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CONFERENCE ON ACCESSION TO THE EUROPEAN UNION SERBIA Brussels, 3 December 2015 (OR. en ) AD 13 / 15 CONF - RS 2 ACCESSION DOCUMENT Subject: EUROPEAN UNION COMMON POSITION Chapter 32: Financial control AD 13/15 CONF-RS 2/15 1

EUROPEAN UNION COMMON POSITION Chapter 32: Financial control This position of the European Union is based on its general position for the Accession Conference with Serbia (CONF-RS 1/14), and is subject to the negotiating principles endorsed therein, in particular: any view expressed by either party on a chapter of the negotiations will in no way prejudge the position which may be taken on other chapters; agreements even partial agreements reached during the course of the negotiations on chapters to be examined successively may not be considered as final until an overall agreement has been established; as well as to the requirements set out in points 23, 28, 42 and 47 of the Negotiating Framework. The EU encourages Serbia to continue the process of alignment with the acquis and its effective implementation and enforcement, and in general to develop already before accession, policies and instruments as close as possible to those of the European Union. The EU notes that Serbia, in its negotiating position CONF-RS 5/14 accepts the acquis under chapter 32 as in force on 26 November 2013, and that Serbia declares that it will be ready to implement it by the date of its accession to the European Union. AD 13/15 CONF-RS 2/15 2

1. Public Internal Financial Control (PIFC) The EU notes that Serbia has a PIFC strategy for the period 2009-14 in place. The EU further notes that the new public administration reform strategy from January 2014 covers PIFC to a certain extent. The EU welcomes Serbia's plans to ensure that the new PIFC strategy for the period 2015-19 and its action plan will be fully embedded in a wider public financial management reform programme. The EU invites Serbia to provide information on the revision of the PIFC strategy and the new action plans and their implementation on a regular basis. The EU notes that the legal framework for PIFC is largely in place. The EU takes note of Serbia's plans to ensure the coherency of the legal framework by introducing amendments to the Budget System Law by the end of 2014 as well as to implementing legislation and the financial management and control and internal audit manuals by the end of 2016. The EU welcomes Serbia's plans to translate the managerial accountability principle more effectively into implementing legislation. In this context, the EU also welcomes Serbia's plans to effectively regulate irregularity management, which is an integral part of the managerial responsibility of the head of the budget user. The EU takes note of Serbia's plans to regulate the centralised budget inspection in line with the PIFC requirements by the end of 2015. The EU invites Serbia to ensure the necessary human resources and administrative capacity for the centralised budget inspection function. As concerns the Central Harmonisation Unit (CHU), the EU takes note of Serbia's plans to conduct a gap assessment of the CHU's institutional and operational capacity in the short-term. The EU further takes note of Serbia's plans to reinforce the CHU's role as part of the new PIFC strategy, enabling the CHU to implement its core functions more proactively. The EU specifically welcomes the plans to transfer by the end of 2016 the responsibility for the organisation of training from the CHU to government bodies responsible for civil service training, while keeping the CHU responsible for the development of the training curricula. The EU recalls the importance of a more effective annual reporting by the CHU to the government on the implementation of PIFC, including concrete proposals to the government for corrective measures, and a more effective follow-up to government recommendations. The EU invites Serbia to provide regular updates on the follow-up to government recommendations. The EU stresses the need to ensure sufficient administrative capacity of the CHU. AD 13/15 CONF-RS 2/15 3

The EU notes that the implementation of financial management and control is still at an early stage and that the management accountability principle is not yet fully embedded in the public sector management culture. The EU welcomes Serbia's plans to ensure that irregularity management is properly incorporated and actively implemented in the public administration. The EU further welcomes Serbia's plans to develop risk management and to ensure its systematic application in practice. The EU underlines that Serbia needs to take active and continuous measures to ensure that the principle of managerial accountability will be fully embedded in the management culture, such that managers perceive internal procedures, controls, audit trails, risk registers and risk management as a necessary basis for improving organisational governance, including the management of public funds according to the sound financial management principle. The EU takes note of Serbia's plans to improve both the quality and independence of internal audit through external peer reviews and awareness-raising among senior management. The EU recalls the importance of ensuring both the independence of internal auditors and the sufficient staffing levels in internal audit units. The EU underlines the need to improve the quality of internal audit training and certification, including possibilities for international certification, and to gradually ensure sufficient funding for it through the national funds. The EU further underlines the importance of a regular exchange of information between the EU and Serbia on the basis of the relevant administrative agreements. AD 13/15 CONF-RS 2/15 4

