Special Report in support of the Statement of Assurance concerning the activities of the sixth and seventh European Development Funds for the financial year 1995 together with the Commission's reply

TABLE OF CONTENTS

Paragraph reference

1. CONDITIONS FOR PRODUCING THE STATEMENT OF ASSURANCE 1.1 - 1.17

The Court's mandate 1.1 - 1.2

Accounts and transactions covered by the DAS 1.3 - 1.12

Scope and limitations of the DAS 1.13 - 1.14

Auditing standards and methodology applied by the Court 1.15 - 1.17

2. CONDUCT OF THE AUDIT 2.1 - 2.8

Constraints on the audit work 2.1 - 2.2

Audit work carried out 2.3 - 2.8

3. THE AUDIT RESULTS 3.1 - 3.83

General conclusion 3.1 - 3.10

Improvements noted 3.3

Reservations concerning the accounts 3.4 - 3.5

Reservations concerning the underlying transactions 3.6 - 3.10

Detailed observations concerning the accounts 3.11 - 3.56

Balance sheets and financial statements 3.11 - 3.39

Decisions (primary commitments) 3.40 - 3.45

Payments 3.46 - 3.56

Detailed observations concerning the underlying transactions 3.57 - 3.83

Substantial legality/regularity errors 3.57 - 3.65

Formal legality/regularity errors 3.66 - 3.80

Other observations 3.81 - 3.83

1. CONDITIONS GOVERNING THE PRODUCTION OF THE STATEMENT OF ASSURANCE

The Court's mandate

1.1. The Treaty establishing the European Community entrusted the Court of Auditors with the task of auditing transactions carried out under the European Development Funds. The Court of Auditors is required to provide the European Parliament and the Council with a Statement of Assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions. The Special Report in support of this Statement of Assurance sets out the overall results of the work performed under that mandate in respect of operations under the sixth and seventh EDFs for the financial year 1995.

1.2. The Statement of Assurance (DAS) consists of the issuing of an opinion as to whether:

(a) the accounts (balance sheets and revenue and expenditure accounts) give a true and fair view of the assets, the financial situation at the end of the financial year and the results of operations for the year then ended, in accordance with the provisions of the Treaties, financial regulations and generally accepted public-sector auditing standards;

(b) the underlying transactions, in general, are legal and regular with regard to the relevant legal provisions.

Accounts and transactions covered by the DAS

1.3. The European Development Funds (EDFs) are based on, firstly, international conventions concluded between the Member States of the European Union and 70 African, Caribbean and Pacific States () and, secondly, Council decisions relating to the association of 24 overseas countries and territories (OCTs) with the European Economic Community. The EDFs were established in accordance with the Internal Agreements on the financing and management of the aid which the Community provides under these conventions and agreements ().

1.4. The Court has examined the balance sheets and accounts of the sixth and seventh EDFs for the financial year 1995, which were published as a communication from the Commission to the Court of Auditors, the Parliament and the Council under reference SEC(96) 989 final of 31 May 1996. These accounts present, on the one hand, the transactions pertaining to the year and, on the other, the cumulative statements of revenue and expenditure recorded since the entry into force of the sixth and seventh EDFs.

1.5. Within the framework of the agreement signed at Mauritius on 4 November 1995, the second financial protocol to the Fourth Lomé Convention, which has a value of 14 625 Mio ECU (), was adopted for a term of five years, with effect from 1 March 1995. Implementation of the protocol is expected to begin during the 1997 financial year, in the form of the eighth EDF, which was established by the Internal Agreement adopted by the Council on 20 December 1995.

1.6. The financing procedures applying to them are one of the main characteristics of the EDFs. The financing for the EDFs is separate from that of the general budget of the European Communities and each Member State contributes to the funding in accordance with the scales laid down in the Internal Agreement for each EDF (see Table 1).

1.7. The appropriations which are entered against the various EDFs are not subject to the annuality rule and there is thus no risk of their lapsing. Although the sixth EDF, like the first financial protocol to the seventh EDF, has a term of five years, implementation of both of them will extend over a much longer period and will continue until the Commission considers that it is sufficiently advanced. The residual balances are then transferred to a later Fund. The accounts of the sixth EDF at 31 December 1995 thus included residual balances from the fourth EDF (125,1 Mio ECU), whilst the seventh EDF included the residue of the first three and the fifth EDFs (492,5 Mio ECU), for which final accounts were prepared at the end of 1993 ().

1.8. The EDFs do not include the resources supplied by the European Investment Bank (EIB) from its own funds, which are mentioned in both the Lomé Conventions and the OCT association agreements (see Table 1.2). The Internal Agreements refer not only to the EDFs' ACP and OCT resources, but also to the sums which the EIB is to make available to them in the form of loans from its own funds, namely, 1 120 Mio ECU complementary to the sixth EDF and 1 225 Mio ECU complementary to the seventh EDF ().

1.9. The financial implementation of the EDFs has three stages:

(a) the financing decisions adopted by the Commission or the EIB (often known as 'primary commitments`);

(b) the contractual undertakings vis-à-vis third parties - applying mainly to the appropriations for which national authorizing officers in the ACP countries and the OCT are responsible; these operations are normally referred to as 'secondary commitments`;

(c) the payments effected by virtue of primary and secondary commitments.

1.10. In the Court's opinion, the primary commitment (paragraph 1.9.(a)) is not the appropriate level at which to implement the provisions of Article 19(1) of the Financial Regulation concerning the audit of:

(a) the 'conformity (of the expenditure) with the provisions applicable to the management of the EDF, and with all other measures taken in implementation of those provisions, in particular, the general and special conditions of the financing agreement relating to the operation`;

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(b) the application of the principles of sound financial management.

In order to eliminate the ambiguities of the present situation, the regulations should define the concept of an accounting commitment, as well as the control procedures to be applied by the Commission to primary commitments, on the one hand, and secondary commitments (delegated appropriations) on the other.

1.11. At the year-end, in order to ascertain the volume of appropriations available for re-use, it is necessary to deduct from the capital of each EDF both the final payments disbursed since the start of the Fund and the commitments of appropriations that are genuinely awaiting settlement. Table 1.3 shows the amounts that were expected to be available for re-use at the end of the 1995 financial year and thus also provides a summary overview of the progress of the sixth and seventh EDFs. The figures are taken from the Commission's accounts and do not take account of the audit results.

1.12. Between the closure of the 1995 accounts and publication of the Court's audit results, the Commission corrected the accounting errors pointed out by the Court. These corrections were recorded against the 1996 year and do not affect the financial statements for the financial year 1995, which were published on 31 May 1996. On the other hand, the audit results did take account of supporting documents for the 1995 accounts which had been made available by the Commission by October 1996.

Scope and limitations of the DAS

1.13. The 1995 statement of assurance, like last year's, concerns only the transactions belonging to that year. Owing to the cumulative presentation of the EDF financial statements, and given that the sixth and seventh EDFs had already been in operation for a number of years before the first financial year covered by a Statement of Assurance (1994), it is not, at this stage, possible for the Court's Statement of Assurance to cover the cumulative EDF accounts.

1.14. The Court refers readers to its Special Report on the activities financed from the general budget for the financial year 1995 (paragraphs 1.9 - 1.14) as regards the global nature of the DAS and its limitations, in particular concerning its coverage of the quality of the management and the uncovering of deliberate acts of illegality.

Auditing standards and methodology applied by the Court

1.15. The Court carried out its task to the best of its ability in accordance with internationally generally accepted auditing standards, insofar as they are applicable in the Community context. The Court refers readers to its Special Report on the activities financed from the general budget for the financial year 1994, as the auditing standards and general methodology followed are similar.

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1.16. The Court does not carry out any on-the-spot checks before it issues the EDF DAS. In view of the precision of the financial implementing procedures laid down by successive Lomé Conventions, and given the Commission's involvement in the monitoring and implementation of them, the audit of 1995 transactions was carried out centrally, at the Commission, in the same way as the 1994 audit, i.e. in those departments which hold or are able to obtain from the Delegations all the supporting documents required for the audit of the legality and regularity of underlying transactions down to final beneficiary level.

1.17. The EDF financial allocations are used up as development measures progress, over a five-year period at least. This calls for careful monitoring of the gradual decline in each Fund's capital as measures are carried out, and the view of progress achieved that is provided by the end-of-year financial statements also requires careful attention, since these various components are the elements which give the volume of appropriations available for re-use. 2. CONDUCT OF THE AUDIT

Constraints on the audit work

2.1. In the context of previous financial years, the Court has already drawn the discharge authority's attention to the unsuitability of the legal framework in terms of the conditions under which the EDFs are implemented (). This lack of harmonization makes it very difficult to assess the authorization of certain types of operation or their legality.

2.2. The Commission has introduced an action plan to reform certain accounting practices () and, since 1994, has initiated a process which is intended to provide reliable end-of-year financial statements with real informative value. The observations set out in this report show that substantial progress has been achieved, but that further effort is required if that objective is to be fully attained.

Audit work carried out

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2.3. The audits were concerned with, firstly, the expenditure flows corresponding to aid implementation during the 1995 financial year and, secondly, the balances which made up the EDFs' capital and assets at the end of the financial year.

2.4. The audit of 1995 expenditure was based on a statistical sample of commitments and payments. The transactions pertaining to the two current EDFs were grouped together for the purpose of the audit and each Fund was treated as part of the same population. The upper error limit was 50 Mio ECU () with a 95% confidence level, as a result of which a sample of 99 primary commitments (Commission decisions) and 149 payments was examined.

2.5. The commitments and payments examined in the context of the sampling procedures accounted for 63% and 37% respectively of total commitments and payments for the year. In the fields of Stabex and structural adjustment, the size of the transactions examined was such that most of the movements in that year were examined ().

2.6. The review of commitment and payment samples was supplemented by analytical reviews covering possible omissions, the valuation of commitments at the year-end, the accuracy of account totals and increases and decreases in the capital. Specific substantive tests were also applied to allocations, by financial instrument and by country, suspense accounts and various asset and liabilities accounts. Since these various tests were not statistical tests, the results cannot be used as the basis for projections and the conclusions are based only on known error.

2.7. The bank accounts were systematically checked by obtaining external confirmation of balances from the financial institutions at which accounts are held.

2.8. The overall conclusions concerning the reliability of the accounts and the legality and regularity of the underlying transactions are based on the results of all the above-mentioned tests.

