiary Member States). The Service Level Agreement between DG ECFIN and DG Budget on coordination in case of default by a Member State benefitting from an EFSM loan has been signed. All questions from individual Member States and Members of the EP on BoP and EFSM were answered promptly. The budgetary assessment was provided, which was necessary to support ratings by ratings agencies. BUDG_aar_2011_final Page 8 of 74

9 The yearly recovery process (collect and assess invoices, send the annual requests for reimbursement, pilot the maintenance and development of the dedicated IT programme) was managed in All requests for reimbursement for 2010 have been sent on time. Progress was made on the assessment of alternatives for simplification of the recovery process. The application of the Protocol on Privileges and Immunities (PPI) was scrutinised in the Member States, and DG Budget replied regularly to questions from other services related to VAT recovery. Regarding the negotiations of PPI application agreements with candidate countries, the final draft agreement was sent to Croatia on 12/05/2011. The agreement with Croatia's signature was received on 05/01/2012. DG Budget also participated in two bilateral meetings with Iceland in March and April Traditional Own Resources (TOR) inspections were carried out in the Member States in conformity with the inspection programme for Only one of the three Joint Audit inspections needed to be postponed to mid-january because of the late submission of the Dutch auditors' audit report. In general, the inspections showed a satisfactory level of compliance of national provisions and practises with European regulations. However, a number of shortcomings or weaknesses were noticed, in particular as far as the control of customs declarations lodged under the local clearance procedure are concerned. During the second half of 2011, 4 TOR inspections on Binding Tariff Information (BTI) were completed dedicated to the processes of issuing BTI and the usage of BTI when lodging a customs declaration for import. A total of 28 reports were sent to the Member States during the year, all produced within the legal 3-month time limit. End of December 2011, 119 follow-up actions on ECA preliminary finding (PF) letters have been taken of which 92 (77.31%) within the self-imposed target deadlines. During 2011, 10 PF-letters were closed which represents one third of all open PF-letters. During 2011, the management of TOR by Member States' authorities was further improved by identifying cases of financial responsibility: UK Chinese garlic BTI (EUR 27 million): The Reasoned Opinion has been sent in November Turkish colour TV (over EUR 35 million): A reminder letter was sent to Spain. A reply was sent to UK authorities asking them to make available the amount of The amount was paid in January Additional information has also been requested to the UK authorities. Italy sent a reply which is under Commission services assessment. A reminder letter to Germany will be sent. DG AGRI: In 2011 DG AGRI has notified DG BUDG of additional 13 cases where 7 Member States made administrative errors in applying the Import tariff quota system (AMIS- System). In all cases follow-up letters have been sent to the Member States. Anguilla / UK case (over EUR 2 million): UK is considered liable for wrongfully issued EXP certificate by their overseas territory Anguilla which resulted in non-establishment/loss of TOR. l. Since the UK refuses to pay; infringement proceedings will have to be considered. Netherlands Antilles case (EUR 18.2 million): Similar to the Anguilla case, a call for funds has been sent to the Netherlands in January "Listing cases": The follow-up of the cases communicated for the years 2008 and 2009 has been closed.. As regards the cases for 2010, 14 Member States have been held financially liable totalling EUR The letters asking the Member States for the cases of 2011 have been drafted and were sent in January TAXUD cases: In 2011 DG TAXUD forwarded cases which Member States had communicated as provided for in Articles 870(2) and 904a(2) of Regulation No 2454/93. In one of them the Member State is considered financially liable for EUR Two BUDG_aar_2011_final Page 9 of 74

10 cases are being assessed further. Member States reported 4182 cases of fraud and irregularity via OWNRES with an estimated impact of EUR 281 million. The "management of administrative errors" clause has already been successfully introduced in the following signed trade agreements: The Stabilisation and Association Agreement (SAA) EU-Albania, SAA EC-Montenegro, SAA EC-Serbia, SAA EC-Bosnia and Herzegovina and European Partnership Agreement (EPA) EU-Cariforum, Stepping stone EPA EC-Central Africa and in the following negotiated (but still to be signed) agreements: EU-Syria Association Agreement, Interim EPA with East and Southern African countries, stepping stone EPA with Ghana and Framework EPA with East African Countries, Andean countries and Central America, Ukraine, South African countries, Central Africa and Pacific countries. The clause is in discussion with India, Malaysia, and the MERCOSUR countries. Representatives from all MS, the European Commission and the European Court of Auditors met in Berlin on 27 and 28 October 2011 for a first ever seminar on TOR inspections. In the workshops, practical ideas were presented for enhancing the preparation and performance of inspections, and to change the Advisory Committee on Own Resources (ACOR) more into a platform for technical discussions on working methods and control standards. At the ACOR meeting of 8 December an action plan for the followup of the seminar was presented. The final version of the thematic report on the customs control strategy in the MS was presented to the MS Customs Director-Generals at the Customs Policy Group on 30 June 2011 and discussed at the ACOR meeting on 7 July Concerning the management and examination of the Member States' write-off reports: A) Cases received on paper: In 2011, for 131 write-off cases involving EUR million, additional information or Member States' requests to review already refused cases were received. In terms of treatment, 245 write-off cases amounting to EUR million were analysed in 2011 with the following result: cases amounting to EUR million were accepted; - 62 cases amounting to EUR million were refused; - 57 cases amounting to EUR million required additional information; - 3 cases amounting to EUR 1.77 million were considered as non-appropriate. B) Cases communicated via the application WOMIS (Write-Off Management and Information System): In 2011, 140 cases involving EUR 30 million were communicated via WOMIS and 217 cases involving EUR million were analysed with the following result: - 73 cases amounting to EUR million were accepted, 43 cases amounting to EUR million were refused - 85 cases amounting to EUR million required additional information, - 16 cases amounting to EUR 1.88 million were considered as non-appropriate. End of cases, including old paper and WOMIS cases, remained open. For 84 cases the assessment is ongoing and for 100 cases the Member States have not yet communicated the additional information requested by the Commission. In 2011 the WOMIS version 2.0 has been completed and tested. It was put into production on 18 July It includes the already planned upload possibilities for communications to Member States. BUDG_aar_2011_final Page 10 of 74

11 Regarding the control of the Union's Gross National Income/Gross Domestic Product (GNI/GDP) own resource, timely action was taken by letters issued in June to notify Member States of the lifting of one reservation, the setting of two, and the extension of twenty-five (requests dated 13 March and 26 May). The requests for further changes received on 22 December 2011 will be completed by the end of January Regarding the implementation of DG Budget's GNI own resources strategy, draft assessment reports concerning 25 Member States were presented at this year's GNI Committee meetings thus paving the way for the lifting, by the end of January 2012, of many general reservations outstanding for long periods. DG Budget was represented in the two annual Eurostat GNI meetings in July and October; the internal reports were prepared in accordance with the deadlines. The annual work programme on VAT (Value Added Tax) inspections was successfully completed following minor adaptations owing to a reduction in available staff during the first half of the year plus the postponement until April 2012 of the Iceland workshop to allow the country more time to prepare. Nine control reports were published during 2011 all were issued in time (Slovakia, Austria, Bulgaria, Ireland, Germany, the Netherlands, Romania, Luxembourg and the Czech Republic). Regarding the reduction of the number of outstanding reservations the target was not met. One reservation has been lifted but progress on the remainder during the second half of the year has been disappointing. No financial consequences are expected from three of the remaining items and the issues of principle have been resolved, but further data or verification is still required to draw the final conclusions. Agreement having also been reached in principle to lift the Italian reservations, the proposed management meeting was postponed. Further data from the earliest years is still required, and has been demanded for the end of January The management meeting will take place during the first quarter of 2012 if the new data does not entirely resolve the issues. No action is possible to resolve the Sweden item before the infringement procedure is concluded. Ten inspection reports were discussed at the ACOR meeting in October. All the final versions of the relevant summary documents were dispatched by the end of the year. Four ACOR meetings (forecasts, VAT and two TOR) were organised in accordance with plan. In addition, the ACOR rules of procedure were revised to reflect the new Comitology Regulation and were accepted by the Committee. BUDG_aar_2011_final Page 11 of 74

12 1.1.2 ABB Activity: Accounting Specific Objective : Main outputs : 1. Ensure a true and fair view of Commission, EDF, EEAS and EU accounts 1.1. Draw up the budgetary reporting and annual accounts of the Commission, EU and EDF accounts for Quality of accounting data improved 1.3. Efficient follow up of the discharge procedure for the accounts 1.4. Completion of ABAC EEAS implementation 1.5. Further improve the information quality, completeness and timeliness on the recovery and financial corrections by the Member States in shared management Annual accounts: The 2010 EU, Commission, EDPS, EDF and RCAM final accounts were issued in line with the legal deadline. Clean opinions of the Court of Auditors with respect to the reliability of the EU accounts and EDF and of the external auditor of the RCAM were received. The Guarantee Fund 7FC financial statements 2010, were adopted by the Accounting Officer and sent to DG RTD. The 2011 closure process for all the entities under the responsibility of the Accounting Officer of the Commission, including the EEAS is ongoing and on schedule. Regarding the coordination of the ECA audit on the reliability of the accounts, DG Budget has maintained an excellent communication with the Court of Auditors, all the issues noted by the Court have been discussed with them and solutions have been found and agreed. A significant issue concerning the accounting of the amounts paid to Financial Engineering Instruments was dealt with, together with the Structural Fund DGs. The Court of Auditors has reported no findings related to the reliability of the EDF accounts and so a clean opinion was received. Quality of the accounting data: The complete reconciliation of bank accounts for Commission and EDF for 2010 was finalised on time for the closure. The bank circularisation for the DAS has been done. For General budget and EDF nearly all banks sent the confirmations. For delegations the % of answers is of around 60%. No particular exceptions or issues have been registered. BUDG_aar_2011_final Page 12 of 74

13 Monthly and quarterly accounting controls have been implemented for all key processes. The EDF 2010 summary and 2011 control programme has been submitted by DG DEVCO. Regarding the Accounting quality project implementation, all Commission services, DEVCO (EDF) and EEAS were subject to the diagnostic review and the results communicated individually to each of them. DG Budget has ensured an active and frequent communication with the accounting correspondents, which has been essential for the 2010 closure (e.g. adjustment due to Financial Engineering Instruments). Regarding the regular clearing of prefinancing the communication has been intense, including bilateral meetings, participation in the RUF and the organisation of a specific workshop to discuss on the matter. The communication effort, which will be maintained in the future, has allowed a clear understanding of the objectives sought, the problems that the regular clearing of prefinancing poses to AOD financial services and the best practices for implementation. This has helped to reach a common position and to enhance the effectiveness of the procedure. DG Budget also ensured a regular and active communication with the Accounting Officers of the other consolidated entities, in particular during the 2010 closure and through its helpdesk for accounting questions and the annual meeting with the Accounting Officers of the Institutions, Agencies and Joint Undertakings EEAS: The EEAS went live as an independent institution beginning of January 2011, as planned. The procedure of closing the 'old' Commission's imprest accounts and opening of new EEAS imprest accounts is ongoing but takes more time than initially foreseen. The process was slowed down considerably from July to September due to staff turnover in the delegations. At the end of the year around 76 delegations have opened the new account (EEAS). For all the other delegations the process is ongoing. The EEAS treasury architecture is now aligned to the one of the Commission. A procedure for the regular (monthly) replenishment of the EEAS treasury has been put in place and its payment and cash management system now functions in a "routine" mode. All relevant EEAS payment instructions are executed as SEPA compliant. Financial corrections: DG BUDG liaised with the DGs (shared management) to ensure that complete, reliable and timely information on financial corrections is available. As of 31/12/2011 the 3 quarterly reports on financial corrections were sent to the COCOBU. Note 6 of the 2010 accounts provided complete and reliable information and it also takes into consideration relevant ECA and Discharge Authority comments. BUDG_aar_2011_final Page 13 of 74

14 Specific Objective : Main Outputs : 2. Appropriate execution of Accountant's tasks 2.1. Management of the Commission s accounting framework and system 2.2. Management of the central budgetary framework 2.3. Commission's Treasury management 2.4. Validation of Local systems 2.5. Early opening of budget lines 2.6. Efficient recovery 2.7. Management of the Legal Entities File and the Bank Accounts File 2.8. Management of EC's EWS and exclusion database 2.9. Payment Deadlines monitored Pre-financing (mandate) In October 2011 the 17 th meeting of the advisory group of experts was held to update several accounting rules, including the accounting rule on financial instruments. The updated rules were adopted in the 4th quarter of Additional guidelines for Joint Undertakings have been integrated in the 2011 closure guidance sent in December The aligning of the EDF accounting rules with the recently adopted EU rules will be done in The changes to the accounting rules in particular in the area of financial instruments will be incorporated in the accounting manual. The management of master data and monitoring of the SAM/FI/CO/AA/ECCS systems including data for General budget, EDF, CAM, EDPS, EEAS was completed for Regular follow up of the suspense accounts of all the entities under the responsibility of the Accounting Officer of the Commission, and quarterly reporting to the Accounting Officer were completed for DG Budget is monitoring the situation closely and has recently developed a new more detailed ageing report in SAP which provides a better tool for the follow up of the suspense accounts (both in DG Budget and in the DGs/EEAS). Concerning the management of central budget structure and central appropriations, all 2011 amending budgets have been duly implemented and all necessary adjustments of structures and appropriations have been done. Inscriptions of RIB appropriations have been made on a regular basis (2/week). All 2011 documents have been treated at year-end. BUDG_aar_2011_final Page 14 of 74

