Mrs President,
Mr President,
Distinguished Ministers,
Ladies and Gentlemen,

On behalf of the Members of the European Court of Auditors, I would like to thank you for inviting me to present the Court’s 28th Annual Report on the 2004 financial year.

The Annual Report is largely based on the financial audit work performed by the Court and its work on legality and regularity, whereas the findings of the Court’s performance audit work are generally published in the form of Special Reports.

The 2004 financial year was marked by the accession of 10 new Member States, increasing the payment budget from €98 billion in 2003 to €105 billion in 2004. The underspending characterising previous years was considerably reduced through better planning and management. The surplus of 2,7 billion euro in 2004 was far lower than that of 2003 - around half, in fact.

I will now discuss the key messages contained in the Court’s Statement of Assurance, known as DAS, starting with the Court’s opinion on the reliability of the accounts.

For 2004 the Court concludes that the consolidated financial statements faithfully reflect revenue and expenditure for the year and the financial position at the year end, except in the case of the sundry debtors.

Concerning the legality and regularity of underlying transactions, the Court’s DAS opinion is as follows.

For the 2004 financial year the Court found supervisory and control systems to be implemented and operating effectively and underlying transactions, taken as a whole, to be legal and regular in respect of:

– revenue,
– commitments,
– administrative expenditure and the pre-accession strategy of the payment budget.

For the remainder of the payment budget, consisting of

– agricultural spending,
– structural measures,
– internal policies, and
– external actions,

the Court is again not in a position to provide an unqualified opinion: the supervisory and control systems are not yet implemented and operating effectively and payments are still materially affected by errors.

The Court is able to report for the first time, that the efforts made by the Commission and Member States to implement the Integrated Administration and Control System (IACS), covering 59% of agricultural expenditure, have had a positive impact. In fact, IACS is effective in limiting the risk of irregular expenditure to an acceptable level, where properly applied.

I will now turn to those specific assessments of each area of activity within the Statement of Assurance which concern revenue and shared management of appropriations.

In terms of revenue, the Court found revenue transactions to be legal and regular. However, weaknesses were identified in systems in respect of the GNI resource both within the Commission and in Member States.

As in previous years, the Court found evidence that the expenditure under the Common Agricultural Policy, viewed as a whole, was still materially affected by errors. Whereas the Court found that IACS is effective where properly applied, agricultural expenditure not covered by IACS, or where IACS is inadequately applied, is at greater risk of irregularity due to weaknesses in the control systems.

For structural measures the Court again found weaknesses in the management and control systems in the Member States across all programmes in the Court’s sample. For example, the Court identified failures in the Member States’ checks, including failure to perform or document checks, failure to check eligibility criteria for expenditure and failure to verify proof of delivery of the services co-financed. A material incidence of error was detected in the Member States’ expenditure declarations - the basis for the Commission’s payments. In its sample of 167 projects the Court found various wide-ranging problems, including a large number of instances of declarations of ineligible items of expenditure.

So what are the main messages that can be drawn?

The Court found that the vast majority of the payment budget was again materially affected by errors of legality and regularity in the underlying transactions. This is a result of inherently risky transactions, and supervisory and control systems that are ineffective in terms of limiting the risk of irregularity to an adequate level.

However, improvements in systems have been noted, particularly with IACS, the principal supervisory and control system for agricultural expenditure. In addition, the administrative and financial reform process started in 2000 has produced good results at Commission level. Considerably more needs to be done, however, especially in the Member States.

The legislation, rules and procedures governing expenditure often remain overly complex, much expenditure is by nature inherently risky and based only on declarations of beneficiaries, and the Union itself has changed and grown considerably since the introduction of DAS in 1994. Over these 11 years annual payments have risen from €60bn to €100bn and 12 Member States have become 25. The scale and complexity of management - involving ever more authorities and organisations - has therefore increased, requiring ever more effective supervisory and control systems.

In its Opinion 2/2004 on the single audit model, the Court puts forward a proposal for the creation of a Community internal control framework covering all levels of administration - Community institutions, and Member and beneficiary states.

The Court’s opinion on the single audit has contributed to the political debate on improving management and control of Community funds. The Commission has taken a positive step by issuing a Roadmap to an integrated internal control framework, providing a basis for extending reform to all types of budgetary management, in particular to shared management in the Member States. It is indeed of critical importance that the Commission and Member States work together in this area.

The Court welcomes the roadmap initiative. The Court will follow progress closely, in its role as an external auditor and assess the impact of these changes on the financial management and control of EU funds over the coming years.

The Court’s active role since 1978 in the Contact Committee of the Supreme Audit Institutions of Member States has proved very useful both at the strategic and practical levels. In particular in the area of performance audits we regularly exchange work programmes and audit reports, and have carried out several joint audit activities. At present there is an on-going debate on how to further intensify cooperation with the Supreme Audit Institutions, also in connection with the Statement of Assurance.

Turning to another issue, the Court’s position with regard to the future financing, management and control of the Common Agricultural Policy and structural measures should be taken into account when finalising this important legislation. The current draft regulation on the Structural Funds contains provisions relative to the retention of supporting documents which would make it impossible for the Court of Auditors to audit some of the expenditure concerned.

To conclude, I strongly believe that it is only through the good functioning of our institutions and through high quality management, both at policy and implementation level, that the legitimacy of the Union will be assured. Member States, too, need to assume their responsibilities in administering and controlling a major part of the EU budget. In this context the European Court of Auditors plays a key role in providing an independent, professional and objective overview of financial management and helping promote change for the benefit of the citizens of the Union.

I thank you for your kind attention.

Ref: ECA/05/16