3. THE AUDIT RESULTS

General conclusion

3.1. The Court's audit provided it with reasonable assurance that the financial statements for the year ending 31 December 1995 are accurate, subject to the facts mentioned in paragraph 3.4. In the light of those facts, it is clear that the presentation of the EDF's financial situation, and of the capital available for re-use in particular, must be improved.

3.2. The Court has also obtained reasonable assurance that, subject to the facts summarized in paragraphs 3.6 - 3.10, the transactions underlying the year's revenue, commitments and payments are legal and regular. The formal errors that were noted in the areas of Stabex, structural adjustment and the operations managed by the EIB were mainly due to the nature of the legal framework, which, in part, is unsuitable for the actual circumstances under which transactions are effected and decisions taken.

Improvements noted

3.3. The Court's audit established that, by comparison with 1994, improvements had been made in the following main areas:

(a) the statement of the accounting principles applied and the tightening-up of inventory and closure procedures, especially those relating to the accounting for transactions effected by the EIB during the year;

(b) the strengthening of the analytical framework for monitoring appropriations;

(c) the inclusion of improved notes to the financial statements. This was necessary in order to provide a better assessment of the true situation regarding the implementation of Community aid.

Reservations concerning the accounts

3.4. Despite the improvements introduced by the Commission, the accounts are still affected to a significant extent by the unsuitability of certain accounting methods and practices:

(a) the Court has estimated that the year-end value of primary commitments that remained unsettled and did not reflect the economic reality of operations was around 197 Mio ECU (paragraph 3.45), which is approximately 3,6% of the 5 449 Mio ECU of commitments remaining to be settled shown in the accounts (see Table 1.3);

(b) the 29 Mio ECU shown as advances for scholarships and technical assistance constitute expenditure under verification amounting to 18,3 Mio ECU (paragraphs 3.31 - 3.32), not assets;

(c) the accounting system does not yet provide a view of the situation with regard to other types of advance, especially those relating to structural adjustment, estimates and contracts for works, services and supplies, which continue to be shown as final payments in the financial statements (paragraphs 3.51 - 3.54);

(d) the expenditure under verification item in the balance sheet includes some amounts which are not the usual payments in progess at the year-end. These items amount to 13 Mio ECU in total, of which 8 Mio ECU was cleared after the balance-sheet date (paragraphs 3.27 - 3.28);

(e) posting errors that remained uncorrected at the closure totalled 0,17 Mio ECU and affected the valuation of the amounts unsettled against one primary commitment and one secondary commitment (paragraph 3.55). The best estimate of the year's payments that are affected by such errors of classification in the accounts is approximately 17,7 Mio ECU at the end of the sampling procedure. No error of this type was found in the case of the year's commitments;

(f) the treasury accounts include 2,9 Mio ECU of doubtful accounts and 213,2 Mio ECU of securities and associated interest which are not specifically mentioned in the financial statements (paragraphs 3.29 - 3.30).

3.5. The Court also wishes to draw the Commission's attention to the following:

(a) the presentation of the appropriations does not give a clear view of two important action programmes: structural adjustment (paragraphs 3.21 - 3.22) and the special initiative for Africa (paragraph 3.23).

(b) the system allowed 1,2 Mio ECU to be transferred to Stabex in 1995 without adequate justification (paragraph 3.24);

(c) owing to delays in the inventory procedures, the statement of primary commitments was understated by 3,4 Mio ECU (paragraph 3.40).

Reservations concerning the underlying transactions

3.6. It was estimated that the most likely amount of substantial legality/regularity errors affecting the year's payments was 32,6 Mio ECU (2,1% of the payments). This projection was corroborated by the identification of a volume of known errors amounting to 6,5 Mio ECU (0,4% of total payments):

(a) errors in the calculation of amounts paid to contractors totalled 2,5 Mio ECU (paragraphs 3.60 - 3.62 and 3.65);

(b) additional support for structural adjustment, to the amount of 4 Mio ECU, was committed and paid, although the beneficiary country was no longer eligible (paragraph 3.63).

3.7. Moreover, the expenditure under verification includes transactions totalling 6 Mio ECU for which there were no supporting documents (paragraph 3.58).

3.8. For the year's commitments, the volume of substantial known legality/regularity errors was 4 Mio ECU, which is 0,2% of total commitments for the year (paragraph 3.57).

3.9. The known value of the year's payments affected by formal legality/regularity errors was 323,3 Mio ECU:

(a) a payment of 4 Mio ECU concerning structural adjustment was authorized without the authorization of the Commissioner concerned (paragraph 3.71);

(b) the way in which the terms of the financing agreements are interpreted does not provide the basis for a positive conclusion regarding the justification for 87 Mio ECU of payments relating to structural adjustment (paragraph 3.72);

(c) in the case of the 3,6 Mio ECU of interest subsidy payments examined, the supporting documents available at the Commission constitute insufficient evidence to justify the amounts calculated by the EIB and passed to the accounts by the Commission (paragraph 3.77);

(d) the rules were not applied in the case of 18 Stabex payments totalling 216 Mio ECU, 163,4 Mio ECU of which was disbursed although the beneficiary State had not submitted a report on the use of the resources transferred (paragraph 3.73); 75 Mio ECU was paid without prior substantial analysis and 31,1 Mio ECU was based on insufficient substantive analysis (paragraph 3.74), whilst there was insufficient justification for 101,5 Mio ECU in the calculation of transfer base reductions (paragraph 3.75);

(e) payments amounting to 12,2 Mio ECU were made despite the fact that the rules and contractual conditions, the payment deadlines (paragraphs 3.79 - 3.80) and the performance deadlines (paragraph 3.78) had not been observed. For one payment of 0,5 Mio ECU the Court was unable to obtain the supporting documents needed to justify the revised prices charged on invoices (paragraph 3.76).

3.10. The known value of the year's commitments affected by formal legality/regularity errors is 87,2 Mio ECU:

(a) an amount of 9 Mio ECU by way of additional structural adjustment support financed through national indicative programmes was authorized according to a procedure which is reserved for traditional types of development project (paragraph 3.66). There were a further two cases, for a total of 26,6 Mio ECU (paragraph 3.67), where the EDF Committee did not have sufficient information. In another case, involving an amount of 9,2 Mio ECU, the commitment was entered into before the necessary appropriations had been made available (paragraph 3.68);

(b) the supporting documents held by the Commission are insufficient evidence to justify an amount of 37 Mio ECU in commitments and interest subsidies which were calculated by the EIB and passed to the accounts by the Commission (paragraph 3.69).

(c) the supporting documents did not provide the Court with positive evidence of the justification for reducing the transfer base for one Stabex commitment of 5,5 Mio ECU (paragraph 3.70).

Detailed observations concerning the accounts

Balance sheets and financial statements

Accounting principles, methods and practices

3.11. The accounting standards applied when the end-of-year financial statements are being prepared affect the valuation and, in consequence, the reliability, of the accounts, in that the latter are required to provide a true and fair view of the assets and financial flows and of the actual financial situation.

3.12. For the first time, the EDF accounting officer has specified the accounting principles followed in the financial statements. However, they must be applied more consistently if the EDF accounts are to provide a true and fair view of economic reality:

(a) some transactions belonging to the financial year were not recorded. The book-keeping, inventory and closure procedures are still not sufficiently advanced for this to be possible (paragraphs 3.25, 3.30 - 3.34 and 3.38);

(b) some account entries lacked supporting documents (paragraphs 3.29 and 3.58); moreover, the link between entries and supporting documents is not very obvious and is not apparent from the account books and other accounting records;

(c) transactions of very different kinds are grouped together in the same balance, without any regard for the descriptions, so that it becomes impossible to assess the reality of the situation (paragraphs 3.27, 3.29, 3.48);

(d) end-of-year adjustments are effected either outside the accounts (paragraph 3.13) or by means of entries which subsequently require adjustment (paragraph 3.27(a)). If the latter are not suitably identified in the accounts (standard entries and special account books) they are treated as normal transactions (paragraph 3.28).

Content and presentation of the financial statements

3.13. The amounts shown in the balance sheet do not always correspond to the account balances:

(a) the trial balance for the sixth EDF shows contributions paid of 7498,9 Mio ECU, 186 Mio ECU of Stabex appropriations made available again and 202,1 Mio ECU of resources transferred from the fifth EDF. The amounts shown in the revenue and expenditure account are 7558,9 Mio ECU, 153,5 Mio ECU and 174,6 Mio ECU respectively. The differences cancel each other out and stem from the entry in the accounts of the additional contribution of 60 Mio ECU provided by the Member States in the context of the special programme for heavily indebted countries;

(b) the sixth EDF receipts under verification are classed as cash accounts rather than suspense accounts, which results in a difference between the balances shown in the trial balance and those presented on the balance sheet.

3.14. The recovery orders issued ('revenue and VAT to be collected` item) do not correspond to account balances in the trial balance. The way they are presented as both assets and liabilities reflects the problems of presenting a balance sheet which observes the cash-based accounting principles adopted for the EDF, on the one hand, and, on the other, presents claims and debts as necessary in order to give a fair view of the capital actually available. This twofold requirement could easily be satisfied by showing the asset items not recorded in the treasury accounts in a separate off-balance sheet section.

3.15. The presentation of cumulative balances on the assets side and only annual variations on the liabilities side lacks transparency. The liabilities side should also show cumulative totals and would thus present the changes that have occurred in the capital of each Fund since its inception.

3.16. Expenditure under verification appears as a capital deduction for the 1995 year and is shown under the assets for 1994. The new presentation provides a better reflection of the economic reality of the operations. As a consequence of this change of method, the accounts show an additional decrease of 41 Mio ECU in the sixth EDF's available capital over the year. This does not, however, reflect the actual use of this amount during the year.

3.17. The sixth EDF AIDS programme measures are shown on a separate line in the financial statements. This is not so for the seventh EDF, even though the resources available under the latter are much greater (allocation: 50 Mio ECU). In the interests of keeping the same methodology and preserving the consistency of the financial statements, the measures should be presented in a comparable way in the accounts of the sixth and the seventh EDFs.

3.18. The report on the destination of aid by sector is based on the OECD classification. The latter should be used as the standard classification, replacing the sectoral classification used for the present accounting system. Whereas 99% of cumulative payments appear in it, 50% of the year's decisions are not covered by the classification presented.