2. External audit The EU notes that the independence of the State Audit Institution (SAI) is anchored in the Constitution and that the SAI law is broadly in line with the standards of the International Organisation of Supreme Audit Institutions (INTOSAI). The EU takes note of Serbia's plans to prepare an assessment of the SAI law in 2015, in view of amending the law and bringing it fully in line with the INTOSAI standards. The EU stresses the importance of ensuring that the SAI law contributes to full financial, functional and institutional independence of the SAI in line with the Lima and Mexico Declarations of the INTOSAI. The EU welcomes Serbia's commitment to address, as part of the forthcoming amendments to the SAI law, the responsibility assigned by the law for the SAI to detect individual errors and file with competent authorities misdemeanour, economic offence and criminal charges against individuals. The EU recalls that this task involves risks in terms of further constraining the SAI's limited audit resources. The EU further notes this task could be preferably allocated to the centralised inspection function. The EU notes that the SAI has a strategic development plan for the period 2011-15. The EU takes note of the ongoing review of its implementation and the foreseen development of the new strategic development plan for the period 2016-20. The EU invites Serbia to provide regular information on the implementation of the strategic development plan. With regard to the SAI's institutional and audit capacity, the EU notes that the SAI has envisaged 435 employees in total. The SAI currently has around 210 employees, including around 170 auditors. The EU takes note of the planned recruitment of around 90 auditors by the end of 2014 and the remaining auditors after that in the short-term. The EU underlines the need for a considerable further strengthening of the SAI's audit capacity, also in view of the fact that the SAI will implement as of 2015 the additional task of auditing the financing of political parties. The EU recalls the government's responsibility to ensure adequate working conditions and premises for the SAI according to the SAI law. AD 13/15 CONF-RS 2/15 5

With regard to the SAI's audit work, the EU notes that the SAI aims to adopt the required financial and performance audit manuals in line with the INTOSAI standards at the beginning of 2015. The EU also notes that the focus of audit work has so far been on financial and compliance audits and that the performance audit work has only recently started with one performance audit completed so far. In this context, the EU takes note of the planned transition to programme based budgeting at all levels of the government as of 2015. The EU welcomes Serbia's commitment for continuous development of the SAI's audit work. The EU recalls that the development of performance audit work requires specialised audit skills. The EU takes note of the SAI's plans regarding training and certification of auditors and invites Serbia to ensure that auditors are provided with continuous audit training. The EU takes note of the SAI's commitment to contribute to the development of the public sector internal control standards in Serbia. The EU encourages the setting up of an internal audit function in compliance with International Standards for the Professional Practice of Internal Auditing (IPPF standards) within the SAI. The EU welcomes the SAI's commitment to improve internal control within its own organisation which provides a positive example to other budget users of the importance of internal control. The EU also takes note of the SAI's commitment to cooperate with the government, especially the Central Harmonisation Unit, on topics of common interest. The EU welcomes the commitment of the SAI to continuously enhance its cooperation with the parliament. The EU notes that the contact persons for cooperation have been appointed both in the SAI and in the parliament in order to ensure appropriate follow-up to the SAI's audit recommendations. The EU invites Serbia to provide regular updates on the follow-up to SAI's audit findings both by the parliament and the government. The EU also welcomes plans to further strengthen the SAI's international cooperation, including with INTOSAI, the European Organisation of Supreme Audit Institutions (EUROSAI) and the European Court of Auditors. 3. Protection of the EU's financial interests The EU notes that Serbia's legal framework is already harmonised with the Convention on the Protection of the EU's Financial Interests (PFI) and its three protocols, providing for a sufficient criminal law protection in this area. AD 13/15 CONF-RS 2/15 6

With regard to on-the-spot checks, the EU notes that the Framework Agreement between Serbia and the Commission on the implementation of the Instrument for Pre-Accession (IPA) provides a legal framework for Commission on-the-spot checks regarding pre-accession funds. The EU further notes that an administrative cooperation agreement between Serbia and the Commission, regulating cooperation in this area, is planned to be signed by the end of 2014. The EU welcomes Serbia's commitment to assess the current legal framework and amend it, as necessary, in order to ensure sufficient safeguard of evidence, which is required to support Commission inspectors in performing on-the-spot checks. The EU invites Serbia to provide information on the future amendments to the legal framework. The EU further invites Serbia to ensure cooperation with the Commission and to regularly provide information to the Commission on the implementation of the obligations regarding on-the-spot checks. The EU notes that Serbia has assigned a national anti-fraud coordination service (AFCOS) in the Ministry of Finance, reporting directly to the Minister, for the cooperation with the Commission. The EU welcomes Serbia's commitment to ensure a more comprehensive legal basis for AFCOS in the new Budget System Law, planned to be adopted by the end of 2014. The EU recalls the need to clearly define in the law the tasks and responsibilities of AFCOS and the cooperation arrangements with the Commission. The EU further notes that Serbia plans to adopt the implementing legislation, including manuals of procedures, by mid-2015. As concerns the operational capacity of AFCOS, the EU notes that two out of three foreseen employees have been recruited and that a third employee is foreseen to be recruited by the end of 2014. The EU further notes that Serbia plans to formally establish an AFCOS network by mid-2015. The EU underlines that Serbia needs to ensure and maintain sufficient administrative capacity for AFCOS so that it can efficiently coordinate all relevant actors in the future AFCOS network and can be a fully operational partner for the Commission. The EU takes note of Serbia s plans to prepare a national anti-fraud strategy in 2015, with a view to adopting it by mid-2016, in order to ensure an effective protection of the EU s financial interests. In this context, the EU welcomes Serbia's plans to aim for a more harmonised management of irregularities and prevention and detection of fraud both in the EU funds and national funds. AD 13/15 CONF-RS 2/15 7