15 Financial Year Transition (2011 to 2012) opened the 2012 budget on 9/12/11 accurately. Regarding the carry forward, the was achieved, resulting in the availability of the RAL for commitments in the first week of 2011, while the preparation was ongoing at the end of The Commissions treasury resources have been managed in compliance with the applicable regulatory framework. No instances have been registered of exception to this principle. Cash resources have always been sufficient to cover for the execution of payments on time and without any delay. In the first half of the year resources have been called up in advance from Member States in order to cover for the very high level of FEAGA payments. The advance was then gradually absorbed until the month of July, when the call for own resources from MS went back to the monthly twelfths. The monitoring of the MS own resources payments, both for the general budget and the EDF, was performed regularly and timely and with a close communication with Direction B and DEVCO (EDF). All issues and exceptions were promptly followed up. No significant issues have been registered in this area in Payment operations have run regularly in All payments for the entities under the responsibility of the Accounting Officer were executed and reconciled without delay. No particular exceptions or issues were registered in the period. Weekly controls have been put in place to monitor the payments delays taken by DG Budget and by our banks. No major delays have been identified. The reconciliation of all payments and receipts is a recurrent and daily task. No significant issues have been registered in this area during The InforEuro has been produced on a monthly basis and its web page presentation has been modernised. Regarding the validation of local systems, the work progressed well. The validation reports for SANCO Follow-up, PMO JSIS, EMPL, AGRI, RELEX Follow-up, REA, OIL restaurants activity, OP sale of publications activity, DEVCO, and RTD Guarantee Fund have been finalised and issued. The validation have been confirmed and a number of issues identified. Recommendations for improvement ( e.g. of procedures, manuals and flows or corrective measures to address issues related to timeliness of recording cost claims and invoices, consistency of data between the local systems and ABAC, suspensions, differences in workflows, etc) have been made which will be followed up in the course of The work for EGNOS, ELARG, JRC, INFSO and ENER/MOVE is underway and close to finalisation. The validation team will continue to press for further improvements. It will continue its new cycle of re-validation with the aim to focus on specific aspects of the accounting systems where risks exist or important changes are made. The global report for 2010 was issued as foreseen. It was sent to the Court of Auditors, the Directors of Resources and the IAS. Concerning the Accountant s validation of recovery orders, the return rate for recovery orders established by high risk services, for the whole year was 2.4 %, which is in line with statistics previously observed. The total number of bank cashing reconciliations reached almost , corresponding to some billions which have been matched with the corresponding recovery orders. The open items, which could not yet be reconciled, were in number of 715 (i.e. some 651,5 million), 260 (36%) of which being more than 6 months old. Timely evaluation of pending claims and timely record of guarantees was completed. Contribution on evaluation of claims was provided. The recording of guarantees (ABAC) is an ongoing activity. Correct and timely issuance of recovery orders for default interest is an ongoing activity; the ROs are issued within the financial year of the cashing BUDG_aar_2011_final Page 15 of 74

16 Concerning the execution of offsetting files the figures confirm the existing trend. A total of 720 files has been handled allowing the closure of recovery orders, and the cashing of 62.4 millions. The analysis of the reactions of debtors and authorising officers continue to show that the offsetting remains very well accepted and that has taken the place of a current financial management tool. Contact points are maintained with some 79 debtors (mainly Member States and International organisations). The purpose is to ensure the payment by bank transfer of the amounts due to the Commission and thus to avoid the offsetting. For the Member States, in total, some 18.3 millions have been collected as a direct or indirect result of these contacts. The validations of Legal Entities and Bank accounts are done respecting the deadlines. The number of requests for validation continued to be very high, in particular in the last months of the year. In total about bank accounts requests and about legal entities requests have been processed in The optimisation of the legal entities and bank accounts process is an ongoing project. The main objective of the project is to improve the efficiency, effectiveness of the LE and BA process both at DGs level as well as at DG Budget level by increasing automation and reducing manual work, increasing quality at source, adapting procedures to the risk of processes. Moving to a paperless environment is one aspect of this project. The number of registered EWS warnings was regularly monitored. Actions were taken to ensure the correct functioning of EWS in the operational DGs. Quarterly statistics on EWS flags are now prepared and sent to the Accounting Officer. The usage of the Central Exclusion Database (CED) by Member States was reviewed and the letters sent to Member States that have not designated the Liaison Points yet. The Vademecum with operational instructions for the use of CED was updated in line with requirements of EDPS, and it has been sent. Regarding the monitoring of the payment deadlines there is a monthly monitoring of the key indicators, the comparison is made taking previous year as baseline, the previous reporting month and the corresponding period of previous year. Several notes had been sent to the DGs informing them on their performance. Reactions received were treated and replied to, when needed. Some DGs sent action plans for improvement. Overall, the figures show a mixed performance for By certain measures, for example the average number of days to make a payment, improvements have continued. However, beneficiary often has to wait a long time to receive the payment. Performance improved notably in certain services, while in others additional effort must be done to meet the target deadlines. The issue is given full importance by the ABM Steering Group which in January 2012 endorsed the approach proposed by DG BUDG. In view of the reduced time limits introduced by the new FR, a critical cross-cutting risk was introduced. Monitoring will continue in 2012 and will propose further areas for improvement. The issue of payment deadlines will be raised at least twice a year in the Group of Resource Directors, and, if need be, in the ABM Steering Group. BUDG_aar_2011_final Page 16 of 74

17 Specific Objective : Main Outputs : 3. User support for Corporate financial/accounting system 3.1. Efficient management and monitoring of security 3.2. Information and training 3.3. Organise User Requirements meetings with the DGs 3.4. The USMs are present in the RUF meetings 3.5. Follow up and monitoring of the User Incidents and Problems Regarding the implementation of Governance Risk Compliancy monitoring, specifically the refinement of the rules set with business experts, is an ongoing activity. All financial high risks are covered (incl. ECFIN), the update of rules set based on non standard SAP-transactions was done as well as the renewal of the standing procedures governing the accesses to SAP by IT-experts to align to SAP/GRC-Implementation. The electronic security forms in ABAC have been implemented in the autumn release 2011, except for crossed sub-delegations. The crossed sub-delegations are planned for spring The monitoring of content and effectiveness of the new structure of ABAC and accounting certification courses, to ensure that it corresponds well to users' needs, has been completed. The pilot courses have been attended and considered adequate. Monitoring the courses will be done by the responsible training Units. Two ABAC User Committee meetings were organised in 2011 in order to collect user feedback on a number of upcoming features in ABAC: Single view of a file; Appropriation browser; Signing transactions in batch; Integration with Ares; Monitoring of payment delays; Paperless Office & einvoicing. The first meeting was held on 21/03/2011 and the second on 1 st December In each RUF meeting the Head of Unit or a Team Leader of the Unit responsible for User management of financial information systems is present to answer questions on ABAC. Debriefings within the Unit exist, sometimes on paper, sometimes they are communicated in the Team Leader Meetings. In case ABAC issues are pointed out, then they are encoded in the ABAC Issues database to keep track of them. A new report is developed listing monthly the number of JIRA issues (bug and issues tracking and programme management tool) which are unsolved, created, fixed, the average number of days to fix them, the median of the number of days to fix them and the number implemented in Production. The Scoreboard of DG Budget has the number of open issues, but as from January 2012 other Key Performance Indicators will be added. A new report is developed to list per USM (User Service Management) team the number of tickets which are open, which are resolved, and which were created by the USM team. The resolved ones are ranked per number of days it took to close them. BUDG_aar_2011_final Page 17 of 74

18 The procedure ABAC Incident Management and Management of USM Functional Mailbox is online since June A procedure to ensure a better follow up of tickets made for the resolution of SMT (Service Management Tool) incidents was setup. The document is finalised, and has to be implemented by all the USM team. BUDG_aar_2011_final Page 18 of 74

19 Specific Objective : Main Outputs : 4. Management and development of the Corporate financial/accounting system 4.1. Continuous enhancement of ABAC in line with the Roadmap 4.2. Ensure availability and reliability conform the SLAs 4.3. Strengthen ABAC Project Office 4.4. Prepare the implementation of the re-casted architecture 4.5. Gradual Rollout of ABAC SAM across major management centres 4.6. Further roll out of the corporate system across institutions/agencies and Joint Undertakings Regular review and progress tracking of the Roadmap and associated priorities has been done during Regular requests of updates were sent around as well as the formalisation of a procedure for adding new projects via approved PIRs (Project Implementation Reports). The continuous Improvement Program for IT Service management, the implementation of processes (change management, incident management, improve release & deployment management and service catalogue) have been ongoing. Regarding the improvement of the ABAC Workflow User interface, to avoid possible time-out in certain transactions following on phasing out of Powerbuilder technology, has been delayed due to issues encountered during a first tentative of migration,, which has been postponed in Q1/2012. Regarding the implementation of ECAS module for authentication in ABAC Workflow, in the frame of the new ABAC architecture project, this action has been postponed to 2013 since the pre-analysis demonstrated that a more profound analysis is required. The ECAS authentication is a pre-condition to further integrate Ares/Hermes with ABAC. The implementation of Non For Profit Organisation (NFPO) as a new legal entity has been partially completed, ABAC Workflow was upgraded in April 2011, the user guidelines are to be finalised, the Integration NGO/(N)FP indicator in the full review of the LE classification has been completed for the 27 Member States, the second phase (rest of the world) is for 2012 and the analysis is ongoing. To limit the impact on the ABAC User Community the two releases of ABAC in 2011 (and in the future similarly) were (will) be planned long after the closure (May) and long before the anticipated budget opens (October). DG Budget respects the Service Level Agreement (SLA) that has been set with the User Community and any halting of ABAC during core hours is only accepted by the USM for urgent or risky corrections. The October release 6.4 was put in production as planned on the 13 th of October. BUDG_aar_2011_final Page 19 of 74

20 Concerning the technical management and monitoring of the ABAC system, the SLA objectives (96%) were reached for system availability (99.44%). Help Desk Statistics : Incident solved within 1 hour (Target 70%) and Incident solved within 4 hours (Target 80%) were met in all quarters outside SAM calls which are complex and time consuming to solve. Regarding the respect of timing and completion of all the phases (specifications definition, development, functional testing, putting in production) in release management and implementation no major deviation was noted, but it is nonetheless under continuous improvement. The first step of the Review of the SLA for external entities using ABAC is on track. No particular issues were raised by Units. A version was sent out to all external entities for feedback, the main questions raised by entities relate to the fees payable. The ABAC Project Office was strengthened through establishing and implementing procedures and tools to ensure that the corporate financial/accounting system stays in line with the evolving business, planning and priorities (roadmap, dashboards and reports). The finalisation of procedures depends on the end result in relation to resources management procedures. The establishment of DG Budget standards with regard to project and service management (documents, methodology, reports) was completed through the integration of the Commission's standard PM² project methodology adapted to DG Budget's environment, as well as the procedures for Service Management (SCRs) and the definition of the guidelines to define the line between project and service mode. The definition and implementation strategy of the re-casted architecture was partially completed. Progress was made, the building blocks are defined. A working group was re-launched on the basis of the TOGAF (Open Group Architecture) Framework. The scope, detailed planning and launch of projects notably on the standardisation of the current landscape were defined and launched: - Archiving - Paperless finance (including ECAS, Hermes integration, optimisations of LE/BA and Electronic security forms) - New General ledger and simplification of payment flow - Legal Commitment Kernel - Proof of Concept on the Architecture - Pilot project for the Invoicing domain (including e-invoicing) - Policy for standardisation of SAP and the role of the SAM platform herein. The owners of local systems are actively collaborating with DG Budget for the implementation of the service oriented architecture (SOA). As a consequence of this facility, local system will be enabled to abandon functionality which is overlapping with ABAC. This will improve data consistency across the full IT landscape and should ultimately reduce maintenance costs of local systems. From a technical perspective all required infrastructure environment was made available. A specific effort is made to increase the number of virtualised servers. Regarding the Gradual Rollout of ABAC SAM, the Accounting Officer and the Director General decided to put ABAC SAM in maintenance mode (see section Major events during the reporting year IT environment). The most important maintenance items for this year are: - Accounting quality - Security management revision - Fine-tune interface with ABAC Contracts - More reporting BUDG_aar_2011_final Page 20 of 74

21 - Purchasing Flows: o Automated data Loading features and form updates - Finance Flows o Aligning data sets between systems o Update in accounting checks and controls across systems o Reporting: Invoice history reporting in data warehouse - Logistics /Tracking o Update of user roles in system and streamlining the security management of these roles o Update forms and partial shipment tracking process o Reports: Additional reports for GBIs and OIB management to monitor inventory across all buildings for OIB and OIL The following Agencies have implemented ABAC in 2011: ACER, BEREC, EASO, EBA, EFSA, EIOPA and ESMA. The Agencies calendar for 2011 has been met. Support for extraction of specific data of an agency from the Datawarehouse was given. The Security conventions are updated. Two meetings with the external entities were organised in 2011, one in April and one in October. The migration of candidate agencies' bank account data to ABAC LEF/BAF is an ongoing activity. 2-day trainings on treasury matters and payment run and bank reconciliation were delivered in Support/advice was provided to Institutions (including EP and CoR) and agencies on the preparation of calls for tender for the selection of banks. For LEF/BAF several trainings were delivered to various agencies and some Commission departments. All the trainings received a positive feedback. Appropriate support on accounting matters to all entities using the ABAC system is a recurrent task. As part of the ongoing support provided by DG Budget all the questions received via the ABAC agencies helpdesk were answered in a timely manner. BUDG_aar_2011_final Page 21 of 74