3.19. The commitments for the year are shown net in the financial statements, as a result of the netting-out of commitments and cancellations. This is illustrated by the commitments for the year's interest subsidies, in respect of which the financial statements show an amount of 55 Mio ECU, which, in fact, represents the balance of commitments (90 Mio ECU) and the cancellations effected (35 Mio ECU).

Presentation of appropriations

3.20. The EDFs' resources are divided into large allocations and this is the breakdown which is used for the presentation of the EDFs' income and expenditure account. The credit lines are then defined at a much more detailed level in accordance with the EDF implementing provisions, for example: broken down by country and region following the signature of national indicative programmes (subsidies), or the setting of disbursement targets (structural adjustment), posting of bank interest.

3.21. It is not possible to evaluate the actual situation regarding the implementation of Community aid in the area of structural adjustment, given the current presentation of the EDF balance sheets and income and expenditure accounts, because several financial instruments are used to provide the finance for these measures. The total amount of appropriations allocated to structural adjustment measures can thus be estimated provisionally at around 350 Mio ECU for the sixth EDF and 1 605 Mio ECU for the seventh EDF, or 1 955 Mio ECU in total at the end of 1995. This amount is 70% higher than the allocation provided for by the Financial protocol to the Fourth Lomé convention. In the case of the seventh EDF, 392 Mio ECU of these additional resources derive either from national indicative programmes, as provided in Article 281 of the Lomé Convention and Article 1 of the Financial Protocol to the Convention, or from the subsequent allocation of programmable reserves to projects relating to structural adjustment.

3.22. The Lomé Convention makes no provision for the subsequent allocation of programmable reserves to structural adjustment, which is why the rules on the initial allocation were applied mutatis mutandis when the Convention was first implemented. In this way, an amount of 100 Mio ECU, of which 50,6 Mio ECU has still not been committed, was withdrawn from the programmable reserve of the seventh EDF in 1995.

3.23. It should be noted that regional cooperation and the trans-frontier initiative are now subject to precise follow-up in the accounts. On the other hand, it is not possible to identify in the accounts all the rehabilitation measures under the special initiative for Africa, which, according to the follow-up carried out by the Commission outside the accounting system, were the subject of EDF financing decisions amounting, at the end of 1995, to a grand total of around 500 Mio ECU.

3.24. As a result of the errors noted () in connection with the management of Stabex appropriations, the Commission made adjustments in 1995 to the bank interest allocated to the Stabex system: 125 Mio ECU of contributions not paid by the Member States in December 1992 were finally credited to the system in December 1994. In the Stabex interest calculations they were treated as having been credited to the bank account since January 1993. The interest thus calculated (17,2 Mio ECU) was transferred in 1995 to Stabex interest from the interest on funds on deposit. Moreover, when the schedule of past Stabex tranches was drawn up in preparation for the interest recalculation, 10 Mio ECU was included in the account as of July 1993, instead of July 1995. 1,2 Mio ECU of bank interest was thus credited to the Stabex system without justification. In future, the Commission will only treat interest generated by the balances of Stabex bank accounts as Stabex funds.

Payments under verification

3.25. As of 31 December 1995 there was a difference of 3,9 Mio ECU between the total resources available for each Fund according to the balance sheet drawn up by the accounting officer and the allocations recorded by the authorizing officer. This figure corresponds to the amount recorded as outstanding at the year-end in the form of interest received but not yet verified. In the case of the expenditure, the difference was 41,1 Mio ECU, These differences correspond to the amount recorded as outstanding at the year-end in the form of expenditure not yet posted.

3.26. The amount of 41,1 Mio ECU for expenditure under verification consists in reality of a sum of 44,7 Mio ECU for expenditure under verification and 3,6 Mio ECU of revenue received but not finally posted.

3.27. The expenditure under verification of 41,1 Mio ECU shown in the sixth EDF balance sheet includes 13 Mio ECU of a different or extraordinary nature, which breaks down as follows:

(a) 9,5 Mio ECU corresponding to entries made at the year-end in order to bring the account balances for the bank accounts into line with the actual bank balances. 8 Mio ECU of these entries were reversed as soon as the details of the payments made by the EDF's banks at the year-end had been recorded. As of 1 May 1996, however, the corrections had not yet been applied in the case of 1,3 Mio ECU (six bank accounts), which could have the effect of definitively concealing the unexplained differences between the EDF accounts and the real bank position. Furthermore, the reversing entries that were applied included an amount of 0,2 Mio ECU (seven bank accounts) that was not replaced by any individual payment record, which could have the effect of deferring the treatment of unexplained differences to the next closure;

(b) 3,5 Mio ECU of payments and 0,7 Mio ECU of revenue (mostly old), for which the Commission has no supporting documents or which cannot be charged to a commitment. In total 4,5 Mio ECU of payments and 1 Mio ECU of revenue have been outstanding for more than 12 months (including 2,1 Mio ECU that has been outstanding for more than three years) and cannot be entered definitively because there are no authorizations for the transactions in question;

(c) the balance of 0,25 Mio ECU on an account headed 'VAT to be recovered` has not changed for several years. The Commission does not know the real nature of the account and does not have any supporting documents for it;

(d) 0,2 Mio ECU representing irrecoverable bank deposits and transfers. The corresponding losses will be entered either in the account for administrative and financial expenses (0,15 Mio ECU for Somalia) or against the residual balance on a project (0,05 Mio ECU for Guinea);

(e) 0,24 Mio ECU representing extra-contractual advances against the EDF's treasury in favour of certain Member States which are co-financing projects with the EDF.

3.28. The suspense accounts that are presented as expenditure under verification should be broken down by type of account, so that each one can be cleared and followed up in the appropriate manner. In particular, the clearance of the adjusting entries for the bank accounts must be monitored very closely, in order to ensure that the unexplained differences between the real balances and the balances shown in the accounts are identified and dealt with promptly and are not carried forward from year to year. Similarly, items that are known to be doubtful or irrecoverable, or which do not correspond to expenditure that can be attributed to projects, should be identified in the accounts, so that they can be mentioned in the financial statements if the amount involved so justifies.

EDF cash position

3.29. The balance of 728,2 Mio ECU in the EDF's bank accounts includes:

(a) 2,9 Mio ECU corresponding to bank balances that have been lost or recovery of which has proved to be uncertain for several years. They should be identified as doubtful accounts on the balance sheet and the EDF authorizing and accounting officers should have either initiated the recovery procedure or recorded the losses incurred ();

(b) 188,2 Mio ECU of securities purchased and 25 Mio ECU of interest generated by them (giving a total of 213,2 Mio ECU) as part of the management of the Stabex treasury should be shown as such in the balance sheet;

(c) 0,3 Mio ECU - only a fraction of the 0,8 Mio ECU of 1995 interest credited by the banks with a 1996 value date.

3.30. The accounts contain only one bank account for Stabex. In reality there are several different accounts (capital, interest, securities) with the bank which handles the Stabex assets. This situation contributes nothing to the transparency and reliability of the Stabex capital and interest balances (paragraph 3.24), which have repeatedly been the subject of criticism by the Court ().

Advances for scholarships and technical assistance

3.31. The 'advances` item on the assets side of the balance sheet comprises advances paid for scholarships and technical assistance and amounts to 29 Mio ECU. The advances break down into three groups:

(a) 3,4 Mio ECU transferred to the Delegations to pay out as scholarships in 42 ACP States, of which 1,8 Mio ECU relates to old advances, the situation regarding which has not been confirmed by the Delegations recently in any way. During the financial year 1995, only 0,03 Mio ECU was cleared by way of expenditure in two countries;

(b) 16 Mio ECU (15,3 Mio ECU for technical assistance and 0,7 Mio ECU for scholarships) paid to the European Association for Cooperation (EAC), which, subject to its final accounts, provided the Court with direct confirmation of an amount of 0,5 Mio ECU, which would indicate that the clearing of 15,5 Mio ECU of these advances is overdue. This balance also includes 2,1 Mio ECU of expenditure, the justification for which, in terms of the corresponding commitments, has been questioned by the Commission. However, no steps have been taken to resolve the problem quickly;

(c) 9,6 Mio ECU paid to agencies in the Member States for scholarships. The EDF accounting officer has not checked with the agencies concerned that these scholarships were actually awarded. This balance includes advances totalling 4,4 Mio ECU to the British Council, which confirmed directly to the Court a balance of 1,6 Mio ECU, indicating a delay in clearing 2,8 Mio ECU. No part of this agency's declared expenditure for 1994 and 1995 has been entered in the accounts by the Commission. The situation regarding this account should be clarified before any new advances are paid.

3.32. The Court has already insisted that a comprehensive audit of the accounts for these three series of operations should be carried out by the Commission, so that the existence of the sums recorded in the accounts can be confirmed (). The balance of 29 Mio ECU shown on the assets side cannot be considered available for re-use and overstates the EDF's capital by some 18,3 Mio ECU.

Other claims omitted

3.33. A debt of 0,8 Mio ECU, representing the interest due on Italian co-financing operations, was mentioned in the authorizing officer's notes, but was not recorded in the final accounts submitted by the accounting officer.

3.34. The bank interest for the final month or final quarter of 1995 was credited with a value date of 31 December 1995 by some banks and by others with a value date of the beginning of January 1996. 0,6 Mio ECU of this interest was credited at the beginning of 1996, including 0,1 Mio ECU with a 1995 value date, but was not included in the year-end accounts.

Revenue

3.35. At 31 December 1995, contributions due amounted to zero ECU, and not 1,13 Mio ECU as stated in the balance sheet. The corresponding payment connected with the balance of the special programme for heavily indebted countries was confirmed by the EIB on 1 February 1996, the day after the accounts were closed.

3.36. The Member State contributions called up by the Commission in 1995 amounted to 1 650 Mio ECU for the seventh EDF, and were paid over in full.

3.37. The contributions due following calls for funds in the preceding financial year were paid over, with the exception of 112 000 ECU still owed by Germany.

3.38. Of the 11,6 Mio ECU of general bank interest recorded as income for the financial year 1995, 3,6 Mio ECU was actually received in 1994 and 1,1 Mio ECU during the financial years 1990 to 1993. In the case of the Stabex interest received, 0,8 Mio ECU was collected in 1994 and was the subject of adjustment in 1995.