4. Protection of the euro against counterfeiting The EU takes note of Serbia's commitment to ratify the 1929 Geneva International Convention for the suppression of counterfeiting currency. The EU also notes that Serbia plans to fully align its legislation with the acquis, including authentication of euro coins and the handling of euro coins unfit for circulation and authentication of euro banknotes, by the end of 2018. The EU invites Serbia to provide detailed information on the ratification of the Geneva International Convention for the suppression of counterfeiting currency and the adoption of the relevant national legislation ensuring full alignment with the acquis. The EU notes that Serbia has set up the required administrative structures for technical analysis and classification of counterfeit money, including euro banknotes and coins. The EU invites Serbia to ensure that the national analysis centre has sufficient administrative capacity for technical analysis. The EU notes that Serbia has formalised agreements with the Commission on the handling of euro coins and with the European Central Bank on the handling of euro banknotes. The EU further notes that Serbia has concluded an agreement with the European Police Office on operational and strategic cooperation. This agreement is expected to be shortly ratified by the parliament. The EU also takes note of Serbia s plans to continue to participate in the Pericles programme. The EU invites Serbia to ensure the continuation of its international cooperation with the Commission, the European Central Bank, the European Police Office and a number of EU Member States' central banks. * * * In view of the present state of Serbia s preparations, the EU notes that, on the understanding that Serbia has to continue to make progress in the alignment with and implementation of the acquis covered by the chapter on financial control, this chapter may only be provisionally closed once it is agreed by the EU that the following benchmarks are met: AD 13/15 CONF-RS 2/15 8

Serbia amends its legal framework to ensure coherent PIFC legislation. Serbia implements PIFC legislation and the underlying policies and ensures sufficient administrative capacity at central and local level, in social security funds and in the state-owned enterprises. Serbia ensures that the centralised budget inspection function is compatible with the PIFC requirements. The State Audit Institution (SAI) of Serbia complies with the standards of the International Organisation of Supreme Audit Institutions (INTOSAI), including ensuring financial, functional and institutional independence, implementation of finance and performance audits, and ensures sufficient administrative capacity. Serbia ensures an effective and efficient coordination of anti-fraud activities and cooperation with the Commission to guarantee the fulfilment of future obligations arising from Article 325(3) of the TFEU and application of the provisions of Regulation (EU, EURATOM) No 883/2013 concerning investigations conducted by the European Anti-Fraud Office (OLAF) and Regulation (EC) No 2185/96 concerning on-the-spot checks and inspections carried out by the Commission, in particular the obligation of assistance to Commission inspectors. Serbia ensures in its national legislation the obligation to safeguard evidence. Serbia ensures a comprehensive legal basis and sufficient operational capacity for its national anti-fraud coordination service. Serbia provides a track record on cooperation with the Commission on reported irregularities and investigation cases involving EU funds. Serbia ratifies and implements the 1929 Geneva International Convention for the suppression of counterfeiting currency, aligns its legislation with the EU acquis on authentication of euro coins and the handling of euro coins unfit for circulation and on authentication of euro banknotes. Serbia ensures sufficient administrative capacity for the technical analysis centre. AD 13/15 CONF-RS 2/15 9

Monitoring of progress in the alignment with, and implementation of, the acquis will continue throughout the negotiations. The EU underlines that it will devote particular attention to monitoring all specific issues mentioned above with a view to ensuring Serbia's administrative capacity, its capacity to implement internationally agreed internal control standards and EU good practices across the entire public sector and the external audit standards as defined by the INTOSAI as well as the obligations arising from Article 325 of the TFEU. Particular consideration needs to be given to the links between the present chapter and other negotiation chapters, especially chapters 5, 17, 22, 23, 24 and 33. A final assessment of the conformity of Serbia's legislation with the acquis and of its implementation capacity can only be made at a later stage of the negotiations. In addition to all the information the EU may require for the negotiations in this chapter and which is to be provided to the Conference, the EU invites Serbia to provide regularly detailed written information to the Stabilisation and Association Council on progress in the implementation of the acquis. In view of all the above considerations, the Conference will have to return to this chapter at an appropriate moment. Furthermore, the EU recalls that there may be new acquis between 26 November 2013 and the conclusion of the negotiations. AD 13/15 CONF-RS 2/15 10