22 1.1.3 ABB Activity: Promotion of sound financial management Specific Objectives : Main Outputs : 1. Revision of the Financial Regulation and Execution Modalities (FR/EM) 3. Implement the Lisbon Treaty 1.1.Adoption of a new Commission proposal on the Financial Regulation (same output as 3.1) 1.2. Negotiations with the European Parliament and the Council (same output as 3.2) 1.3. Adoption of the Commission delegated Regulation for the Execution Modalities, to be submitted to the approval of EP and Council 1.4. Information to Commission services on progress (same output as 3.4) The Commission proposal on the Triennial revision of the Financial Regulation (FR) was adopted on 28 May 2010, accompanied with the working document on the delegated act. However, after months of stalemate with the European Parliament due to the recast format of the revision, and in order to facilitate negotiations, it was decided to replace all pending proposals on the revision of the FR (triennial and Lisbon) with a single one, which also took on board the changes already adopted for the creation of the EEAS. The new Commission proposal was adopted on Negotiations with the EP and the Council have been ongoing through Coreper adopted a draft Presidency compromise in May 2011 and EP eventually voted its amendments in the October II plenary. Close cooperation as well as technical support was ensured with the Presidency (Council) and the co-rapporteurs (EP) through meetings and exchange of documents. Trialogues with Council and EP were held on a regular and steady basis. Numerous Combud meetings were attended. Non papers were prepared in order to reply to delegations queries and to provide trialogues with further explanations or alternative wordings. Since there have been delays in the procedure resulting from the decision process of the other institutions involved, this action will still be relevant in 2012 until a political compromise between institutions is reached. The group of experts from the Member States on the delegated act, met for the first time in At its request the Parliament participated for early informal consultation in order to avoid as much as possible subsequent difficulties with the legislative authority which may delay the entry into force, Since the discussions in the expert group are closely linked to the rhythm of discussions (trialogues) in the legislative procedure leading to the adoption of the revised/new FR, a detailed table could only be sent in January 2012 when the first provisions of the FR were sufficiently stable. Consequently this action is still relevant in BUDG_aar_2011_final Page 22 of 74

23 For Output 3.3: Adoption of Commission proposal on the revision of the Financial Regulation applicable to the EDF (EEAS related): This adoption has been postponed to 2012 as this proposal can only be prepared on the basis of the final outcome of the negotiation relating to the revision of the Financial Regulation. BudgWeb is continuously updated with information on the state of play of the adoption process; information is communicated during RUF sessions. Information notes were submitted to GRI at regular intervals (May, July, September and November). An intranet webpage is permanently updated in order to inform services of the latest developments. This process will continue in 2012, until a political agreement between the 2 branches of the legislative authority on the FR is reached. BUDG_aar_2011_final Page 23 of 74

24 Specific Objective : Main Outputs : 2. Promote sound financial management and conformity with the financial regulations in the management of the EU Budget 2.1. Accurate, up-to-date, userfriendly guidance and information available on BudgWeb 2.2. Guidance and information actively communicated to staff managing the EU budget (RUF/SFC helpdesk) 2.3. Staff trained with the information and skills necessary to manage the EU budget effectively 2.4. Effective assistance given to DGs and Agencies in the adoption and application of the financial rules 2.5. Publication of circulars 2.6. Adoption of Internal Rules 2.7. Preparation of revised guidelines for executive agencies 2.8. Financial Transparency System (FTS) 2.9. Work to assess costs of controls and errors continues in 2011 along with the adaptation of the TRE approach into a "management concept" Contribution to the revision of legislative provisions on control Financial Regulation and future sectorial legislation Adoption of principles and key concepts for simplification and its follow up A continuous effort throughout 2011 was made to help and train staff managing money in the Commission (and on request Agencies and other Institutions) by providing them accurate, up-to-date user-friendly guidance and information. A continuous effort has been made during the year 2011 to further improve ownership of the content of BudgWeb by the different DG Budget contributing Units, consequently 110 pages were updated. A total of 743 updates have been published on BudgWeb in The online feedback form allows BudgWeb users to send a message and inform DG Budget if they have found the information or not. In 2011 we answered 250 messages in addition to the 180 messages received via the "contact" button. BUDG_aar_2011_final Page 24 of 74

25 The RUF (Finance Units Network) has been kept regularly informed on new developments. Upon request of the RUF members the following working groups were created: Moving towards paperless finance in the Commission (workshops held 24/01/2011 and 12/04/2011 outcome: results presented at the RUF and published on BudgWeb) Clearing of pre-financing: how to strike the right balance between accounting quality & efficient + effective grant management? (workshop held 20/05/2011 outcome provided to BUDG C2 proposal in preparation) Preparation of Heads of Finance Unit's away-day (4 members + RUF Chair provided input on desired format and content The RUF chair sent the conclusions of the following working groups: on "Audits" to all Directors Generals and IAS on "Towards Paperless Finance" to the Chairman of the High Level Committee for IT Governance The RUF had exchanges of best practice followed by discussions in March = E- invoicing applications; April = E-management of framework programme for research by executive agency; May = admissibility of invoices/payment requests; June and September = implementation of EWS The Expenditure Lifecycle (ELC) payments e-learning module was completed end The participants of ELC courses from October 2011 onwards will have access to this new module as from February The need for additional modules will be studied in 2012 according to the feedback received on the existing one and the available resources. The regular course offer of DG Budget concerning procurement, grants and other domains has been running well and is regularly kept up-to-date. Preparatory on a new practical workshop on contract management was completed and the new course will be piloted in March Following delays in the adoption of the new Financial Regulation (FR) and Delegated act, the information sessions for financial staff on the main changes foreseen in the revised/new FR/EM is postponed to Preliminary discussions on this action have been undertaken in 2011 in the training team and with the Unit in charge of the FR revision (permanent monitoring of progress is done by the training team leader). Effective assistance was given to the DGs and the Agencies in the adoption and application of the financial rules throughout In total, 2740 Interservice Consultations (ISC) were replied to by DG Budget. Among those SFC (Central Financial Service) was chef de file for 1232 ISC. In particular all proposals for basic acts for the future MFF (Multiannual Financial Framework) were reviewed during the fall regarding their management modes and delivery mechanisms. Together with consultations on annual work programmes mostly, it means that 261 ICS were dealt with by the Unit in charge of procurement and grants, while another 564 direct consultations were treated, excluding those received through the helpdesk. Agreed standards on how to respond to Helpdesk questions were finalised and published in A regular review of the answers, ensuring consistency, timeliness and correct applications of the standards and procedures has been ongoing during The so-called "Questions à suivre" are identified and regularly registered on a permanent basis. Discussions are held during weekly Helpdesk meetings. The corresponding actions to be implemented are regularly discussed and agreed with relevant Units (15 cases registered in 2011). BUDG_aar_2011_final Page 25 of 74

26 Concerning the Grants Vademecum an interservice group was set-up. Five meetings took place, the target group, format and presentation were agreed, and the work on chapters is progressing. The principles, submission and evaluation of proposals are almost covered. Conditions of access by third countries to procurement were updated in the Vademecum (VM) in March. The Inter-institutional contract template, the IPR (Intellectual Property Rules) clause and the related guidance notes were updated as part of the update and harmonisation of contract templates. The Guidance note was published following two presentation workshops in October and November, together with the one on framework contracts. All contract templates are now published in all languages. Regarding the publication of circulars, the Implementation of grants through subcontracting was done and discussed in the Vademecum group. The Reduction of grants (final payment) will be part of the Vademecum. Considering the pace of discussions, it will be dealt with in a meeting in Concerning the Internal Rules 2011, the InterService Consultation was launched on The Commission decision was adopted on (C(2011)4211). The adoption by the Commission of the revised guidelines in the light of experience and the revised working arrangements agreed with EP, and taking account of the Court of Auditors' opinion and recommendation on executive agencies has been postponed to 2012 due to priority to be given to the Financial Regulation and Implementing Rules revision process. Nevertheless input was received by the Executive Agencies on Preparation of externalisation to executive agencies for the next generation of programmes has started and DG BUDG has contributed to this work inter alia as part of the interservice group on externalisation chaired by DG RTD. Concerning the Financial Transparency System (FTS), the quality of the data was enhanced and a detailed dashboard in the reports was included. The process of manual corrections was more formalised. Final confirmation requested through ARES included a detailed checklist. The commitments of the 10 th EDF (European Development Fund) relating to the financial year 2010 have been integrated previous years not yet. The work to assess costs of controls and errors continues in 2011 along with the adaptation of the TRE (Tolerable Risk of Error) approach into a "management concept". Guidelines on how to provide an estimation of the cost and benefits of controls as well as the expected level of non compliance in the financial statements were issued. They were used to review the post 2013 sectoral proposals. The concept of Tolerable (Residual) Risk of Error as a management tool will be taken forward, on the basis of the final texts adopted under the revised Financial Regulation, so that it can be translated in concrete terms in the Commission's responsibilities for the implementation of the Budget. The Annual Activity Report standing instructions were updated in November. All MFF (Multiannual Financial Framework) sectoral proposals have been screened by the end of An inter-services group was set up by DG Budget in agreement with the Secretariat General chaired by the Principal advisor of DG Budget. A screening of sectoral legislation coordinated by the Principal Advisor took place in The guidelines on simplification of new legal bases and programmes were adopted in June Specific input was provided to the Interservices Group "Financial Regulation/Sectoral Legislation" regarding simplification of sectoral rules with a view to reducing the administrative burden on beneficiaries and reducing the scope for legality and regularity error. Also coherence of the sector-specific rules was ensured with the provisions of the general Financial Regulation. All basic acts were treated in InterService Consultation during the fall. BUDG_aar_2011_final Page 26 of 74

27 A guidance document was prepared on "Simplification: options to consider in drafting sectoral legislation" outlining suggestions based on the results of the College seminar of simplification held in January. This document was distributed to the DGs on 28 March and discussed at the GIS (Groupe InterService) "Financial Regulation/Sectoral Legislation" meeting of 11 April BUDG_aar_2011_final Page 27 of 74

28 Specific Objective : Main Outputs : 4. Facilitate the implementation of the internal control framework 4.1. Preparation and adoption of : "Overview" report, synthesis report and conduct the associated Peer Reviews 4.2. Animation of inter-dg networks to promote good practice 4.3. Guidelines/ training on internal control issues 4.4. Other support for internal control 4.5. Follow-up of Discharge on internal control matters Input was given throughout the entire Annual Activity Report (AAR) process. Pre-peer reviews took place in January 2011 with DGs having reservations in AAR 2009 followed by Peer reviews and targeted feedback on draft AAR quality to all DGs in March 2011 (in cooperation with the SG). The Overview report was finalised on 28 April 2011 and the Synthesis report was adopted by the Commission on 1 st June 2011 (COM (2011) 323). AAR instructions were revised in November 2011 to (1) ensure error rates sufficiently representative; (2) better define the concept of residual risk of error; (3) introduction of internal control objectives; and (4) reporting on anti-fraud strategies. The Ex Post Control Network (EPCnet) is inactive and has not met during A new meeting will take place in early 2012 to examine whether to merge it back with ICC net. The Internal Control Coordinators Network (ICCNet) continued its regular meetings in Training courses on internal control, risk management, fraud awareness and AAR preparation were defined, prepared and delivered during The course content as well as the schedule and structure are being revised for Developments on risk management and internal control in DGs were monitored throughout the year. Specific risk management guidelines as requested by the DGs and on risk management for procurement have been issued. Those on fraud will be prepared in cooperation with Olaf as foreseen in the anti-fraud action plan (2012). Those on grants will be revised followed by the update of the Vademecum (deadline foreseen June 2013). Complementary guidance on Internal Control Standard (ICS) 8 (registry of exceptions) was prepared at two seminars with the DGs, discussed at the ICCNet meeting and then published in June An Interinstitutional framework contract for audits and controls was completed during 2011; the contracts were signed in December The management of the framework contracts for internal control including advice to DGs and processing of specific contracts has been ongoing. BUDG_aar_2011_final Page 28 of 74

29 The liaison with authorities in Member States concerning the reporting on payments to national SAIs and Finance Ministries, the provision of information and advice on audit and control issues and the maintenance of an overview of annual summaries and national declarations is an ongoing recurrent task. The reporting on payments for 2011 has been completed. The revision of the transmission modalities to prevent misuse of the information is currently ongoing. BUDG_aar_2011_final Page 29 of 74