Revenue awaiting clearance

3.39. The 3,9 Mio ECU of interest under verification that is shown on the balance sheet comprises 3,7 Mio ECU of bank interest received and 0,2 Mio ECU of late-payment interest charged in connection with Italian co-financing operations (paragraph 3.33). These amounts were still shown as revenue awaiting clearance at the end of the financial year because they had still not been passed by the Financial Controller.

Decisions (primary commitments)

Posting delays

3.40. Two cases of posting delays were noted. They concerned subsidized interest loan decisions to a value of 3,4 Mio ECU, which were taken by the EIB in 1995 and will not be posted until 1996. These cases should have been singled out by the Commission in the course of the inventory and closure procedures. With the exception of these two delays in the closure operations, the financing decisions were recorded for the full amount, without any notable delay.

Valuation at the close of the financial year

3.41. The expenditure commitments correspond to financing decisions taken by the Commission. These sums will, in principle, be disbursed. However, the amount decided on often differs from the sums actually disbursed during a project. Where the amount decided on is insufficient, the commitment is increased as soon as additional financing has been approved. On the other hand, if the amount decided on is too high, the difference is not recorded in the accounts until the project is considered to have been fully executed and the national authorizing officer and the Commission agree to carry out the closure procedures. The Court has already pointed out this phenomenon and its impact on the reliability of the commitments accounts, which are thus overstated ().

3.42. In an annex to the 1995 financial statements, the Commission presents an analysis of the commitments for which there have been no movements in the accounts for over 18 months. Of the commitments thus recorded, the Commission has identified amounts totalling 22,4 Mio ECU for the sixth EDF and 13,52 Mio ECU for the seventh EDF, which need to be cancelled. The audit work indicated that this analysis understates the amount of appropriations tied up unnecessarily.

3.43. The balances that the Commission has identified as balances to remain open include 94,3 Mio ECU that is no longer likely to be disbursed:

(a) sixth EDF risk capital amounting to 12 Mio ECU for a loan contract which lapsed at the year-end;

(b) risk capital of 7 Mio ECU for the seventh EDF for a loan contract which lapsed at the year-end;

(c) various operations totalling 43,5 Mio ECU for the sixth EDF and 31,8 Mio ECU for the seventh EDF.

3.44. Furthermore, many projects which were not included in the Commission's analysis because there had been movements in the accounts during the previous 18 months may also include sums that are being tied up unnecessarily. For example, the review of the balances of commitments not included in the Commission's analysis revealed a large number of projects where the valuation in the accounts no longer reflects the reality of the operations, which is therefore overstated by 66,7 Mio ECU:

(a) risk capital of 4,52 Mio ECU (out of a total of 6 Mio ECU committed) for the sixth EDF and 18 Mio ECU for the seventh EDF;

(b) the balances totalling 11 Mio ECU on emergency-aid operations which ended in 1994;

(c) three balances on emergency-aid operations and two for technical assistance corresponding to operations completed in 1995 for which a total of 0,4 Mio ECU should have been cancelled at the close of the financial year;

(d) balances on various projects, totalling 22,8 Mio ECU, against which no contracts had been recorded for more than 18 months and which have thus become pointless;

(e) outstanding balances on various contracts, totalling 7,3 Mio ECU, against which there have been no payments for over 18 months and which are no longer likely to be used under the same financing agreement;

(f) a commitment for works that was overstated by 2,7 Mio ECU (7% of the amount committed), because the forecasts on which the decision was based had been overstated.

3.45. There is thus a total of some 161 Mio ECU which could be cancelled, rather than the 35,9 Mio ECU shown in the financial statements. This situation is partly due to the fact that the Commission departments (excluding ECHO) are often obliged to wait for the final accounts for all the contracts for a project, as well as the approval of the national authorizing officer concerned, before they consider cancelling the surplus appropriations. Moreover, there is no provision for a simple procedure whereby financing agreements can be revised downwards if, during implementation, it becomes clear that the estimates on which the related decision was based are too high. It is recommended that this type of price-revision clause be included in future financing agreements.

Payments

Presentation of payments

3.46. With regard to the Stabex transfers and the operations in support of structural adjustment, the procedures stipulated in the regulations laying down detailed rules for the implementation of appropriations result in a presentation of payments that does not accurately reflect the extent to which aid has been mobilized. Whereas in the case of the other EDF expenditure headings, payment constitutes confirmation of the final use of the financial resources following execution of the measures, in the case of Stabex transfers the payment recorded by the EDF is, in the first instance, merely a payment of funds into an intermediate bank account.

Following the Court's observations on this matter (), the 1995 EDF financial statements present a breakdown by country for these two financial instruments showing, firstly, the balances on the ECU bank accounts opened in Europe and, secondly, the counterpart funds. However, the tables do not indicate clearly the magnitude of the balances yet to be mobilized ().

3.47. In the case of structural adjustment, the Commission does not always apply the provisions of Article 250(3) of the Fourth Lomé Convention, which provide that the funds remitted to beneficiary authorities are to be regarded as advances of funds until such time as the authorities in question submit justification of the use of them.

3.48. The negative figure of 0,15 Mio ECU presented as expenditure incurred for the financial year in the form of financial and administrative expenses is obtained by offsetting 1,8 Mio ECU of revenue against 1,7 Mio ECU of expenditure. The bookings for the financial year include in particular:

(a) 1,6 Mio ECU of revaluation gains on bank balances, 1,5 Mio ECU of which relates to the financial year 1994 and 0,1 Mio ECU to the financial year 1995;

(b) 0,2 Mio ECU of revenue from the European Association for Cooperation (EAC) in the form of interest on the cash advances granted by the EDF;

(c) 0,1 Mio ECU relating to a direct payment to the EAC, unconnected with the advances system;

(d) 0,3 Mio ECU of late-payment interest charged to the EDF;

(e) 0,6 Mio ECU relating to studies financed with EDF bank interest under Article 9(2) of the internal agreement;

(f) 0,7 Mio ECU for miscellaneous administrative and financial expenses.

3.49. The expenditure under verification at 31 December 1994 included payments totalling 6,1 Mio ECU which were not supported by the necessary documents. As part of the clearance of these amounts and with a view to the closure of the accounts at 31 December 1995, the authorizing officer and the accounting officer proposed to charge any losses that might be established to the account for financial and administrative expenses (). Analysis of the account reveals that only 0,01 Mio ECU (0,03 Mio ECU of expenditure and 0,04 Mio ECU of revenue) was recorded as such during the financial year 1995. However, some of the losses recorded were also charged directly to development projects (paragraphs 3.27(e) and 3.54). The Court is unable to quantify the extent of this phenomenon, as there is no audit trail for these transactions. A suitable accounting trail will be required to take account of the records of losses incurred during 1996.

3.50. For accounting purposes, the administrative and financial expenses item, like the expenditure under verification account, should be broken down according to the nature of the costs and charges. Firstly, revenue must be separated from expenditure. Secondly, late-payment penalties, established losses of assets (non-chargeable expenditure and irrecoverable assets) and exchange gains and losses are extraordinary items, not current expenditure, and must be examined in greater depth with regard to their regularity and must be presented clearly in the accounts, so that they can be mentioned in the financial statements if the amount is sufficiently large.

Advances on contracts

3.51. Many contracts provide for the payment of advances before the commencement of works, deliveries of supplies or the provision of services. These advances are separate from the payments on account that are made on the basis of progress reports during implementation.

3.52. The Commission's rule is to treat these advances as so many final transactions, which results in a forced presentation of the use of the appropriations that is not pointed out in the financial statements. Throughout 1995 the departments under the EDF's chief authorizing officer took steps to show the situation regarding advances in the EDF accounts as of the end of 1995.

3.53. At the end of 1995, the schedule showing payments of advances in the accounting system was still incomplete and could not be used to draw up the statement of advances for presentation in the financial statements.

3.54. Some of these advances, which will be credited to bank accounts opened in ACP countries to meet project expenditure (imprest funds), are also presented as final payments applied to the projects concerned. The balances on these bank accounts are thus also shown in the accounts as final payments. On the basis of the bank balances confirmed by the Delegations, these balances amounted to at least 11,7 Mio ECU on 31 December 1995. These cash advances presented as expenditure include a bank balance of 0,3 Mio ECU which was lost when the bank holding the account went into liquidation.

Charging

3.55. Three of the payments examined, totalling 0,17 Mio ECU, were not applied to the corresponding commitment or delegated appropriation. In each case the effect of this error was to clear older outstanding balances without triggering the necessary cancellations, whether at the level of the primary commitment or the secondary commitment.

3.56. With regard to one payment of 0,4 Mio ECU, as a result of the account entry the commitment showed a negative balance of 0,02 Mio ECU, which was neither detected nor corrected before the accounts were closed. Additional analytical reviews resulted in identification of five other commitments, all of which related to earlier EDF transfers, showing a negative, committed and paid total amounting to 0,8 Mio ECU following the closure of the residues of projects that had been transferred from previous EDFs. The accounting procedures for such transactions should be reviewed so as to make it impossible for the commitment and payment accounts to present negative totals.

Detailed observations concerning the underlying transactions

Substantial legality/regularity errors

Decisions (primary commitments)

3.57. The additional commitments totalling 4 Mio ECU for Niger's structural adjustment programme, which were authorized in accordance with procedures questioned by the Court (paragraph 3.66), were entered into at the end of 1995, although this country no longer qualified automatically under the terms of Article 246(2) of the Fourth Lomé Convention, and had not been declared eligible under the terms of Article 246(1) of the Convention. The coup d'état that took place in Niger in January 1996 ought to delay its return to eligibility still further.

Expenditure awaiting clearance

3.58. Analysis of the expenditure under verification account showed that a total of 6 Mio ECU is not supported by the necessary documents:

(a) 3,75 Mio ECU of payments without supporting documents (paragraph 3.27(b) and 3.27(c));

(b) 0,7 Mio ECU of revenue for which there are no supporting documents (paragraph 3.27(b));

(c) 1,5 Mio ECU of unjustified adjustments to the bank balances (paragraph 3.27(a)).

3.59. In the Court's opinion these transactions should be explained when the Commission grants final discharge to the EDF accounting officer pursuant to the provisions of Article 43 of the Financial Regulation for the seventh EDF.

