Sound Financial Management
When the previousCommission (1999-2004) took office, there was an overriding need to restore public confidence in the management of the European Union's budget and the control of expenditure. Problems had arisen because existing systems for financial management and control were too centralised for the volume and variety of transactions they had to handle. The Reform has made procedures simpler, faster and more accountable by decentralising management and making it more transparent .
The key principles of reform in the area of financial management have been simplification, decentralisation and the taking of responsibility by management departments. Rules have been simplified and made easier to understand and those who authorise expenditure and payments are now responsible for their actions. Everyone involved in financial management and control has therefore been made aware of his or her responsibilities.
The term 'decentralisation' has a particular significance in the context of financial controls because the traditional system provided that each transaction be approved by a centralised financial control. This was often far removed from the service managing the activity in question. Whilst putting controls on expenditure closer to the point of decision may increase their effectiveness, this had to be backed up by an incentive for managers to implement good quality control mechanisms. Empowerment, transparency and accountability are the incentives. The instruments are the Annual Activity Report and the Annual Declaration on the part of each Director-General/Head of Service. The Annual Activity Report sets out the main achievements of the previous year. The Declaration attests to the financial management and to the effectiveness of the control systems in his/her department, and to the accuracy of the information contained in the Annual Activity Report. The Declaration also points out - through reservations - any weaknesses and the related remedial measures taken or planned.
Re-examining the organisation of controls has also led the Commission to re-think the very concepts underlying them. This has resulted in led to the adoption of a modern concept of controls, including a very powerful internal control self-assessment instrument for management. In particular, it involves looking far beyond management's control activities related to each individual transaction. It embraces other components such as the control environment, risk assessment, information and communication, as well as monitoring.
Authority has been delegated within departments so that, wherever possible, the person who decides that an action will go ahead is also the person who authorises the expenditure.
A new Central Financial Service was created in DG Budget in order to make central professional support and advice available to anyone dealing with budgetary and financial management. This provides coherence across the Commission in the definition and application of rules, procedures and standards of internal control. It goes hand in hand with giving more responsibility to those dealing with financial matters: to be able to act responsibly, they need first the knowledge and means to exercise their responsibilities.
The extreme centralisation of financial management and control in the Commission had been strongly criticised internally and externally for failing to prevent financial irregularities in a number of important cases. In the past, both the approval of expenditure and its auditing after the event was carried out by the same central service, suggesting a potential for conflict of interest. Now financial control has been decentralised to the Commission's various Directorates-General and services. The tasks of authorising payments and auditing them have also been separated.
An Internal Audit Service, under the responsibility of Vice-President Kallas, has been established. It gives reassurance as to the sound functioning of the control over operations at the level of the Commission as a whole, thereby helping to ensure that the EU gets value for money and that the money in its care is protected from the risks of misappropriation/misuse. It also keeps a close eye on how the Commission is performing and draws attention to any apparent weaknesses it may spot. At the level of each Directorate-General, an Internal Audit Capability has been established, which reports to the Director-General and is intended to provide him or her with an independent view regarding the department's operations. An Audit Progress Committee, chaired by Vice-President Kallas, started its work at the end of 2004. Its tasks include examining the work of the Internal Audit Capabilities as well as dealing with issues concerning the discharge procedure.
A range of actions is being implemented to step up the prevention of financial irregularities and to close any loopholes, which may leave legislation and financial systems vulnerable to fraud.
Amongst other things, on 1 st January 2005 the Commission moved to accrual accounting. The new accounting system complies with the international accounting standards for the public sector developed by the International Federation of Accountants (IFAC).
Since most fraud and financial irregularities occurs in payments managed by the Member States, cooperation between them and the Commission is crucial, so that the incidence of misappropriations is reduced and the frequency of detection increased.
Find out more about the Annual Statement of Assurance from the Court of Auditors…