30 Specific Objective: Main Outputs : 5. Prepare candidate and potential candidate countries and assist European Neighbourhood countries 5.1. Chapter 33 - Monitoring progress in Own Resources preparedness (candidate countries) 5.2. Chapter 33 - Produce input to periodical monitoring and progress reports 5.3. Chapter 32 - Carry out information and monitoring missions regarding Financial Control 5.4. Chapter 32 - Benchmarking of internal control environments against international standards in participating countries 5.5. Chapter 32 - Participate in PIFC seminars organized by third-parties Chapter 32 - Produce input to periodical monitoring and progress reports Screening of the Icelandic acquis for Chapter 33 (CH-33) was executed; the screening took place on 7 March and 4 April DG Budget replied on 6 June 2011 to the Inter Service Consultation (ISC) of DG ELARG on the screening report. The report was discussed in Council in September Contributions to the draft EU Common Position were made in October Accession negotiations on CH-33 were formally opened in December On 15 December 2011, a letter was sent to the Icelandic Ambassador setting out the main steps envisaged to assist Iceland in its administrative preparations and how progress in these preparations will be monitored. The questionnaire on own resources administrative conditions was sent out the same day for completion by 15 February Iceland was also asked to simulate A&B account statements for the last quarter of 2011 to be delivered together with the completed questionnaire. The two-day workshop is scheduled for 25 and 26 April A TOR monitoring mission in Croatia was executed between 6 and 10 June The monitoring report sent to Croatia for comments end June. The Croatian observations to the report were received on 18 July 2011 and the consolidated version of the report was sent to DG ELARG a few days after as input to the Croatian 2011 progress report. The Croatian action plan is updated every two months and copy is sent to DG Budget allowing measuring progress in completing own resources preparations. The last update was received early January 2012 covering the period October-December Two contributions were provided in February and May 2011 to the Commission's draft Opinion on EU membership for Serbia. The contribution to the InterService Consultation on the Opinion was provided early in September BUDG_aar_2011_final Page 30 of 74

31 Contributions to the 2011 enlargement package, adopted by the Commission on 12 October 2011, were provided on 19 May Concerning the assessment of progress in the adoption of Public Internal Financial Control (PIFC) in Candidate Countries, Western Balkan countries and ENP (European Neighbourhood Policy) countries, twelve monitoring missions were undertaken in 2011 (Bosnia and Herzegovina (BiH) (2), Croatia, Montenegro, Former Yugoslav Republic of Macedonia (2), Kosovo, the Netherlands (for Fyrom), Albania (2), Moldova and Turkey.). Planned missions to Serbia, Ukraine and Armenia have been postponed until 2012 to allow time for evidence of implementation to be marshalled. Four missions to SIGMA (Support for Improvement in Governance and Management in Central and Eastern European Countries) were undertaken to co-ordinate PIFC approaches in candidate, Western Balkan and ENP Countries. Assessing progress and assisting in the adoption of PIFC in Candidate countries (Croatia, FYROM, Turkey, Iceland), Western Balkan countries (Montenegro, Kosovo, Albania, Serbia, BiH) and ENP countries (Moldova, Ukraine, Armenia) by providing tailored technical advice on planned PIFC policies and draft legislation is a demand-led activity responding to 26 requests from 'customers' for scrutiny and analysis of draft primary and secondary legislation. In 2011 the work mainly involved the Western Balkan countries. Seminars and similar events were attended in BiH (State and Federal levels), Croatia, Montenegro, Fyrom, Kosovo, Moldova and Turkey. The 'seminar' in Montenegro and Albania were at full cabinet level demonstrating the change in focus and greater commitment in these countries. All Member States submitted their replies to the survey of Public Internal Control systems, which contribute to the Compendium. Collaboration between SIGMA and DG Budget resulted in a summary analysis/overview which forms the introduction to the book. DG Budget edited, proof-read and finalised the Compendium which was made available online in December The draft Conference discussion papers prepared with SIGMA were also produced by the deadline. The final versions will be agreed in due course. Two Chartered Institute of Public Finance and Accountancy (CIPFA) Conferences were attended (in London in March on Trust and Accountability, and in Brussels in November on Governance). Active preparation and participation in the SIGMA regional seminar on PIFC implementation (Slovenia, September) also took place. DG Budget's input to the ELARG Regular Reports was submitted on time as was its review of the final draft text. This included comprehensive input to the Commission's opinion on Serbia's application for membership. Conclusions concerning Croatia were submitted in June DG Budget's input to the ENP progress reports was submitted on time, as was its review of the final draft text. DG Budget submitted comments to the draft Public Expenditure and Financial Accountability (PEFA) assessments in both, Ukraine and Moldova. DG Budget took initiatives to foster a reflection process with the aim of modifying the indicators used in the PEFA framework. BUDG_aar_2011_final Page 31 of 74

32 1.1.4 ABB Activity: Financial framework and budget procedure Specific Objective : Main Outputs : 1. Establish a budget of good quality within deadlines respecting the Commission's priorities 1.1. Budget preparation and adoption 1.2. Results orientated information included in DB 1.3. Sound budgetary and financial implications in Commission's proposals and decisions 1.4. Provide a quality IT support for budgetary process 1.5. Financing of the budget 1.6. Calculation of the UK correction 1.7. EFTA proportionality factor After budgetary hearings in February and March, including the necessary work of detailed review of budget lines and a trialogue on budget priorities, the Commission adopted the Draft Budget for 2012 on schedule and without major difficulties on 20 April All accompanying working documents were also disseminated in due time before the end of May to allow the two arms of the Budgetary Authority (Council and European Parliament) to analyse the Commission's requests. On 1st December2011 the EP formally adopted the 2012 Budget, following the agreements reached in the budgetary conciliation, with the level of commitments very close to the one proposed by the Commission, and including the necessary redeployment in favor of the ITER project. The increase in payment appropriations will be lower than originally proposed by the Commission; however, the Commission, Council and Parliament agreed to take stock in the course of 2012 with the possibility of amendments, if needed. The overall budget for 2012 will amount to EUR billion (1.86 % increase) in payments and EUR billion (+3.8 %) in commitments. Seven amending budgets (AB) were presented in 2011 all of which have been approved, two of them with amendments and five without amendments. Three amending letters (AL) were presented: one Amending Letter simultaneously to the mobilisation of the flexibility instrument for the reinforced neighbourhood policy (including the related staff redeployment), one for the administrative preparation to Croatia's accession, and one for Agriculture before the conciliation in November. The amending letters have been taken into account in the final agreement of the conciliation and the mobilisation of the flexibility instrument has been approved albeit with reinforced amounts. BUDG_aar_2011_final Page 32 of 74

33 The Allocation of Human Resources and decentralized administrative expenditure was adopted by the Commission on 20 December 2011 despite the difficult economic context and institutional uncertainties. Regarding the quality IT support for budgetary process the work in 2011 included: Integration Ciba/ Badgebud which started already in 2010 (automatic transfer of data from Ciba to Badgebud when budget is voted) and to be pursued for next year DB (budget remarks); Integration of PAR (Potentially Abnormal RAL) database in ABAC; Interoperability Badgebud and ABAC: The Project Implementation Report has already been presented: it should cover various aspects such as change of exercise and integration of amending budgets. For change of exercise: preconditions (format, content and business definition) are now compatible especially with the new procedure for anticipated budget. DG Budget processed more than 2700 InterService Consultations related to modifications of existing programmes, new programmes, financing decisions and other decisions of the Commission (including those related to real-estate), to ensure they complied with budgetary discipline and sound financial management. Regarding the financing of the Budget, the Commission forecast was prepared in due time for the ACOR (Advisory Committee on Own Resources) meeting. All related budgetary documents were prepared and completed and an agreement was secured with the MS at the ACOR meeting. The calculation of the EFTA proportionality factor was also completed according to the set schedule. The calculation of the UK correction was done according to the set deadline and, following the error detected last year by the ECA, additional control measures with respect to the calculation and the double-checking of the UK correction have been put in place (for a description of the additional control measures, see chapter ECA's Audits 2011). BUDG_aar_2011_final Page 33 of 74

34 Specific Objective : Main Outputs : 2. Forward budgetary planning : frame spending within short and long term financial perspectives 2.1. General Communication accompanying the proposals for the next MFF, including simplification of rules, risk-based and cost effective controls, focus on performance and enhanced accountability of the Member States in shared-management 2.2. Proposals for a post-2013 MFF regulation and for a new Interinstitutional Agreement 2.3. Own Resources report 2.4. Legislative proposal(s) concerning the own resources system and its implementation 2.5. Monitoring of the sectoral legislative proposals for the next MFF; participation/representation of DG BUDG in Impact Assessment groups for the revision of CAP, ERDF/CF, Common Fisheries Policy (CFP) and CLIMA/ENV 2.6. Adjustments of the MFF (Accession negotiations with Croatia, Iceland/reunification of Cyprus) 2.7. Representation of DG BUDG in the group on delivery modes, in the group on eligibility, Public-Private Partnerships and innovative financial instruments 2.8. Monitoring of the MAFF On 29 June 2011, the European Commission adopted its proposal for the Multiannual Financial Framework followed by 57 sector-specific legislative proposals which now, together with the revision of the general rules in the so called Financial Regulation (currently under negotiation) present a unique simplification exercise in the history of the European Union. Over 120 changes referred to in the Communication are designed to simplify the rules governing EU funding for Small and Medium Enterprises, towns and regions, students, scientists and others. They include: reduction of the number of programmes, increases in coherence and clarity of rules, clearer priority objectives and indicators, more coherent cost eligibility rules, simplified forms of grants and a decisive move towards a faster delivery of payments. These all are direct measures to ensure that the European citizens get easier in and faster out of the application procedures for EU funding, with money in their hands in order to boost the European economy and create jobs. BUDG_aar_2011_final Page 34 of 74

35 As well as adopting the General Communication accompanying the proposals for the next MFF ( ), the College also adopted on 29 June 2011 the Proposal for a Council decision on the system of own resources of the European Union (COM (2011) 510) and the Proposal for a Council Regulation laying down implementing measures for the system of own resources of the European Union (COM (2011) 511). The proposal for a Council decision was accompanied by the Commission Staff Working Paper on Financing the EU Budget: Report on the operation of the Own Resources System (SEC (2011)876). DG Budget also presented on 29 June the following documents for adoption of the College the Proposal for a Council Regulation laying down the multiannual financial framework for the years (COM(2011)398), the Draft Interinstitutional Agreement between the European Parliament, the Council and the Commission on cooperation in budgetary matters and on sound financial management (COM(2011) 403) and the Proposal for a Council Regulation on the methods and procedure for making available the traditional and GNI-based own resources and on the measures to meet cash requirements (COM(2011)512). The sectoral legislative proposals for the next MFF were continuously monitored. DG Budget participated in Impact Assessment groups for the revision of Common Agricultural Policy (CAP), European Regional Development Fund (ERDF/CF), Common Fisheries Policy (CFP) and CLIMA/ENV. The Council discussions on the accession negotiations with Croatia were followed closely and subsequent negotiations on the financial package were completed. The revision of the MFF to cater for the financial impact of the accession of Croatia has shifted to 2012 and will be adopted in parallel with the Draft Budget 2013 in April During 2011 DG Budget was represented in the group on delivery modes, in the group on eligibility, Public-Private Partnerships and innovative financial instruments. Following the 13 December 2011 agreement between the two branches of the budgetary authority (Council and Parliament), the Commission has adopted a draft amending budget to meet part of 2012 financial needs for the ITER project (EUR 650 million) without asking Member States within the overall spending ceiling for the period The break down of the extra EUR 1.3 billion needed for ITER in 2012 and 2013 is as follows: EUR 100 million included in the 2012 budget; EUR 840 million covered through an increase in the part of the budget dedicated to Competitiveness for Growth and Employment (from which ITER is financed): EUR 650 million in 2012 and EUR 190 million in These needs were covered by the reducing the 2011 ceilings for agriculture and for administration by EUR 450 million and EUR 243 million respectively and the 2012 ceiling for administration by EUR 147 million; EUR 360 million to be made available in the 2013 budget. BUDG_aar_2011_final Page 35 of 74

36 PART 2. MANAGEMENT AND INTERNAL CONTROL SYSTEMS 2.1 Introduction to DG Budget The six main areas of activities of DG Budget are to: 1. prepare the draft budget and secure from the budgetary authority the resources needed for the European Union's policies, on the basis of an effective financial programming; 2. manage the budgetary regulatory framework; 3. implement the budget in compliance with the regulatory framework; 4. draw up the annual accounts of the institutions; 5. promote sound financial management within Commission services; 6. Report on the implementation of the budget, progress towards the granting of a positive Declaration of Assurance (DAS) by the Court of Auditors and coordinate the discharge procedure. Beyond its own operational responsibilities, DG Budget is a horizontal department operating as a service provider, providing support, advice and tools to all other DGs within the Commission and to the Agencies. The DG has around 500 staff members including contract agents (over and above which a certain number of intra-muros IT consultants are present on the premises) and is structured around five Directorates based in Brussels: Expenditure; prepare the draft budget, allocate the budget among Commission departments, contribute to sound financial management of Community funds and monitor budget implementation; Own resources and financial programming in charge of three areas of Commission's competence: financial programming; management of the own resources system and preparation of the annual budgetary procedure (revenue side); Budget execution; responsible for drawing up the Union's financial statements, the Commission's accounts and the consolidated accounts of the European institutions; Central Financial Service, providing support to the different services in the field of financial management, budget implementation and internal control; Resources: horizontal Directorate providing support in the field of information and communication, coordination and management of the resources, financial information systems, IT infrastructure and users support. DG Budget is responsible for managing the Communities' own resources, notably the three main categories: traditional own resources (TOR, i.e. custom duties and sugar levies) and the VAT and GNI resources. As delegated authorising officer for own resources, DG Budget manages financial flows with Member States and ensures that own resources are duly collected and made available timely. Expenditure related to DG Budget is exclusively administrative aimed at ensuring the functioning of the DG. To optimize the use of human resources, appropriations are managed centrally and a centralised financial circuit (Model 4, "Centralised") is in place. DG Budget has a formal role concerning the management of reserves, appropriations which may be unblocked under specific conditions by the Budgetary Authority. DG Budget s role is to ensure that these conditions are met before making appropriations available. BUDG_aar_2011_final Page 36 of 74