Payments

3.60. Contracts set out the procedures for both the payment of advances and their subsequent recovery. Among the payments examined, five relating to works contracts were for the wrong amount because the advance that had been paid earlier had not been recovered correctly. Notwithstanding the correction of these errors in subsequent payments relating to the same contracts, the individual payments examined are 2,3 Mio ECU too high.

3.61. In another case relating to an emergency-aid operation, an advance of 70% amounting to 0,35 Mio ECU was granted, by derogation from the normal ceiling of 50%, without establishing the existence of conditions which make such a derogation possible (20% or 0,1 Mio ECU).

3.62. In the case of one payment on account relating to a technical assistance contract the retention money had been deducted twice. The financial impact of this error is around 0,01 Mio ECU.

3.63. The eligibility of the payments of 4 Mio ECU made in December 1995 in connection with the increase in the ceiling on a financing agreement relating to structural adjustment in Niger is just as questionable as the increase in the corresponding commitments (paragraph 3.57), and the remarks concerning conditionality made in paragraph 3.77 are equally relevant in this case.

3.64. The general terms and conditions for service contracts which entered into force on 1 June 1991 () have considerably amended the conditions that applied previously. Article 35(4), in particular, stipulates that an advance payment may not exceed 90% of the value of the services to which it relates and does not provide for any derogation from this regulation by either the contracts or the special conditions. The provisions concerning retention money are considered by the Commission departments to be inappropriate to certain types of contract, e.g. contracts carried out by government agencies, as in the case of technical assistance. As a general rule there is no retention money on these contracts.

3.65. In the case of six of the 13 payments which were examined and which are covered by this rule, there was no retention money, although there was nothing in the contract to justify such a derogation. The payments in question, totalling 0,41 Mio ECU, are, therefore, 0,04 Mio ECU too high.

Formal legality/regularity errors

Decisions (primary commitments)

3.66. Commitments for structural adjustment programmes in Niger and Ethiopia were increased by 4 Mio ECU and 9 Mio ECU, respectively, on the basis of Articles 292 and 311 of the Fourth Lomé Convention and Article 62 of the Financial Regulation applicable to the latter. The application of these provisions to structural adjustment () does not follow scrupulously the procedures laid down in Article 292(1) of the Convention, which limit additional financing to the traditional types of programme and project. These additional commitments should not have been authorized in this form.

3.67. As pointed out in the remarks concerning the management of appropriations, an increasing proportion of structural adjustment measures is financed by subsidies drawn from the national indicative programmes. A joint declaration by the Council and the Commission annexed to the internal agreement for the seventh EDF stressed that such drawings could exceed 10% of the national indicative programme only in exceptional cases, and that a favourable opinion must be issued by the EDF Committee if this percentage is to be exceeded. In the sample audited, two commitments relating to structural adjustment and amounting to 26,6 Mio ECU in total were financed by drawings on the national indicative programmes and resulted in such an overrun. In neither case was the percentage overrun specifically mentioned in the financing proposal submitted to the EDF Committee for its opinion. The matter was raised by a Delegation in only one of the cases. The Commission's written reply stated, mistakenly, that the percentage overrun was below 10%. The information supplied to the EDF Committee concerning the percentage by which the indicative ceiling of 10% had been exceeded and the reasons therefor thus appear insufficient or inaccurate.

3.68. In December 1995, the Council decided to convert the outstanding balances of special loans under the sixth EDF and earlier EDFs into subsidies. As of July 1995 a structural adjustment commitment of 9,2 Mio ECU financed by subsidies from the indicative programme anticipated this decision and thus exceeded the subsidies that had been entered in the accounts at the time for the country concerned.

3.69. Commitments for the interest-rate subsidies on low-interest loans granted by the EIB are entered into to the extent of the estimated amount notified by the EIB. The Commission makes the commitment without having any other evidence by which to check that the amount was calculated in accordance with the provisions of Article 60(3) of the Financial Regulation. This uncertainty affects all the commitments passed to the accounts in respect of interest-rate subsidies throughout the year, namely 90,3 Mio ECU, and not just the four commitments of this type, involving 37 Mio ECU, that were in the sample reviewed.

3.70. The supporting documents for one of the year's Stabex commitments, to an amount of 5,5 Mio ECU, did not provide the Court with positive evidence of the justification for reducing the transfer base.

Payments

3.71. One payment amounting to 4 Mio ECU and relating to the second tranche for the Lesotho structural adjustment programme was authorized without the authorization of the responsible Commissioner. This anomaly was not detected at any of the various stages of the Commission's internal control.

3.72. Five of the structural adjustment payments that were examined, totalling 87 Mio ECU, were made without it having been established beforehand that all the special conditions laid down in the financing agreement had been fully met.

3.73. In the case of 13 Stabex transfers, accounting for 163,4 Mio ECU, the beneficiary States had not reported on the utilization of previous transfers of funds, as required under Article 212(1) of the Lomé Convention, at the time when the transfers were made. The Commission did not apply the provisions laid down in Articles 212(2) and 212(3) of the Convention to rectify this situation and did not consider the possibility of suspending application of the decisions on subsequent transfers, i.e. those examined by the Court.

3.74. Article 209 of the Convention also stipulates that States receiving Stabex transfers must present the Commission with a substantiating report on the sectors affected by falls in revenue. No such report was supplied in the case of eight of the Stabex payments reviewed, which accounted for 75 Mio ECU. In four other cases, totalling 31,2 Mio ECU, the document presented and accepted by the Commission was too vague to be used as a substantiating report within the meaning of Article 209.

3.75. No reductions were applied to the transfer base for seven Stabex payments reviewed by the Court amounting to 101,5 Mio ECU. The Court is unable to evaluate the justification for these measures from the supporting documents available.

3.76. With regard to one payment of 0,54 Mio ECU relating to a works contract, the supporting documents do not contain any details that allow the calculation of the price revision to be checked, even though it accounts for 93% of the invoices in question. As the documentation requested by the Court in January 1996 was not supplied, the Court was unable to check the validity of the calculation. For this contract alone, which had a value of 21,2 Mio ECU, the Court estimates that some 8 Mio ECU has already been paid by way of price revisions alone.

3.77. Just like the corresponding commitments, payments of interest-rate subsidies are entered in the accounts on the basis of information supplied by the EIB, which does not make it possible to check whether the calculations for the loan account were in accordance with the provisions of Article 60(3) of the Financial Regulation. The same uncertainty applies to all the interest-subsidy payments for the financial year, which amount to 21,5 Mio ECU, in addition to the four cases identified in the sample of payments totalling 3,6 Mio ECU.

3.78. There were three payments for a total of 0,4 Mio ECU, also connected with services contracts, where there had been delays in the performance of the related contract. However, the contracts had not been formally amended to cover the extra time allowed by the Commission.

3.79. Article 58(3) of the Financial Regulation stipulates that the Commission must satisfy the EIB's requests for payment in respect of risk-capital operations within 21 days. This time-limit was not always respected. In two of the cases examined the delay exceeded a year, with the further consequence that 1994 payments totalling 10,8 Mio ECU were presented in 1995. In both cases the delay was partly attributable to the EIB. In one case it forwarded the corresponding supporting contract nine months after its request for payment and, in the other, the request for payment exceeded the contractual amount committed and was only corrected 11 months later.

3.80. Article 38(1) of the general terms and conditions governing service contracts specifies that payments must be made by the contractor within 90 days. This time-limit was not always respected. In three of these cases, involving 1 Mio ECU, the delays were more than nine months, the longest being 15 months. Although the contractor did not impose late-fulfilment penalties in any of these cases, the Commission should respect its obligations (forms 17, 32 and 51).

Other observations

3.81. In July 1995, the Commission granted final discharge to the EDF accounting officer for the period between 24 July 1987 and 15 May 1992 using the written procedure. The file on the review which preceded this decision is not supported by any check as to the legality and regularity of the payments entered in the accounts during the above-mentioned period (), and, in particular, of the payments unaccompanied by supporting documents that appear in the accounts drawn up at 31 December 1994 (paragraph 3.49) and which concern the period prior to 15 May 1992.

3.82. Included among the payments examined in the field of emergency aid is an advance of 20 Mio ECU that was paid to the UNHCR in connection with an operating contract with ECHO. The contract was extended twice in succession, from six to 12 months, which means that financial settlement has been put back to 1996. It should be pointed out that the contracts that remained unsettled at the end of the financial year 1994 because of contract extensions () include a contract for 3,6 Mio ECU with the same partner, and that the advance of 1,8 Mio ECU paid in 1994 had still not been cleared as of 31 December 1995.

3.83. Retention money amounting to 1,8 Mio ECU in respect of a works contract signed by the Kenyan Government remained frozen in an EDF account from 1989 onwards, following a dispute with the contractor. The amount in question was refunded at the end of 1995. As the money was in an interest-bearing account, the amount generated, estimated at 1 Mio ECU, was entered in the accounts as EDF revenue, instead of being earmarked for possible payment to Kenya.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 28 October 1996.

For the Court of Auditors Bernhard FRIEDMANN President

The Commission's reply

INTRODUCTION

For the second year running, the Court has provided a Statement of Assurance. In contrast to last year, the Court concludes, despite some reservations, with a favourable opinion of the reliability of the accounts and the legality and regularity of the underlying transactions. The Commission welcomes this favourable assessment, which shows that its efforts to improve both the management and financial administration of the EDF are beginning to bear fruit.

With regard to financial management the Commission is continually improving the efficiency and reliability of the computerized accounts system and has endeavoured to make the financial statements more informative; they are now more transparent and incorporate comments on the overall allocations, as the Court requested in last year's report.

It has drafted instruments designed to improve financial management by both Commission departments and ACP States, and has begun gradually devolving accountancy and financial execution to the delegations; this will be followed by a gradual redeployment of some of the headquarters staff now engaged in accounts and authorization to the work of auditing and systems supervision.

The Commission intends to press ahead with these improvements in the light of the Court's observations.

1. CONDITIONS FOR PRODUCING THE STATEMENT OF ASSURANCE

Accounts and transactions covered by the DAS

1.10. This subject occasioned extensive discussion when the 1994 DAS was discussed. The Commission subsequently amended its commitment and contract procedures in line with its replies to the special report in support of the 1994 DAS (see points 3.52 to 3.54). These measures will be formally incorporated into the draft Financial Regulation for the eighth EDF.

There is no need for any legal provision on a second level of accounting commitment. Only Commission financing decisions give rise to commitments. The proposals for such decisions, together with technical and administrative documentation, are sent to financial control for prior endorsement. The documents cover all the main points of the financing agreement subsequently signed by the Commission and the ACP State.

Contracts to execute the financing decisions, concluded by the national authorizing officers of the ACP States, are recorded in the accounting system by the authorizing officer for administrative purposes.

2. PERFORMANCE OF THE AUDIT

Constraints on auditing

2.1. The Commission considers that the fact that certain legislative provisions may create practical difficulties for the Court in carrying out the audit does not mean that the overall legal framework is unsuitable; in any case, the Commission has an obligation to comply with the prevailing legislation.

2.2. The Commission notes the Court's observation that substantial progress has been made with a view to providing reliable and genuinely informative financial statements.

3. AUDIT RESULTS

General conclusion

3.1. The Commission notes the Court's favourable opinion, subject to the reservations outlined in point 3.4 with regard to the reliability of the EDF annual accounts.

The Commission will endeavour to improve the quality of the financial statements and will press ahead with the action plan presented to the Court in 1993. On this subject, the Commission attaches at Annex A list of reforms achieved or under way to improve the financial management of the EDF.

3.2. The Commission notes the Court's favourable opinion on the underlying transactions, subject to the reservations outlined in points 3.6 to 3.10.

The Court has largely noted formal errors, with regard to which the Commission does not always share the Court's interpretation of the relevant legislation.

Improvements noted

3.3. The Commission notes that the Court approves of the improvements made in the presentation of the financial statements, to which it committed itself in its reply to the special report in support of the 1994 DAS on the EDF. The Commission will continue to improve the financial statements where it can, and will press ahead with the action plan presented to the Court in 1993. On this subject, the Commission attaches at Annex A list of reforms achieved or under way with a view to improving financial management of the EDF.

Reservations concerning the accounts

3.4. Certain Court findings (for example points 3.4(b) and 3.4(d)) are a normal consequence of the way the EDF is administered; the presentation of the operations cited follows generally accepted accounting principles.

Moreover, in the Commission's opinion, the problems raised cannot be solved merely by amending its current accounting procedures.

(a) The problem of overestimation of commitments raised by the Court is a question of project management, not accounting methods and practices. Projects can only be closed or reduced on a proposal from the national authorizing officer. The accounts record amendments legally accepted by the parties. The Commission considers that at the closure of the 1995 financial year, the accounts were a faithful reflection of legal commitments.

The Commission does not wish to introduce partial decommitment procedures systematically for projects in progress. The Commission decommits the sums remaining at the closure of a project, once the exact amount is known. The cases of this type examined by the Court accounted for ECU 32.8 million. However, the Commission is not opposed to the introduction of a revision clause in financing agreements.

Moreover, in the absence of a request from the EIB, the Commission was not entitled to close the accounts for the ECU 37 million of EIB operations referred to by the Court.

However, the Commission has a system to identify commitments likely to be closed, which has already made it possible to decommit large sums. The Court's estimate of primary commitments yet to be paid that no longer reflect the economic reality of operations represents 3.6% of the commitments still unsettled, i.e. 1.2% of the primary commitments posted.

(b) Advances are made available to management agencies for the payment of study grants and technical assistance contracts in progress. Documentary proof is supplied to the Commission at regular intervals. Upon closure of the account, there is therefore an outstanding debt corresponding to any advances paid and not yet justified.

These uncleared advances are presented on the assets side of the balance sheet at the closure of the accounts, in accordance with generally accepted accounting standards.

(c) Advances paid in connection with structural adjustment currency programmes and contracts and estimates concluded by ACP States are presented in the financial statements as payments for projects, which is an accurate reflection of the reality.

However, the Commission has changed the accounting system to give a view of the situation of such advances at the year-end. Once the historical data on currency levels and amounts converted have been included, the Commission will be able to include this information in the published financial statements.

(d) The ECU 8 million depletion of capital recorded refers to expenditure and receipts transacted locally on the paying agents' accounts in the ACP States.

Before such transactions are finally charged against the national authorizing officer's accounts, documentary proof must be sent by the delegations and checked and approved by the accounting officer, the authorizing officer and the financial controller.

Outstanding items of expenditure and income not yet recorded in the accounts are generally operations carried out shortly before the closure of the accounts and not yet charged as a result of decentralized financial management.

The financial statements give an account of the Fund at a fixed date (31 December). They therefore include payments made locally but not yet charged to the projects.

With regard to expenditure, the amount outstanding is charged to the Fund's capital in accordance with generally accepted accounting standards.

It is true that a sum of ECU 1.5 million was still not cleared at 1 May 1996. The Commission will see that it is cleared by the end of the 1996 financial year.

Beginning with the 1996 financial year, the Commission will give a breakdown by type of suspense accounts presented as expenditure to be cleared.

(e) The Commission has corrected the posting errors identified by the Court in the course of 1996.

(f) For a detailed reply see point 3.29(a).

See point 3.30 for the Commission's reply regarding the Stabex special fund.

3.5 (a) The allocations are presented in accordance with the provisions of the Convention, the Decision of Association with the OCT and the Internal Agreement; for each allocation (programmable aid, Sysmin, structural adjustment facility, etc.) the amount of the commitments and payments charged to it is shown.

The financial statements give clear information (pages 52, 53 and 141) on the funds assigned to structural adjustment, all sources combined (programmable aid, structural adjustment facility, Sysmin).

Rehabilitation operations (i.e. the special initiative for Africa) are presented separately in the financial statements (page 50).

To show these programmes in the allocation of funds, one would need to modify the structure of allocations laid down in the Lomé Convention. The Commission therefore considers statistical analysis more appropriate for this kind of information.

(b) The Commission will make the necessary correction (see point 3.24 for more details).

(c) The Commission acknowledges the facts as presented by the Court and will persevere in its efforts to ensure that all EIB operations are recorded in the EDF accounts at the end of the financial year.

However, increased liaison with the EIB has already achieved significant results. The Court found a discrepancy of ECU 71.1 million at the close of 1994 (1994 DAS, point 3.29(b)); this had shrunk to ECU 3.4 million as at the close of 1995.

Reservations concerning the underlying transactions

3.6 (a) With the exception of one case detected and corrected by the Commission (point 3.62), the Court's observations relate not to errors made in calculating the amount to be paid but to the way in which the contracts giving rise to the payments were interpreted.

Notwithstanding point 3.65 (retention money for certain service contracts), the Commission acknowledges its error in interpreting the contractual provisions; however, the amounts advanced were cleared in full (ECU 2.4 million, points 3.60 and 3.61).

(b) The Commission acknowledges the facts but considers its decision to have been justified by the prospect (at the end of 1995) of a formal agreement between Niger and the IMF in February 1996. The agreement was set back by the political events of January 1996, but negotiations with the IMF resumed in the first half of 1996.

3.7. This is a criticism of the way in which the accounts are closed at the end of the year. For a detailed reply, see points 3.28 to 3.30.

3.8. The substantial error in connection with a commitment relating to a structural adjustment programme (ECU 4 million) is explained in point 3.6(b).

3.9 (a) This was an oversight; all the basic conditions for payment were met (see point 3.71).

(b) The Commission considers that the overall assessment of compliance with the general and specific conditions justified the disbursement of the ECU 87 million of structural adjustment payments (see point 3.72).

(c) The Commission repeats that it is not responsible for the management of EIB operations and is therefore not competent to conduct checks on them (see point 3.69).

The Commission takes the Court's observation to reflect the audit's constraints (point 2 of the report) rather than a criticism addressed to the Commission with a view to the DAS.

With regard to the payments examined by the Court, the Commission confirms that details of the calculations are given in the payment dossier. However, the Commission is willing to supply, on request, any document the Court deems necessary.

(d) The Commission does not share the Court's interpretation of Article 212 of the Convention. There may be valid reasons for an ACP State's failure to produce a report on time, or at all, such as delays or blockages in the implementation of the framework of mutual obligations. The Commission considers the payments cited by the Court to be in order, as the Convention allows the Commission some discretion on late reports or failure to report (see point 3.73).

The substantial analysis of the relevant sector which the ACP State is required to produce is not a condition of payment but merely one of the assessment factors used to calculate the transfer basis. The payments are therefore in order (see point 3.74).

The amounts are calculated in consultation with the ACP States under Article 203 of the Convention. The Commission considers that the details given in the calculations provide sufficient justification for the ECU 101.5 million (see the Commission's comments in point 3.75).

(e) Apart from delays in three payments totalling ECU 1 million, referred to in point 3.80, the Commission shares neither the Court's assessment of payment delays for EIB interest rate subsidies (point 3.79), nor its stance as to the need formally to amend the contracts to cover the extra time allowed by the Commission for submission of interim reports (point 3.78).

The Commission's failure to reply concerning the revised prices for a payment of ECU 0.5 million arose from a misunderstanding with regard to the Court's request.

3.10 (a) The Commission acknowledges that, in the absence of any specific procedure, decisions on additional financing for structural adjustment programmes financed under the structural adjustment facility (point 3.66) have merely followed the procedure for projects financed under the national indicative programme. This arrangement has been formalized in the Internal Agreement on the eighth EDF.

The Commission considers that the information sent to the EDF Committee was sufficient to for it to judge whether the 10% of the national indicative programme devoted to structural adjustment was exceeded and the EDF Committee approved the excess by endorsing the relevant financing proposals (see point 3.67).

The Commission accepts that one project (see point 3.68), decided upon quite openly following a favourable opinion by the EDF Committee, exceeded the total budget for grant aid to the ACP State concerned. At the time, it understood the budget to include the converted special loans, already approved by the Cannes Summit in June 1995.

(b) The Commission takes the view that, since it is not responsible for the management of EIB operations, it is not competent to conduct checks on them (see point 3.69). Consequently, the Commission takes the Court's observation to reflect the audit's constraints (point 2 of the report) rather than as a criticism addressed to the Commission with a view to the DAS. The Commission is willing to supply, on request, any document the Court deems necessary.

(c) The Commission believes it gave valid reasons for the non-application of the reduction in the Stabex transfer (point 3.70).

Detailed observations concerning the accounts

Balance sheets and financial statements

Accounting principles, methods and practices

3.12 (b) The Commission's reply is given in detail in point 3.29. However, the Commission is attempting to improve the link between entries and supporting documents by using a standard identifier (for example the OLAS or project number).