37 2.1.1 DG Budget in 2011 DG Budget had in 2011 appropriate working arrangements agreed with the two Cabinets: the Cabinet of the Commissioner responsible for Budget Planning and Programming and the Cabinet of the Commissioner dealing with Taxation and Customs Union, Audit and Anti- Fraud. Additionally, a mission statement is in place comprising all the main elements to be followed. The management and control systems for own resources and for procurement including the key inherent risks are analysed in detail in the Annex 5, internal control templates for Budget Implementation. Own resources The own resources outturn for 2011 was very closely in line with the figures included in the 2011 budget. The own resources collected (EUR ) amounted to 99, 91 % of the amounts forecasted. European Union accounts The Accounting Officer BUDG prepares both the Commission and EU consolidated accounts. To do this, the accounting services perform certain controls over the accounting data produced by the AODs, noting that, according to the FR, the AODs are responsible for the reliability of this data and thus perform more detailed controls themselves. A summary of the controls done by the accounting services (Dir C) are: Written Procedures: in place covering all the major elements of their work, including the closure exercise and the preparation of the financial statements, as well as for opening, closing and general operation of the Commission bank accounts. Regular reconciliations and year-end controls: review of all the major yearend bookings of the Commission Services to ensure that there are no material misstatements, performing varying levels of controls on these, depending on the materiality of the amounts in question. Documentation: Closure files documenting the checks and bookings made are prepared, reviewed and signed-off for all material areas of the closure. IT system controls: The accounting IT environment is based around SAP, which is a standard software commonly used this means quality is assured and risks are minimised since there are inbuilt security functionalities and other safeguards. Moreover, the accounting system leaves a clear audit trail. Validation of the local systems: verification of procedures and data in the DGs, in order to provide assurance that the systems in the DGs, both IT and non-it, provide complete and accurate information to the central accounting system. The reporting of the Accountant is separate from the reporting of the AOD of DG Budget. In line with international accounting standards, the key documents are a risk analysis and a "letter of representation" which are sent to the Court of Auditors together with the provisional accounts before 31 March. BUDG_aar_2011_final Page 37 of 74

38 Resources Following an internal reorganisation of the Accounting services, Unit BUDG.C.4 "Validation and appraisal of financial management systems" was suppressed and the staff reallocated to two others existing Units. Unit BUDG.C.5 was consequently renamed in BUDG.C.4. This movement was done with a constant number of staff, except for one position of Head of Unit which was suppressed. External staff resources have not only allowed DG BUDG to respect measures regarding the replacement of absent staff but were also called upon for the execution of administrative and support tasks as well as in the financial and budgetary field. This has allowed the upgrading of certain permanent posts. For 2011, the financial management of the administrative appropriations of the Directorate General went fairly well. The execution rate in commitment appropriations was 97,58 %, excluding the earmarked revenue paid by the Agencies for the use of the ABAC system, as the cashing of the amounts payable is spread throughout the calendar year. Comparatively to 2010, the execution rate was lower due to the delay in the development of large-scale IT projects, notably the start-up of the review of the ABAC architecture taking more time during the pre-analysis. The execution rate of payment appropriations rises up to 37 %. A high volume of commitments executed during the last quarter of the year explains the lower volume of payments made in Implementation of administrative appropriations managed by DG Budget: Credits Commitments Execution Payments Other administrative appropriations Technical assistance EUR EUR , % EUR ,22 EUR EUR , % EUR ,37 TOTAL EUR ,00 EUR , % EUR ,59 Information and communication In 2011 communication activities on EU financial programming and budget continued to be influenced by the economic and budgetary constraints in many Member States of the EU. Communication efforts on draft EU 2012 budget focused on presenting its orientation on Europe 2020 objectives. The communication of the Commission's plan for the new Multiannual Financial Framework (MFF) concentrated on the combination of ambition with realism in the proposals. Demonstrating that the suggested ceilings present a balanced package and underlining the added value of EU spending contributed to a reasonably good general reception in the media. Expanded information provided through the Financial Transparency System generated an increased interest throughout the year and brought new challenges that were addressed through improvements to the system. In order to face the growing need for modern communication tools the Financial Programming and Budget Web site on Europa was completely re-vamped. Social media was used which helped to widen the audience and enabled new modern interactive methods of communication. BUDG_aar_2011_final Page 38 of 74

39 Apart from traditional yearly publications a special leaflet on the MFF was produced providing an overview of the Commission's position. The strategy to improve media reporting on the Court of Auditors reports and especially on the annual report continued to provide results, with fewer reported misperceptions and better coverage of Commission arguments. Increased attention was devoted to the improvements in internal communication Major events during the reporting year Maintaining the green light on the reliability of the Annual Accounts of the European Union from the Court of Auditors for a fourth consecutive year Maintaining the clean opinion on the accounts from the Court of Auditors for the fourth consecutive time was a major achievement in In the Court s opinion, the Annual Accounts of the European Union present fairly, in all material respects, the financial position of the Union as of 31 December 2010, and the results of their operations and cash flows for the year then ended, in accordance with the provisions of the Financial Regulation and the accounting rules adopted by the Commission s Accounting Officer. The Court of Auditors Annual Report 2010 can be seen as very positive with regard to the reliability of the accounts. The Court does however draw attention to the increased use of pre-financing and new types of financial instrument which, in the Court's views, make it necessary to revisit the relevant accounting rule (see also section Building Block 2: Results from audits during the reporting year). Timely adoption of the 2012 budget in line with the new rules of the Lisbon Treaty and agreement on financing the extra-cost for the ITER project The Budgetary Authority agreed on the 2012 budget in the conciliation procedure foreseen in Art. 314 TFEU (Treaty on the Functioning of the European Union). This was the first time, after the unsuccessful experience of the 2011 budget (the first one under the new Lisbon Treaty rules) when the conciliation failed to find an agreement. In parallel, agreement was also reached with Parliament and Council on the long-standing issue of financing the additional cost of the ITER project in 2012 and 2013, and on the related revision of the Multiannual Financial Framework. Reliability doubts on the Belgian clearance and accounting systems and thus on the correctness of the amounts of traditional own resources (TOR) transferred to the EU budget Shortcomings in Belgium's clearance and accounting systems have been closely followed up by DG Budget since 2008 and it has requested remedial action including the enhancement of internal controls and full scale external audits of the accounting system. The remedial and corrective actions taken so far by the Belgian authorities are considered insufficient. Also, certain developments in 2011 (an IT programming error resulting in a TOR refund claim of nearly EUR 169 million and the impossibility for the Belgian authorities to reconcile, on request of the ECA, the TOR amounts transferred to the Commission with the amounts in the underlying accounting records) cast reinforced doubts on the reliability and the exhaustiveness of the Belgian accounts and thus the correctness of the amounts transferred to the EU budget. BUDG_aar_2011_final Page 39 of 74

40 As DG Budget has no reasonable assurance on the correctness of the amounts of TOR credited to the Commission's account and considering that Belgian is a major TOR contributor (9.45% of total EU TOR in 2011), the amount of revenue affected might have the potential of exceeding one percent of the totality of TOR transferred to the EU budget in 2011 (which is the materiality threshold defined for revenue operations). Therefore, a reservation in the Director-General's Declaration of Assurance is made. Reference is made to Sections and 3.2 for a detailed description of the issue and the reservation. Member States' control weaknesses in the area of traditional own resources (TOR) In continuation to its criticism on Member States customs' controls on simplified procedures in its Annual Report 2009, the Court of Auditors referred to deficiencies in national customs supervision also in its 2010 Annual Report (point 2.21). As already mentioned in the 2010 Annual Activity Report, in its TOR controls DG Budget has continuously put special emphasis on Member States' customs controls, because weaknesses in this area can reduce the EU's revenues from custom duties. In recent years, it has carried out inspections focusing on customs controls in all Member States in relation to their global customs control strategies ( ), antidumping duties ( ) and local clearance procedure (2011). On the basis of the inspections on the customs control strategies, a thematic report was prepared, whose final version was presented in the July 2011 Advisory Committee on Own Resources after consultation with Member States and other Commission services. In addition the report was presented to the Member States' Customs Director Generals in the Customs Policy Group meeting in June. The conclusions of the thematic report, the results of the follow-up of the Court's findings and the findings raised in TOR inspections indicate that DG Budget needs to continue monitoring the improvement of customs controls and the efficient use of risk management in this context in Member States. This will also be done in the course of the 2012 inspections on transit procedures. Weaknesses in Greece in the follow-up of TOR recommendations made by the Customs Audit Service In the light of the 2011 TOR inspection carried out Greece, there is no formal procedure in place that guarantees the effective follow-up by higher level management of the recommendations made by the Customs Audit Service (ELYT). The situation as regards the reliability of the separate account of TOR kept and managed by the different customs offices is still unclear. According to the Greek authorities, the shortcomings of the electronic module for the management and monitoring of the separate account have been corrected. However, not all the cases of the customs offices have been introduced in the system. Furthermore, several customs offices do not have any link to the customs electronic declaration system. During the inspection visit it was observed that a customs office in Piraeus did not keep any kind of separate account neither in paper nor electronically, an issue identified by ELYT already in IT environment Since 2007, the Court of Auditors has given an unqualified opinion on the financial accounts. The accounts are prepared via ABAC, the Commission's corporate Financial/Accounting system. DG Budget is the system owner and provides supporting services to all of the Commission's DGs/Services and some 40 External Entities, resulting in a user community of over users around the world. The European External Action Service successfully completed its first budgetary year in ABAC. BUDG_aar_2011_final Page 40 of 74

41 ABAC is used for the execution and recording of budgetary commitments, invoices, payments, legal entities, bank accounts and general income relating to the Commission's budget and the European Development Fund. A contract database records contracts and grants with a value above a minimum threshold set by the Accounting Officer, providing links to legal entities and financial transactions in ABAC. ABAC comprises "ABAC Accounting", based on a "commercial-off-the-shelf-system" SAP, the official source of financial information. ABAC Accounting is mainly used by the services of the Accounting Officer of the Commission and is connected to the SWIFT-network, managing inter-banking exchange of information. ABAC Accounting receives most information via front office applications, in particular "ABAC Workflow" developed by DG Budget to create and validate financial transactions in line with the rules laid down in the Financial Regulation and Implementing Rules. ABAC also includes a reporting environment ("data warehouse") and information made available to the public via the Financial Transparency System is extracted from ABAC. Following an assessment of the Supply and Assets Management System launched in 2010, the Accounting Officer and Director-General decided to limit SAM's user community to the dedicated assets management centres and to cut the development costs awaiting the Review of the ABAC Architecture. Finally, BadgeBud is an inter-institutional system used for the budgetary preparation. Due to impact induced by the entry-into-force of the Lisbon Treaty, major updates have been applied throughout 2010 and the further alignment of the system was continued as a 2011-priority. In 2010, DG Budget launched the Review of the ABAC Architecture Programme to guarantee ABAC's sustainability in addressing efficiently the business objectives and processes. Following the adoption of a Business Vision and IT-systems assessment, a series of business driven projects were launched in Difficulties in defining ITarchitecture in response to business requirements did not allow as much progress as planned. A target architecture blueprint, a first catalogue of services and an evaluation of a SOA (Services Oriented Architecture) platform have been defined. The first results will be implemented in 2012 although the implementation of the full programme will run until Taking into consideration the scarce resources, this planning can be influenced by the impact of the Financial Regulation to be voted in The importance of the Review of the ABAC Architecture has multiplied as the complete Commission's IT-landscape is being examined in the light of the Corporate IT-Governance. DG Budget took up of the role of Domain Leader for the Financial Domain and Assets Management Domain. The preliminary studies conducted in 2011 confirm that finances are tightly interwoven into cross-domain processes. Consequently, the implementation of the rationalisation strategy will take multiple years and resources will have to be diverted accordingly. As part of its risk management and control arrangements, DG Budget again ran its annual Risk Assessment exercise at the end of 2011, resulting in its main risks and related mitigating measures being listed in the Annex 4 to the BUDG 2012 MP. The internal actions strengthening the DG Budget's IT-governance were further developed in 2011 and aligned to the Commission's standards and the Corporate IT-governance initiative. In conclusion, guaranteeing business continuity, the 2012 Financial Regulation, the Review of the Architecture and the initiatives stemming from the Corporate IT-rationalisation are all demanding objectives. Resources, however, remain stable at best and are thus put under severe pressure both in DG Budget as in the DGs/Services. As a consequence, the implementation of these long-term projects - notably the Review of the Architecture - are likely to be impacted by resources availability. In this light, a cross-cutting risk has been raised in 2012 regarding the Review of the ABAC Architecture. BUDG_aar_2011_final Page 41 of 74

42 Fines and Guarantees Competition fines appealed before the Court need to be covered either by a provisional payment or by a bank guarantee. The total amount covered by guarantees was about EUR 3 billions at 31/12/2011. When provisionally paid, the amounts must be kept off-budget according to Article 74 of the Financial Regulation, which states that revenues received by way of fines shall not be recorded as budgetary revenue as long as the decisions imposing them may be annulled by the Court of Justice. Subject to the final judgement, which may take up to eight years, fines provisionally paid are either transferred to the Commission's income account and booked in the budget as miscellaneous revenue or reimbursed to the undertakings. Fines adopted before 2010 and provisionally cashed are held with commercial banks selected by call for tender. On , the global volume is about EUR 9.2 billions. Further to the Commission decision C(2009) 4264 of concerning the reduction in the risks of management of fines provisionally cashed, fines adopted since 2010 and provisionally cashed are held with a special fund (BUFI) managed by DG ECFIN and composed of a portfolio of assets with an exposure limited to high quality sovereign credit risk. On , the global volume invested in the BUFI is about EUR 1.5 billion. Some of the fines imposed by the Commission are not fully covered at their deadline. At a payment has been received or a bank guarantee lodged in respect of almost 98% of the fines pending. This does not mean however that the Commission is not taking action in the recovery process but that it has to adapt the means of recovery to the economic reality. The Commission seeks to obtain coverage of fines by negotiating with the companies in order to safeguard the fine by regular down payments or guarantees. In many Member States (17 out of 27) it is now impossible to find banks with a very high credit quality, which makes it difficult for a small or medium-sized company to obtain such a guarantee. This point is currently raised by a fined company before the General Court (case T-564/10). In this context, the Accounting Officer has to assess the risks related to guarantees offered and/or obtained, taking into account the lack of alternatives, the amount of the fines, the presumed length of the proceeding and the solvency of the main debtor. Given the impact that the current economic environment has on the management of fines, the procedure to be applied by the accounting services, including supervision, is being reviewed. The Court of Auditors issued two sets of preliminary findings relating to fines in The first focused on waivers and was connected with the DAS 2010 (PF 4300 of 3 May 2011) but did not give rise to any observation. The second was issued in relation with the DAS 2011 (PF 4584 of 6 December 2011) and focused on guarantees and the risk management policy associated. BUDG_aar_2011_final Page 42 of 74

43 2.2 The functioning of the entire Internal Control system Compliance with the requirements of the control standards The effective compliance with the requirements of the internal control standards has been reviewed in autumn The assessment has been based on different building blocks: An icat self-assessment exercise has been carried out for which the questions have been adapted to the specificities of DG BUDG. For certain internal control standards, questions have been developed not only for management but also for staff in order to test awareness. The icat exercise was completed by an assessment of the respective lead services ("chef-de-file") in the DG, as well as by other sources attesting compliance such as audit reports. Based on this comprehensive review, DG BUDG considers being fully compliant with all the requirements of the internal control standards in It should be noted that ICS 14 Evaluation was assessed as not applicable to DG BUDG, since it refers mainly to operational DGs. Sensitive functions have been reviewed and staff holding sensitive functions is below the limit of 5 years in the year Thus there is no requirement for derogations to be given for mandatory staff mobility Effectiveness of implementation of the prioritised control standards Two internal control standards have been prioritised in the MP 2011: ICS 5 Objectives and Performance Indicators and ICS 7 Operational Structure (already prioritised in 2010). The review of the effectiveness of implementation of the prioritised control standards was coordinated by the Internal Control Coordinator and the Unit in charge of internal control. As a starting point, the lead Units ("chef-de-file") of the respective control standards were asked to assess the implementation status of the action plans and concluded on their effective implementation. Based on this, the effectiveness of implementation was assessed during an ICS workshop with participants from every Directorate (including Internal Audit). The conclusions of the assessment were presented to Senior Management who formally concluded on the effective implementation of the priority control standards during a management meeting in December The reasons for the choice of the prioritized standards as well as action taken to ensure effectiveness are outlined below: ICS 5 Objectives and Performance Indicators ICS 5 has been prioritised as part of the efforts on quality management in DG Budget. Specific attention has been given to the definition of indictors for the MP 2012, including focus on deliverables, re-wording of main outputs, a revised template, and linking of human resources to deliverables. Another action consisted in the review of the monthly management scoreboard ("Tableau de bord"). The action plan has been fully implemented. BUDG_aar_2011_final Page 43 of 74

44 Operational Structure (ICS 7) ICS 7, Operational structure, has been maintained as a priority standard as regards to the importance of IT governance in DG Budget, and in particular relating to ABAC. IT governance aspects have been further strengthened in 2011: The IT Steering Committee and the ABAC Programme Office, which has been set up with the help of specialised external consultants, are operational. The PM² Project methodology has been introduced and is operational, as is the DG Budget IS Policy. Resources management has been strengthened by formalising the process for budget requesting and allocation across Units, and by putting in place a follow-up of resource consumption. Particular attention has been placed on clear and proactive communication to stakeholders, and on a sound representation of DG Budget in the different boards (ABM+IT, HLCIT and project board). DG Budget has also liaised with DIGIT on a continuous basis on the usage of Commission standard components for the Review of the ABAC Architecture. The strengthening of IT governance aspects in DG Budget has thus been finalised in It has therefore been decided not to maintain ICS 7 Operational Structure as a priority standard for As mentioned in section IT environment, challenges remain with the Review of the ABAC Architecture, the Revision of the Financial Regulation, guaranteeing business continuity and initiatives stemming from the corporate ITrationalisation Conclusion Concerning the overall state of the internal control system, DG Budget's Units comply with the three assessment criteria for effectiveness: staff having the required knowledge and skills; systems and procedures designed and implemented to manage the key risks effectively; no instance of ineffective controls that have exposed the DG to its key risks. DG Budget has considered the risks and focuses the control resources on those areas where risks are the greatest, while ensuring adequate control over all activities. Furthermore, there are no critical or major ICS-related weaknesses. DG Budget's management has reasonable assurance that: suitable controls are in place and working as intended; risks are mitigated and/or closely monitored; actions are under way to address identified areas for improvement. It can therefore be concluded that there is satisfactory evidence that the internal control system in its entirety is implemented effectively in DG Budget. 2.3 Information to the Commissioner The main elements of this report and assurance declaration, including the reservation envisaged have been brought to the attention of Commissioner Lewandowski, responsible for Financial Programming and Budget and Commissioner Šemeta responsible for Taxation and Customs Union, Audit and Anti-Fraud. BUDG_aar_2011_final Page 44 of 74

45 PART 3. BUILDING BLOCKS TOWARDS THE DECLARATION OF ASSURANCE (AND POSSIBLE RESERVATIONS TO IT) 3.1 Building blocks towards reasonable assurance Building block 1: Assessment by management This chapter concentrates on the resources managed by DG Budget: In 2011, the Communities' own resources, the management of which DG Budget is responsible for, amounted to EUR The administrative expenditure of DG Budget in 2011 was EUR Own resources Directorate B monitors the receipt of VAT & GNI own resource base data together with traditional own resource statements from Member States. It monitors proactively that the corresponding amounts of own resources are timely paid. A reasonable assurance concerning the accuracy and completeness of Member State data is provided by two annual inspection programmes one dealing with TOR, the second with VAT own resources. Management: Member States pay their own resources contributions to the Commission on a monthly basis in line with the procedures and time limits laid down in the Community legislation. Contributions for TOR are based on Member States' actual collection of the relevant duties and levies, while contributions for the other own resources are based on the amounts entered in the budget for the year concerned (i.e. each month the Commission requests each Member State to pay one twelfth of the budgeted forecast amounts, with adjustments in subsequent years to adapt payments to "real" VAT and GNI data). Any delay in paying own resources gives rise to payment of interest by the Member State concerned. Control: The control regimes vary among the three main resources but, for all three, infringement proceedings may be initiated where Member States fail to comply with Community legislation. The Advisory Committee on Own Resources (ACOR) has a forecasting role (for all three resources), reviews reports of Commission controls (for TOR and the VAT resource) and a role in agreeing methodology (for the VAT resource). TOR: DG Budget is responsible for checking that Member States' administrations have complied with Community law when collecting TOR. Member States, and not the Commission, are primarily responsible for (1) establishing TOR, accounting for it, collecting and making it available within prescribed time limits and (2) implementing Community customs legislation and operating a framework of customs checks and controls to ensure that they collect the correct amount of customs duties at the right time. Failure to comply with the rules may lead to a financial liability to the EU budget. BUDG_aar_2011_final Page 45 of 74

46 VAT and GNI resources: The VAT and GNI bases, which DG Budget uses to calculate Member States' contributions to the budget for these two categories, are derived from data Member States transmit to the Commission (DG Budget and Eurostat). This data is analysed and verified in-house by these services, which also make on-the-spot checks. Member States receive and react to report of these controls. The Commission services issue reservations where Member States' data are considered unacceptable, these are lifted when the concern is overcome. The Internal Control Template (ICT) for own resources in annex 5 demonstrates how the control system in place in the DG addresses the risks related to own resources. Legality and regularity indicators of the underlying transactions for Own Resources The aim of the indicators below is to give a view of the inspections and other related checks made to provide the evidence on which to base the assurance BUDG/B seeks that Member States comply with the relevant regulations when discharging their own resources responsibilities. For VAT, all Member States are obliged to administer a value added tax system. The own resources legislation requires the Member States to provide an annual statement of the value of transactions charged with VAT in their jurisdiction. BUDG/B monitors the timely receipt of these annual statements, checks their completeness and coherence with previous years primarily by a programme of inspections. Thus the indicators chosen show whether the Member States' statements were received by the due date and the, sufficiency of the checks made on their completeness and accuracy. For TOR Member States are responsible for operating an appropriate administrative framework by which they collect customs duties and sugar levies for the financing of EU budget. The indicators refer to the annual inspection programme which covers various customs regimes, control methods, and, the procedures for accounting, recovering and making available of TOR. The programme varies from year to year and is based on risk analysis. The focus of the inspections is the identification of the key procedures and systems in each Member State that ensure correct and timely collection and making available of TOR, and testing their adequacy. Lastly for GNI, the activity to provide the assurance is undertaken by ESTAT who check (mainly through the GNI Committee) that Member States have compiled their GNI figures in line with the European standards. Where this process raises concerns and ESTAT wishes to prevent a particular year becoming time-barred then it requests DG BUDG to set or lift reservations on its behalf. The indicators for GNI have been chosen to show the timeliness with which this procedure is carried out. BUDG_aar_2011_final Page 46 of 74

47 VAT Key indicators supporting the reasonable assurance drawn that Member States' annual VAT statements are accurate: Indicator Legality Regularity Comments Target MP2011 Result 2009 Result 2010 Result 2011 Variance Comments analysis/ Number of VAT Statements communicated by MS within the legal deadline x Input indicator. Deadline is 31 st July MS received individualised prereminders based on past performance and at the ACOR Committee meeting in Oct 2011 the need for improvement was discussed. Number of VAT statements, checked, processed and communicated to unit B2 in time to calculate the year end balances X Output indicator 100% 100% 100% 100% Number of anomalies in VAT statements identified by reception checks: corrective action proposed to MS x Result indicator N/A Number of corrections accepted by MS x Result indicator 100% 100% 100% 100% Number statements verified inspections of during x Output indicator. Target annual inspectio n plan Because of staffing difficulties at the beginning of the year there were two fewer missions in this year's programme than in Number of VAT reservations set versus number of reservations lifted X Trend related result indicators. Ratio decreasi ng less than If reservations set by Member States are excluded the result is BUDG_aar_2011_final Page 47 of 74

48 Number of accounting documents generated for potential corrective payments by Member States X Output indicator N/A Legal management Number of open infringement files and annual variation x X Output indicator (B2) N/A Number of Commission infringement decisions taken (Art. 258 TFEU) X Output indicator (B2) N/A GNI-based own resource Indicator Legality Regularity Comments Target as per MP2011 Result 2009 Result 2010 Result 2011 Variance analysis/ Comments Number of communications received from ESTAT regarding setting of GNI reservations X Input indicator N/A Number of communications received from ESTAT regarding lifting of GNI reservations X Input indicator N/A Number of notifications to MS sent by DG Budget regarding setting of GNI reservations within 2 weeks following ESTAT communication x Output indicator. 100% 0-0 All ESTAT communications received on 22 December 2011 BUDG_aar_2011_final Page 48 of 74

49 Number of notifications to MS sent by DG Budget regarding lifting of GNI reservations within 2 weeks following ESTAT communication x Output indicator. 100% 0-1 The remaining 25 requests for notifications were all sent by ESTAT on 22 December. These were processed in January Legal management Number of open infringement files and annual variation x X Output indicator (B2) N/A new case (mostly on GNI but also affecting VAT) Number of Commission infringement decisions taken (Art. 258 TFEU) X Output indicator (B2) N/A Given the division of operational responsibilities between Eurostat and BUDG in the management of the GNI resource, no other indicators for DG BUDG are deemed necessary. These are the remit of Eurostat. Conclusion on VAT and GNI-based own resources: From the foregoing indicators we conclude that there is a framework of checks in place sufficient to identify any instances where Member States fail to comply with their obligations to provide data. The results also show the full performance of the planned inspection programme, checking and verifying the completeness and accuracy of the underlying data, and demonstrate too the post-inspection activity in place to ensure Member States are first informed of any necessary remedial action they need to take and then their subsequent activity monitored and assessed. Taken together these provide a reasonable assurance for 2011 that the VAT and GNI resource contributions made by Member States comply with the requirements of the Union's own resources legislation. BUDG_aar_2011_final Page 49 of 74