(c) The Commission will begin to give a breakdown of the suspense accounts from 1996, categorizing the various operations by type as far as possible.

Content and presentation of the financial statements

3.13. The anomaly of the EIB contribution was settled in March 1996 and no longer occurs. The same entry settles operations relating to the transfer of the fifth EDF and the replenishment of Stabex appropriations.

3.14. The amounts relating to outstanding recovery orders are included in the balance in accordance with Article 68 of the Financial Regulation in force. To improve presentation, the Commission proposes to include appropriate provisions in the Financial Regulation for the eighth EDF. In addition, from the 1996 balances on, it will present a separate table summarizing the situation of recovery orders.

3.15. The presentation to which the Court refers was adopted at the Court's own suggestion, starting with the 1993 accounts. The Court suggests that it should be improved, to which the Commission is willing to agree.

3.16. The suspense amounts do indeed appear in the balance sheet as capital deductions from the sixth EDF, even though they might come from the seventh. This is because there is a single cash reserve, which is under the sixth EDF and the expenditure will be broken down between sixth and seventh once the accounts are finalized.

3.18. The OECD classification is already incorporated into the EDF management system and linked to the OLAS accounting system. It does not need to be shown in the accounts.

The report on the use of aid by sector (pages 39 and 40 of the financial statements) is an improvement on the data formerly given by the Commission, and was introduced in response to the Court's desire to see a better analytical framework (1994 DAS).

The reason why 50% of the year's decisions were not classified is that the OECD classification changed in November 1995. However, the Commission does not consider that this affects the informative value of the report, since it is payments that reflect the actual execution of the aid; 92% of payments for the year and 99% of cumulative payments were classified.

3.19. The Commission's view is that netting out commitments and decommitments portrays the real rate of aid implementation over the year.

In the interest of clarity, the Commission gives decommitment totals for the year in certain explanatory notes on the financial statements. This will be extended to all allocations in future.

Presentation of allocations

3.21. The financial statements are intended to give an account of the capital depletion of each Fund and the level of implementation of the allocations constituted under the Conventions, Association Decisions and Internal Agreements. They therefore present the amounts committed and paid per allocation (programmable aid, Sysmin, structural adjustment facility, etc.).

The financial statements do enable the implementation of Community aid for structural adjustment to be assessed: on pages 52, 53 and 141, for the sake of clarity and in line with the Court's recommendations, the Commission presents full figures on structural adjustment, all allocations combined - national indicative programmes, structural adjustment facility, and Sysmin.

What the Court requests, i.e. a presentation of these programmes by allocation, would require a change in the structure of allocations laid down in the Lomé Convention. In the Commission's view, it is more appropriate to deal with this type of information in a statistical analysis.

The Commission can confirm the figures for structural adjustment presented by the Court, since they match the information given in the financial statements.

3.22. The Commission considers the chief authorizing officer's decision to allocate ECU 100 million from the structural reserve to the national indicative programmes for structural adjustment was legal and complies with the rules on such allocations.

The Lomé Convention which governs relations between the Community and the ACP states is not the only text to lay down programming rules. Programming is also governed by the rules laid down in the Internal Agreement on relations between the Commission and the Member States. It is not stipulated that all the programmable funds must be distributed at the start of the Convention.

The distribution method and the results were presented and discussed with the Member States in the EDF Committee in line with normal procedure. Moreover, the Committee also gave its opinion on the use of these funds when the financing proposals were presented.

3.23. The Commission would point out that regional cooperation has always been subject to precise follow-up in the accounts. The improvements introduced in 1995 related to the follow-up of sub-regions and the 'all-ACP` heading, not including the CDI, trade promotion and the Joint Assembly, which were subject to precise follow-up already.

Rehabilitation operations (special initiative for Africa) are the subject of a separate presentation in the financial statements (page 50).

3.24. Until October 1994, Stabex resources were mixed with those of the EDF and interest generated by the Stabex balance was credited on the basis of the daily interest rate given by the EIB.

The situation was confusing and the Commission decided to open a specific bank account for the Stabex allocation. The account was opened in October 1994.

In the course of 1995, the Commission examined the interest allocated to Stabex prior to 1994 and proceeded to correct it as necessary in capital and interest. To this end, it adopted a pragmatic schedule of supposed Stabex tranches. Since no specific transfers by the Member States actually occurred, there were several possible schedules. The schedule drawn up by the Court differs from the Commission's only in respect of ECU 10 million which the Commission posted for 1993 and the Court assigns to 1995. For the sake of terminating an inconclusive argument, the Commission is prepared to adopt the Court's schedule and make the necessary corrections, i.e. transfer some ECU 1.2 million in interest accruing between July 1993 and July 1995 to the (non-Stabex) EDF account.

Payments under verification

3.25 and 3.26. The difference between the accounts of the authorizing officer and the accounting officer is not abnormal; it results from the outstanding amounts (income and expenditure) executed locally on paying agents' accounts in the ACP States.

It is not a reconciliation problem, it is a normal difference between the balance and the management account.

At the closure of the annual accounts, the accounting officer notes these outgoings and receipts. The authorizing officer must also verify each of these transactions and charge them against the corresponding commitments once Financial Control has approved them. This obviously takes some time. Payments executed and income received locally at the year-end can only be posted in the following year's accounts. The amount outstanding represents about 10 days of EDF payments, which seems perfectly reasonable.

The financial statements depict the situation at a given date (31 December). They therefore include payments made locally but not yet charged to projects. With regard to expenditure, the amount outstanding is charged to the Fund's capital in accordance with generally accepted accounting standards.

3.27 (a) It is true that ECU 1.5 million was not cleared at 1 May 1996; the Commission will endeavour to ensure that it is adjusted before the end of this year.

(c) This refers to a VAT receipt to be recovered which was entered in the accounts in 1989. Despite detailed research, the original documents have not been found. This amount will be subject to an appropriate adjusting entry.

3.28. On the subject of local expenditure and receipts which, failing supporting documents, have not been posted in the accounts, it should be pointed out that the Commission enters such operations in a suspense account upon receipt of the bank statement. Once the supporting documents are received, the operations are properly attributed. It does sometimes happen that supporting documents go astray en route from the delegations to Brussels. The Commission nonetheless makes every effort to recover the documents and attribute the expenditure and receipts with the minimum of delay. However, it is sometimes necessary to make inquiries in the delegations and at head office; on occasion, this still fails to turn up the documents needed. In that case, the Commission proceeds to eliminate such operations from the accounts with the approval of authorizing officer, the financial controller and the accounting officer.

The Commission will break down the suspense accounts presented as expenditure under verification by type of account.

EDF cash position

3.29 (a) Of the ECU 2.9 million referred to, ECU 2.75 million in the Bank of Zaire is currently the subject of discussions with Zaire's Ministry of Finance to see how it can be recovered. There will be an appropriate entry to cover the sum of ECU 0.16 million in Somalia by the year-end.

3.30. For Stabex, a single bank account was opened, which comprised two sub-accounts: interest and capital. The balance of the account is aggregated in the balance sheet and represents total investments at the buying rate and amounts on deposit. The bank supplies monthly information on the progress of the fund, buying and selling operations and extremely detailed statements. The Commission's accounts are properly kept and verifiable. Moreover, for the sake of improving and clarifying the accounts, the Commission undertakes to ensure that in future a table is attached to the balance sheet and financial statements giving details of the investments made and buying prices. These, totalled with the amounts on deposit, will correspond to the bank balance shown on the balance sheet.

Advances for scholarships and technical assistance

3.31. The figures given by the Court for advances for study awards and technical assistance match the information given by the Commission in the financial statements (page 155).

However, the Court does not take into consideration certain factors which explain the situation with regard to advances.

(a) The ECU 3.4 million covers amounts transferred by the EDF accounting officer to specific 'EDF study award` bank accounts, administered by the delegations, and used to finance students' local expenses. The amounts transferred to these bank accounts are considered advances whose use must be justified, since the funds come from the EDF cash reserve.

The ECU 3.4 million therefore covers not only expenditure to be assigned to a particular item but resources made available for future expenditure.

The Commission nonetheless acknowledges the need to re-examine the situation with regard to advances so as to clear expenditure already effected and possibly propose a new system for paying scholarships which would avoid tying up funds unproductively.

(b) At the 1995 year end, the Commission had charged TA expenditure of the European Association for Cooperation (EAC) up to 30 September.

Under the protocol between the Commission and the EAC on management of technical assistance contracts, the maximum allowable amount outstanding on advances transferred to the EAC and not yet justified is the equivalent of two quarters' EAC expenditure. The protocol requires the EAC to send a statement of expenditure for each quarter to the Commission within a month of the end of that quarter, along with the relevant supporting documents. EAC expenditure on technical assistance contracts is currently running at around ECU 8 million.

The advance for technical assistance at the 1995 year-end (ECU 15.3 million) has already been cleared for ECU 8.8 million (EAC expenditure prior to 31 December 1995). Moreover, certain EAC expenditure, totalling ECU 2.7 million, is currently under consideration by the Commission with a view to its charging. A supplementary statement of expenditure for 1995 for ECU 3.3 million was received from the EAC in the third quarter of 1996. The balance of advances not yet justified by the EAC therefore totals ECU 0.5 million.

(c) With regard to the British Council, the advance existing at the 1995 year end (ECU 4.4 million) was fully justified and expenditure posted to EDF projects in the course of the first half of 1996. Expenditure justified for the financial years 1994 and 1995 amounted to ECU 5.1 million, leaving a balance in the British Council's favour of ECU 0.7 million.

As to advances transferred to other agencies in the Member States (ECU 5.2 million at the 1995 year end), some ECU 2.6 million of expenditure was cleared in 1996.

3.32. Uncleared advances paid to management agencies are shown on the assets side in accordance with generally accepted accounting principles.

The Commission considers it inappropriate to have an audit carried out to verify the existence of the advances recorded. On the other hand, the Commission carries out controls of the management agencies on the spot to ensure that the declared expenses are real. In 1996 three such audits were carried out and one is in progress.

Other claims omitted

3.33. The debt in question was subject to a recovery order issued by the authorizing officer on 26 February 1996, after the accounts were closed, on the basis of the interest rate supplied by the EIB. The sum owing was recovered on 29 March 1996. It appears that the sum could not be included in the accounts for the 1995 financial year for lack of information, and that it was rapidly collected once that essential information was received.