50 Traditional Own Resources Key indicators supporting the reasonable assurance drawn that Member States make all established amounts available on time: Indicator Legality Regularity Comment Target as per MP 2011 Result 2009 Result 2010 Result 2011 Variance analysis / Comments Number of riskbased selective inspections made of Member States systems and procedures x X Output indicator Number as per inspectio n program : One inspection was postponed to January Number of anomalies concerning compliance notified to Member States as a result of those inspections x X Result indicator N/A Number of accounting documents generated for actual/potential corrective payments by Member States of principal or interest 1 X Output indicator N/A Legal management Number of open infringement files and their annual variation x X Output indicator (B2) NA 22 (5 closed) 18 (2 new, 6 closed) 17 (1 closed) Number of Commission infringement decisions taken (Art. 258 TFEU) X Output indicator (B2) NA Number generated by all control activities covering TOR BUDG_aar_2011_final Page 50 of 74

51 Conclusion on Traditional Own Resources: The annual inspection programme has been carried out according to plan apart from one inspection which has been postponed to January All anomalies identified during the inspections are closely followed up by DG Budget in collaboration with the Member States. The inspection systems in place allowed identifying a certain number of issues in the area of TOR, which are considered significant enough to be highlighted in section Major events during the reporting year. All are being closely followed up by DG Budget services. As the issue concerning doubts about the reliability of the Belgian clearance and accounting procedures and system and thus on the correctness of the Belgian TOR amounts could have a potential financial impact above the materiality threshold defined for own resources (see Annex 4), it therefore gives rise to a reservation until reasonable assurance is obtained from the Belgian authorities (see section 3.2 Reservations). For the rest of TOR reasonable assurance can be drawn from the annual inspection programme Procurement The intrinsic risk for administrative expenditure managed by DG Budget including procurement is considered relatively low because of the limited budget (EUR ) as well as the centralised and direct mode of budget implementation. The Internal Control Template for procurement in annex 5 demonstrates how the control system in place in the DG addresses the risks related to this type of expenditure. During 2011, 3 negotiated procedures have been launched under article 126 1(b) of the IR. Two of them concerned purchase of financial data worldwide web (total final value of the 2 contracts: EUR ). The third procedure concerned the acquisition of SAP software licenses and core SAP services including training (total final value of the contract: EUR ). Two open procedures were launched, respectively to set up a successive multiple framework contract for technical assistance in the area of audit and control (maximum total final value of the contract: EUR ), and one for IT Assistance for financial management systems (total final value of the contract: EUR ). The risks related to public procurement are effectively mitigated by means of independent ex ante verifications covering 100% of transactions. Tender documents need approval by the Financial Resources Unit before they are allowed to be published. Tenders are evaluated by evaluation committees, as foreseen by the Financial Regulation. The absence of conflicts of interest of the evaluators is ensured. All procedures are documented in detail in the DG Budget Financial Vademecum. Before the payment is completed, the timely execution of the contract is checked and a financial verification is performed by the Financial Resources Unit. All errors detected are corrected. The internal control for specific contracts has been extended in the last quarter of 2011: Every file is cross-checked by a member of the financial cell different than the one who carries out the financial initiation, before being passed to the financial verifying agent. The internal control objective related to the budget executed by DG Budget itself has been fixed at 2%. For details see Annex 4. BUDG_aar_2011_final Page 51 of 74

52 Indicators regarding the efficient use of financial resources: Procurement Below indicators relate to input ex-ante controls, output, and result of controls and support the legality and regularity of underlying transactions Indicator Target as per MP2010 Result 2009 Result 2010 Result 2011 Variance analysis/ Comments Input: Resources devoted to ex ante to ensure legality and regularity of underlying transactions: Staff devoted in each exante control; As per the "four-eyes" principle (art RF) Financial resources Output: Level and nature of controls carried out Budget coverage of first level ex-ante control 100% 100% 100% 100% Budget percentage execution 95% 99 % 99 % 98% Risk management (ICS 6): The action plans for the six critical risks in the Management Plan 2011 were closely monitored throughout the year. None of the risks materialised. The risk management exercise for the identification of critical risks to be incorporated in the 2012 Management Plan has been carried out in November/December A total of ten risks including six critical risks and 2 cross-cutting risks have been identified on DGlevel. The critical risks are subject to a quarterly review by Senior Management. Specific action plans have been established and are closely monitored by the Units in charge. Exception reports (ICS 8): In 2011, only one exception report, relating to the late signature of a mission order, was issued. The amount involved was not material (EUR 79.10). Internal control weaknesses (ICS 12): In accordance with the requirements established with regards to ICS 12, Information and Communication, DG Budget has established a procedure for the communication and review of Internal Control Weaknesses. In 2011 only one internal control weakness was reported to the Internal Control Coordinator. It concerned the late payment of an invoice caused by a mail handling problem. In line with the procedure the case was analysed by the Internal Audit Unit who examined whether the corrective actions proposed by the Unit in charge would be sufficient to mitigate the weakness. The auditors concluded that the measures proposed should normally be sufficient to avoid the occurrence of future payment delays. An action plan to strengthen controls was agreed with the responsible Unit which will be followed up in As stated in chapter 2.2 The functioning of the entire internal control system, DG Budget has satisfactory evidence that the internal control system in its entirety is implemented effectively. BUDG_aar_2011_final Page 52 of 74

53 3.1.2 Building block 2: Results from audits during the reporting year IAC Audits 2011 During 2011 the Internal Audit Capability (IAC) finalised the following audits: Audit of European Development Fund phase 2 (Accounting process - 03 March 2011 started 2010) Audit on the Early Warning System (IT and Fin. Mgt/reporting process - 24 March 2011 started 2010) Audit of the SPP process in DG BUDG (Planning and Programming process - 20 September 2011) Audit on the Management of the implementation of ECA recommendations and Discharge observations (Discharge process - 21 September 2011) Audit of the management of the quality of services delivered by Dir.D (Operational Process - 09 December 2011) Follow-up Audit of recommendations 30 June 2011 Follow-up Audit of recommendations 31 December 2011 For the audit on HR management in DG BUDG (HR Process) the preliminary draft report was issued on 16 December 2011 and the final report in January 2012, its conclusions have been taken into account for the opinion below. A number of recommendations were raised concerning the audited processes and agreed with management and action plans for their implementation have been set up accordingly. IAC's Opinion Note: This opinion on the state of control does not constitute an opinion on the AAR process in general or on the document itself. Based on the results of the audits as described in the objectives and scope of the engagements carried out by the IAC of DG Budget during , IAC believes that the internal control system in place in DG Budget provides reasonable assurance 3 regarding the achievement of the business objectives set up for the processes audited except for the following issues: 2 See the list of finalised audits in the first paragraph of Even an effective internal control system, no matter how well designed and operated, has inherent limitations including the possibility of the circumvention or overriding of controls and therefore can provide only reasonable assurance to management regarding the achievement of the business objectives and not absolute assurance. BUDG_aar_2011_final Page 53 of 74

54 With regards to the management of the implementation of recommendations of the European Court of Auditors and observations of the discharge authority, the lack of updated procedures was identified as a problem as well as the absence of periodic reporting on the status of implementation of recommendations to Senior Management. Both deficiencies have been corrected before the end of With regards to the Early Warning System the conclusion was drawn that the controls in place can only partly ensure that the information contained in the EWS is reliable and complete. DG Budget has a shared responsibility with the other stakeholders (mainly operational services feeding the database). The controls in place can only partly ensure that DG Budget activities efficiently and effectively contribute to the intended sound financial management objective of the EWS. With regards to the management of the quality of services delivered by Directorate D, the central financial service of the Commission, it was noticed that two key elements of a quality management system were missing. The last general customer expectation and satisfaction review took place in 2009, and no new exercise was planned. In addition quality criteria were not systematically embedded in the Directorate objectives, work plans and staff objectives. With regards to the audit on HR management inadequate local security measures for external contractors have been identified. In addition a single case of noncompliance with the mobility rules for middle managers dating from 2010 has been resolved in The internal control weaknesses identified during the audit and advice engagements IAC carried out during the year, and which have been documented in the abovementioned reports, do not represent deficiencies that are likely to have a bearing on the content of the annual declaration of the Director General of DG Budget. IAS Audits 2011 No critical recommendations have been addressed to DG Budget. The audit "Implementation of Internal Control Standard 13" has been closed by IAS without performing any detailed testing as the residual risk at central level was considered low. In December 2011, the IAS has issued a consolidated report on the Management of Guarantees. The IAS concluded that the internal control systems in place provide reasonable assurance regarding the achievement of the business objectives set up for the processes audited, except for three very important issues concerning implementing rules for External Action (article 250 IR), risk assessment for the request of financial guarantees, and internal rules and procedures at service level. The recommendations are addressed to DG Budget in its role as Central Financial Service, and are not of a nature or extent to lead to a reservation. A detailed action plan has been established for the implementation of the recommendations. ECA's Audits 2011 In its Annual Report 2010, the Court maintained the green light on the reliability of the Annual Accounts of the European Union for the fourth consecutive year (see also chapter Major events of the reporting year having a positive impact). The Court addressed two very important recommendations concerning pre-financing to DG Budget. To address these recommendations, DG Budget has already proposed an appropriate modification to the current sectoral legal basis in the structural funds regulation. It will also introduce appropriate provisions in the proposals for future legal bases. This treatment will be reflected in an updated version of the accounting rule for pre-financing to be adopted in BUDG_aar_2011_final Page 54 of 74

55 As concerns revenue, the Court concluded that: Member States' declarations and payments of TOR; the Commission's calculation of Member States' contributions on the basis of the VAT and GNI data received from Member States; as well as other revenue; were free from material error and that the supervisory and control systems were effective in ensuring the regularity of revenue. Notwithstanding the Court's positive conclusion on the TOR in its Annual Report 2010, DG Budget considers it necessary to issue a reservation for the TOR Belgium as doubts about the reliability of the Belgian clearance and accounting systems and thus on the correctness of the amounts of TOR transferred to the EU budget persist (for further information see parts 2.1.2, and 3.2). The Court addressed one important recommendation concerning the correct use of B accounts for Traditional Own Resources (TOR). DG Budget will continue its examination of the B- accounts and of the accounting systems in the course of its inspections in order to ensure that Member States' statements of the A- and B-accounts are correct. The Court also considered that DG Budget should have made a reservation for the error detected in the Commission's calculation of the 2006 definitive amount of the UK correction. DG Budget does not share this view: The amounts overpaid by Member States as a result of the error in 2010 (AB 4/2010), were reimbursed to them in November 2011 (AB 4/2011). Therefore, the real cost of the error can be quantified as the interest foregone between the time the amount was progressively overpaid in 2010 and its reimbursement in This opportunity cost amounts to only 0.001% of Member States' total Own Resources contribution. It was thus decided that the error was not material and did not warrant a specific mention in the Director General's declaration of assurance. In close cooperation with the ECA, the following additional control measures and procedures with respect to the calculation and the double-checking of the UK correction were successfully implemented: Calculation: A first parallel calculation circuit was set up within the primary Unit concerned. Two officials working in parallel perform the calculations independently, thus assuring a first level of full redundancy. A second parallel calculation circuit was set up in another Unit, thus assuring a second level of full redundancy in the process. The verification of the tasks, the double-checking and the check of the quality of related budgetary documents is ensured at the level of the primary Unit. The results of the separate calculations done by the Units are reconciled at the level of Director thus providing for the high level of assurance. Automatic conditional formatting was introduced in the various spreadsheets to reduce the risk of human manipulation error. Double-checking: The checklist was revised a first time last year to oblige the official charged with the verification procedure to scrutinise in detail the various inputs as well as the calculation steps. This checklist was further detailed to identify more points to be checked. BUDG_aar_2011_final Page 55 of 74

56 A second official was appointed last year to the task of double-checking the calculation. The relevant evidence of the new organisational set up was presented to the ECA's auditors in the framework of the checks undertaken during the DAS 2011 visits in September February Apart from the TOR Belgium (see above), none of the Court's recommendations addressed to DG Budget in its Annual Report 2010 are of a nature or extent to lead to a reservation. The Court has not adopted any Special Reports in 2011 with recommendations for DG BUDG Building block 3: Follow-up of previous years' reservations and action plans for audits from previous years Follow-up of previous AAR reservations There were no reservations in the three previous years' AARs. Follow-up of previous years IAC reports The previous years' audit recommendations that are still ongoing following the audits of the IAC (Third Party Files, EDF phase 1 and IT Governance) are closely monitored according to the action plans set up by the auditees. A follow up audit was carried out by the IAC at the end of 2011 and beginning of The objective of the audit was to assess the status of implementation of DG BUDG Internal Audit recommendations as at 31 st December 2011; and to evaluate the existence of measures taken, by conducting interviews and collection of documentary evidence. As per 31/12/ % of the recommendations issued in the 10 reports under review were implemented. This was slightly lower than the 78% reported as per 31/12/2010 due to the high number of new recommendations issued in the second half of 2011 (29). Out of the 23 recommendations outstanding as per 31/12/2011, 17 concern recent reports and only 6 have delays in implementation, which is a satisfactory result. It is also worth noting that the timeliness of the implementation of recommendations from more recent audit reports has clearly improved. Some recent recommendations have even been implemented before the final version of the report was issued. The residual risks related to the non implementation of the recommendations raised in audit reports issued prior to 2011, are not of sufficient importance to be mentioned in the annual declaration of the Director General of DG Budget. Follow-up of previous years IAS reports Action plans have been agreed and are being implemented for all recommendations in order to correct the shortcomings that have been identified. As of 31 December 2011, 77% of the accepted recommendations were considered to have been implemented, which is a satisfactory result. Five very important recommendations raised by IAS prior to 2011 remain open as of 31 December 2011: Three recommendations from the "Audit of the Executive Agencies in the Commission" for which the implementation is under way (expected completion date 31/12/2012); and two recommendations from the audit "Compliance with Payment Deadlines". One of these recommendations is not yet due; the other one, concerning the accuracy of encoding the baseline date, is classified as delayed. The meaning of Art Implementing Rules has already been clarified. The implementation is therefore well under way and will be completed by June BUDG_aar_2011_final Page 56 of 74

57 IAS carried out a "Second follow-up audit of ABAC Implementation of accrual based accounting" in 2011 and concluded that all the remaining open recommendations have been adequately implemented and risks mitigated. The audit has been closed without issuing a formal report. None of the IAS recommendations remaining open represent residual risks having a bearing on the content of the declaration of assurance. Follow-up of previous years ECA reports All recommendations from the Court's audits prior to 2009 have been closed in Apart from the recommendations stemming from the 2010 Annual Report, three recommendations remain open: One desirable recommendation from the Special Report N on Treasury Management, and two very important recommendations from the 2009 Annual Report concerning weaknesses in the accounting system in the DGs, and the recording of customs duties. To address the identified weaknesses in the accounting system, DG Budget has already proposed new requirements for regular clearing of pre-financing in the framework of the revision of the Financial Regulation, currently under discussion with the Budgetary Authorities. The issues concerning the cut-off and invoices/cost claims are addressed via the accounting quality programme and other central guidance and controls of the accounting services. All recommendations are closely monitored and are being implemented. The residual risk is not considered to have an impact on the declaration of assurance Building block 4: Assurance received from other Authorising Officers in cases of crossed sub-delegation DG Budget has given cross sub delegations to DG DIGIT, DG COMM and DG ECHO for which assurance letters have been received as per the requirement under article 66(2) of the Financial Regulation. DG Budget has received cross sub delegations from DG HR, DG COMM (RAL 2010) and DG JRC for which assurance letters have been sent as per the requirement under article 66(2) of the Financial Regulation. As regards the reasonable assurance received/given from/to other Authorising Officers for cross sub delegation concerning the legality and regularity of the financial operations including sound financial management of funds, no major issues were noted Completeness and reliability of the information reported in the building blocks and conclusion on overall assurance The information provided in the various building blocks described in the preceding sections covers all budget delegated to the AOD of DG Budget as well as the Communities' own resources. The information reported is complete and reliable, as confirmed by the statement of the Internal Control Coordinator in annex 1. BUDG_aar_2011_final Page 57 of 74

58 In the area of own resources, the key indicators presented in section Own Resources support the reasonable assurance drawn that Member States comply with the relevant regulations for TOR, VAT and GNI resources when discharging their own responsibilities. The inspection systems in place allowed identifying a certain number of issues in the area of TOR, which are considered significant enough to be highlighted in section Major events during the reporting year. All are being closely followed up by DG Budget services. However, (only) one of those issues concerning doubts about the reliability of the Belgian clearance and accounting procedures and system and thus on the correctness of the (Belgian only) TOR amounts transferred to the EU budget, could have a potential financial impact above the materiality threshold defined for own resources and therefore gives rise to a reservation until reasonable assurance is obtained from the Belgian authorities (see section 3.2 Reservations). For the rest of TOR as well as VAT and GNI resources reasonable assurance can be drawn. The intrinsic risk for administrative expenditure managed by DG Budget including procurement is relatively low because of the limited budget as well as the centralised and direct mode of budget implementation. The risks are effectively mitigated by means of controls put in place. Further assurance is obtained by the risk management process put in place, and the very limited number and significance of exceptions and internal control weaknesses reported in Management has obtained satisfactory evidence that the internal control system in its entirety is implemented effectively in DG Budget. Results from audits during the reporting year (section 3.1.2) give an overall positive feedback and did not include any critical findings. The residual risk from audit recommendations remaining open from previous years (section 3.1.3) is not considered to have a bearing on the declaration of assurance. The "UK rebate" issue, for which the ECA expected a reservation in the BUDG 2010 AAR (which led them to downgrade to "B" the quality assessment of that AAR), is considered to have been settled during Assurance letters have been received for cross sub delegations given to other DGs. As a conclusion, the AOD of DG Budget has obtained reasonable assurance for the budget delegated to him as well as for the Communities' own resources with the exception of the TOR Belgium for which a reservation is issued in section 3.2 below. BUDG_aar_2011_final Page 58 of 74

59 3.2 Reservation DG/service Title of the reservation, including its scope Domain DG Budget Unit B3: Control of Traditional Own Resources and assistance to Candidate countries. Reliability doubts on the Belgian clearance and accounting procedures and system and thus on the correctness of the TOR amounts transferred to the EU budget. Direct centralized management. DG Budget's role is to seek reasonable assurance that own resources are collected and made available in conformity with EU law. For Traditional Own Resources its role it to verify how Member States discharge their responsibility for properly establishing, accounting for and making available TOR to the Commission. For this onthe-spot TOR inspections and documentary controls are made. ABB activity and amount Code 27 02: Budget implementation, control and discharge. Traditional own resources collected EU-wide in 2011 amounts to EUR million (provisional net amount after deduction of 25% collection fee). The problems in Belgium's clearance and accounting systems have been closely followed up by the Commission since BUDG has carried out altogether three dedicated TOR inspections on this issue, one in 2008 and two in 2009 and has requested action including the enhancement of internal controls and full scale external audits of the accounting system. Pending this, a general anomaly was observed on the correctness of the TOR amounts transferred to the EU budget and stated in inspection report The remedial and corrective actions taken so far by the Belgian authorities are considered insufficient to lift the general anomaly. Reason for the reservation In 2011, the Commission has obtained audit evidence that no assurance exists on the correctness of the TOR amounts transferred to the EU budget. This conclusion was derived from the impossibility for the Belgian Customs authorities to reconcile the TOR amounts transferred to the Commission with the amounts in the underlying accounting records. In June 2011, a TOR refund of nearly EUR 169 million (gross amount) was requested due to an IT programming error in PLDA (customs declaration processing system) consisting in a double booking of customs duties in case of annulment of an initial customs declaration and its replacement by a new declaration. In such cases the PLDA application establishes a new customs debt resulting from the new customs declaration without annulling the customs duties that were established by the initial accepted customs declaration. More than customs declarations would be involved. Also, the European Court of Auditors carried out an audit in Belgium in February 2011 and concluded that no assurance exists on the correctness of the TOR amounts transferred to the EU budget. This conclusion was derived from the impossibility for the Belgian Customs authorities to reconcile the TOR amounts transferred to the Commission with the amounts in the underlying accounting records for the June A-account BUDG_aar_2011_final Page 59 of 74

60 statement. On the basis of these two developments, DG Budget considers that the risk that the no assurance exists on the correctness of the TOR amounts transferred to the EU budget has materialised. In its 2010 Annual Report, published in 2011, the Court considers that this significant system weakness should have been mentioned in more detail in the Annual Activity Report of DG BUDG. Further to these recent developments, the Commission services (BUDG) urged the Belgian authorities to have the accounting system audited on its reliability and exhaustiveness by an independent external audit body considering the accounting recommendations made by the Finance Inspectorate (internal audit body in Belgium directly reporting to the Minister of Finance). In July 2011, BUDG refused to treat the refund claim of EUR 169 million isolated from the broader issue of the reliability of the accounting system. The refund will be accepted only on condition that an external auditor certifies the correctness of the claim and after an in-depth investigation of the own resources accounts. These 2011 developments cast doubts and reinforced previous doubts on the reliability and the exhaustiveness of the Belgian accounts and thus the correctness of the amounts transferred to the EU budget. Internal control objective not met The system weakness was found by the Commission's on-the-spot inspection work following the internal control for budget implementation (Cf. the management and control systems for own resources including the key inherent risks as analysed in the Annex 5 to the 2011 AAR). Belgium is a major TOR contributor. This Member State accounted for 9.45% of total TOR in The total payments made in 2011 amount to EUR million (provisional net amount). The financial impact cannot be measured pending the outcome of the planned external audit. There might be no financial impact if the audit were to conclude that the accounting system is reliable and exhaustive. There will be a financial impact if system changes and corrections to incorrect past data will be needed following the results of the audit. Quantification of the impact The refund claim of EUR 169 million (126.7 million net) is a potential overpayment to the EU budget and will have to be refunded to the Belgian authorities provided that the evidence and the method of calculation in this case are audited and certified by an external auditor. As DG Budget has no reasonable assurance on the correctness of the amounts of Belgian TOR credited to the Commission's account due to reliability doubts on the Belgian clearance and accounting systems, the amount of revenue affected (9.45% of TOR) might have the potential of exceeding one percent of the totality of TOR transferred to the EU budget in 2011 (cf. Annex 4 to the AAR as regards the quantitative materiality criterion for the revenue activities of the DG). BUDG_aar_2011_final Page 60 of 74

61 The Court's 2010 annual report stresses that the Director-General's declaration and Annual Activity Report gave only a partially fair assessment of financial management in relation to regularity and in this context also stated that the Belgian accounting system weakness was not mentioned in the AAR text. Impact on the assurance Assurance is still possible as the weaknesses have already been observed previously, are closely monitored by the Commission, and concern one Member State only with no TOR underpayments identified so far. Also, the Court itself concludes in its 2010 annual report that Member states' declarations and payments of TOR for the year ended 31 December 2010 were free from material error and the supervisory and control systems for revenue were overall assessed as being effective. Responsibility for the weakness and its correction The responsibility for the system weakness and for taking corrective actions entirely falls on the Belgian authorities. Based on DG Budget's request (demand), the Belgian authorities submitted end November 2011 a plan of action setting out the envisaged corrective measures that will be taken. The plan contains short-term (2012), medium-term ( ) and long-term objectives ( and subsequent years). Corrective action The first stage consists in conducting the external audit of the accounting system. The audit will cover all aspects of the accounts including the refund claim (EUR 169 million) and the monthly and annual accounts of the Single Office. At present, European tendering takes place and the target is to kick-off mid-march with the results of the audit expected for mid-may 2012 (certification of refund claim that will necessitate an indept audit of the own resources accounts for the period to which the refund relates, ) and mid-june 2012 (certification of the accounting system the 'as is' situation of the system). An internal multidisciplinary working group will be set up to closely follow-up and monitor the external audit and its recommendations. The group will also be charged in drawing-up proposals for 'system change requests' were needed following the outcome of the audit. The second stage consists in the functional improvement of the accounting system based on the results of the external auditor and the internal workgroup. The implementation of the necessary IT system changes is scheduled for the years 2012 (second half) Finally, an external chartered accountant will be appointed in His tasks will be to certify the annual account for the years From 2014 onwards the certification will again be done internally. The responsible service is already appointed and is given two years to build-up the necessary know-how to assume this task. Unit B3 will continue to closely monitor the envisaged activities and the progress made. A further on-the-spot inspection is scheduled for December The interim results of the external audit, including the refund claim, will be discussed in the closing meeting of the first inspection of the year 2012 (June 2012). BUDG_aar_2011_final Page 61 of 74

62 3.3 Overall conclusions on the combined impact of the reservation on the declaration as a whole In 2011, DG Budget has managed the resources for which it was responsible for their intended purpose and in accordance with the principles of sound financial management. The internal control system (see part 2 above) in place functions effectively. In addition, the control procedures put in place ensure the legality and regularity of the underlying transactions. A number of issues, which are considered significant enough to be highlighted, are included in section Major events during the reporting year. However, all issues are closely followed up by DG Budget services and do not have an impact on the overall declaration of assurance. Nevertheless, there are doubts concerning the reliability of the Belgian clearance and accounting procedures and system and thus on the correctness of the (Belgian only) TOR amounts transferred to the EU budget. The financial impact cannot be measured pending the outcome of the planned external audit but is potentially above the materiality threshold defined in annex 4 (1% of 2011 TOR). The risk materialised during the reporting year as Belgium requested a refund prompted by a system deficiency and the European Court of Auditor concluded that no assurance exists on the correctness of the TOR amounts transferred to the EU budget. This is why the Director General considers it prudent to make a reservation until reasonable assurance is obtained from the Belgian authorities. BUDG_aar_2011_final Page 62 of 74

63 PART 4. DECLARATION OF ASSURANCE I, the undersigned, Director-General of DG Budget In my capacity as authorising officer by delegation Declare that the information contained in this report gives a true and fair view4. State that I have reasonable assurance that the resources assigned to the activities described in this report have been used for their intended purpose and in accordance with the principles of sound financial management, and that the control procedures put in place give the necessary guarantees concerning the legality and regularity of the underlying transactions. This reasonable assurance is based on my own judgement and on the information at my disposal, such as the results of the self-assessment, ex-post controls, the work of the internal audit capability, the observations of the Internal Audit Service and the lessons learnt from the reports of the Court of Auditors for years prior to the year of this declaration. Confirm that I am not aware of anything not reported here which could harm the interests of the institution. However the following reservation should be noted on: the reliability doubts on the Belgian clearance and accounting procedures and system and thus on the correctness of the TOR amounts transferred to the EU budget. Brussels, 29/03/2012 Hervé Jouanjean "Signed" 4 True and fair in this context means a reliable, complete and correct view on the state of affairs in the service BUDG_aar_2011_final Page 63 of 74