3.34. As a rule, interest for the final month or final quarter is credited with a value date of 31 December. However, it sometimes occurs that a statement including operations with different value dates, including one for the previous financial year, does not arrive until after the accounts have been closed. The Commission endeavours to post the interest in the relevant year as far as possible.

Revenue

3.37. The Commission's loss was due to the unfavourable exchange rate when Germany's contribution in DM was transferred.

3.38. The interest recorded for previous years (1990/94) was investigated by financial control; it was subsequently cleared as quickly as possible, but only after the close of the 1994 accounts.

Revenue awaiting clearance

3.39. The situation described is normal for the accounting system used. Once the financial controller cleared the revenue, it was entered in the accounts early in the next financial year.

Decisions (primary commitments)

Posting delays

3.40. In one case (project 7 ZIM 69, accounting for ECU 3.1 million), the Commission was informed of the provisional amount of interest-rate subsidies in a memo from the EIB dated 31 January 1996, and it was therefore posted for the 1996 financial year. However, the figures in the 1995 financial statements are accompanied by an explanation which points out (on page 76) that the contract, signed by the EIB in 1995, could not be posted at the year-end.

In the other case (project 7 NEA 24, accounting for ECU 0.3 million), the Commission did not post the interest-rate subsidies for want of available funds. It was done after decommitments in February 1996. This anomaly is unlikely to recur, since funds for interest-rate subsidies are now provisionally earmarked before the Article 28 Committee is consulted.

The Commission was aware of the second case well before the year-end, since the accounts are reconciled with those of the EIB every quarter. However, the Commission will step up reconciliation with the EIB prior to the year-end.

Valuation at the close of the financial year

3.41. The accounts record legal obligations undertaken by the Commission in implementing the EDF. Commitments are therefore entered in the accounts when Commission financing decisions are taken. The financing agreements or exchanges of letters in the form of an agreement are contracts binding the Commission and the recipient ACP State. Any change to the contract is subject to agreement between the two parties.

Therefore the closure of a project requires the agreement of the national authorizing officer, who confirms that the project has been terminated.

A reduction in funding for an ongoing project requires a Commission decision, at the national authorizing officer's request.

The accounts do not record the 'gap` between the amount granted and the funds the project requires, but only records changes legally accepted by both parties.

The Commission agrees that legal procedures enabling the funds to be decommitted should be initiated as quickly as possible.

It cannot, however, decommit funds unilaterally just to ensure that the financial statements reflect the 'economic` reality of projects at the close of the year. From an accounting point of view, therefore, the financial statements do not inflate the figures on the commitment accounts.

The Commission does not consider it appropriate to introduce partial decommitments across the board for ongoing projects, as the Court suggests.

In the Commission's view, it makes more sense to decommit the balance at the close of the project.

3.42. The Commission does not attempt in the financial statements to give an exhaustive account of funds tied up unnecessarily. It gives an estimate, based on an analysis of commitments for which there have been no movement in the accounts for over 18 months.

Moreover, the sums shown by the Commission as needing to be decommitted represent projects for which the parties have agreed to initiate closure procedures (for example, see point 3.43(a) and (b) on risk capital projects).

However, the Court does not take into consideration certain factors which explain the situation with regard to advances.

(a and (b) The Commission proceeded to close projects 7 GUB 8 (ECU 7 million) and 6 ZR 62 (ECU 12 million) at the request of the EIB (February and June 1996). Failing an EIB decision at the close of the year, the Commission could not proceed to decommit the funds.

(c) The commitments referred to by the Court were identified by the Commission in the financial statements. The Commission will examine ways of closing them with the parties concerned.

3.44. The Commission provides a table in the financial statements showing all unexpended balances (sum committed minus payments) available on projects for which there have been no movements in the accounts in the 18 months preceding the close of the financial year. This is intended primarily to show up atypical cases (omission to close a contract on the final payment, failure to follow up, etc.). The Commission is willing to refine this system subject to resources. It has already changed the accounting system to introduce an estimated date of completion for new commitments and contracts.

The Commission repeats (see point 3.41) that the objective of the accounts is to earmark funds to match its legal commitments and not to reflect the economic value of the operations.

However, the Court does not take into consideration certain factors which explain the situation with regard to advances.

(a) The Commission closed projects 7 MAS 15 (ECU 5 million), 7 ZR 23 (ECU 7 million) and 7 RW 55 (ECU 6 million) at the EIB's request (in April, June and April 1996 respectively). Failing an EIB decision at the close of the year, the Commission could not proceed to decommit the funds.

The Commission will effect the necessary decommitment for project 6 CD 22 (ECU 4.5 million) by agreement with the EIB.

(b) The Commission takes careful note of the Court's observations regarding the late decommitment of the unexpended balances from operations. The current situation is that decommitments were effected between November 1995 and March 1996.

(c) The Commission proceeded to close the three emergency aid projects to which the Court refers in the first quarter of 1996.

(d and (e) Since these are ongoing projects, the Commission considers it only logical to make any decommitments once they have been fully executed. Moreover, there is no evidence that the outstanding balances on the relevant contracts will not be used in the execution of the project.

(f) This balance can only be decommitted at the close of the project, once operations have been completed.

3.45. Aside from differences in the way the total for decommitment is arrived at (see point 3.44), the discrepancy between the Court's figures and those of the Commission largely stems from:

(i) different attitudes to decommitments for EIB operations (ECU 37 million): the Commission was not entitled to close the accounts without a request from the EIB;

(ii) different assessments of the factors that would determine decommitment of funds for projects where there has been no movement on the accounts (ECU 75.3 million); the Commission will look into cancellation of these commitments;

(iii) a difference as to the principle of decommiting funds when projects are still under way (ECU 32.8 million); in the Commission's view, it makes more sense to cancel the outstanding balances once projects have been completed.

Where the Commission bears sole responsibility for the management of operations, decommitment decisions can be taken quickly by the departments in charge (ECHO, for example).

Procedures are indeed more complex and lengthy where the ACP State is responsible for executing them but the Commission cannot deny ACP States the rights conferred upon them by the Lomé Convention and the financing agreements.

The Commission is by no means opposed to the introduction of a revision clause in financing agreements. However, its scope would be limited by:

(i) the ACP State's right to supervise execution of the project;

(ii) the prerogatives of the EDF Committee as regards amendments to the value of financing decisions.

Payments

Presentation of payments

3.46. The Commission finds that the presentation of Stabex and structural adjustment payments complies with legal requirements. As the Court points out, the Lomé Convention rightly does not make any provision for the use of funds belonging to ACP States to be traced in the EDF accounts once they have been transferred as structural adjustment or Stabex payments.

The Commission has already given detailed explanations on this point in response to the special report in support of the 1994 DAS (points 3.40 to 3.42). However, it reaffirms that with regard to balance of payments support:

(i) the final use of these funds is their transfer to the recipient State;

(ii) the transfers themselves are final;

(iii) the funds deposited in ECU accounts in Europe and the counterpart funds are the property of the beneficiary State.

However, for the sake of transparency, and despite being under no statutory obligation to do so, the Commission does publish tables in the financial statements showing how much of the funds deposited in Europe and counterpart funds have been mobilized.

To give a clearer idea of the balance of counterpart funds yet to be mobilized, the Commission will convert the amounts into ecus.

3.47. The Commission wishes to stress that the Court's observation applies only to the way the funds transferred are entered into the accounts.

In terms of their management, the Commission always applies Article 250(3), checking that the tranche transferred has been used before proceeding to transfer the next tranche.

Article 250(3) of the Convention only applies to programmes and estimates, not to direct procurement programmes. The accounts traditionally record these transfers as advances. The Commission will see to it in future that this method of accounting is always adopted.

3.49. The Commission identifies and attributes any losses or profits to particular projects where it can. Where this is impossible, the amounts are posted in the financial expenses account. The Commission will consider this question with a view to improving the audit trail.

3.50. The Commission agrees with the Court and will show this breakdown in future financial statements.

Advances on contracts

3.51 to 3.53. The Commission does not view the payment of an advance as a final payment, since it is subject to follow-up and subsequent clearance. Moreover, the financial statements show advances as payments on projects, which reflects what they are.

As to the presentation of the utilization of funds in the financial statements, the Financial Regulation provides for payments to be shown without any distinction between advances and instalments.

However, the Commission acknowledges that it would be useful to have an annex to the financial statements showing advances.

To this end, in June 1995 the accounting system was improved and now shows the value of advances in the currency in which they are paid, which is clearly shown.

However, publishing the situation on advances entails some historical research into currency levels and the amounts converted, which could not be done before the closure of the 1995 financial year, in view of the resources available.

3.54. Advances paid in connection with programme estimates are subject to the same follow-up as advances for EDF contracts (see below).

There is no direct or indirect connection between the loss of ECU 0.3 million, following the winding-up of a bank in an ACP State, and the follow-up and presentation of advances.

Charging

3.55. The Commission acknowledges the two posting errors to which the Court refers.

In one case, a single payment order was divided between two movements in the accounts. The contract, subject to various riders, concerned the implementation of two linked projects (the main operation and some conservation measures).

The payment order (ECU 0.16 million) was attributed to the main project instead of the conservation measures for which it was intended.

In the other case, the payment order (for some ECU 16 000) was posted to the correct commitment but to the funds assigned for the estimate for the previous year. The charging against the assigned funds was corrected for the 1996 financial year.

The posting errors pointed out by the Court did not in any way compromise the reliability of the financial statements as at 31 December 1995.

3.56. In the first case, the posting was correct, and the negative balance was not abnormal. The payment was made within the resources then available, and at the time the transaction was recorded the budget had not been exceeded.

The overrun was due to exchange rate fluctuations between the time the payment was initialled and its execution by the bank. The Commission will see to it in future that such cases are reconciled before the accounts are closed.

In the second example, the situation outlined by the Court is quite normal. It occurs when the amounts recovered exceed the amounts paid, showing a profit in the project's favour.

This occurs with projects transferred following the closure of earlier EDF accounts (for example, the fifth EDF in December 1993), because projects are transferred at the level of the unpaid balance.

Consequently, the accounting procedures for the operations cited by the Court do not need to be revised, and no adjustment needs to be made.

The two examples cited by the Court in this respect cannot be classed as posting errors.

Detailed observations concerning the underlying transactions

Substantial legality/regularity errors

Decisions (primary commitments)

3.57. In the case of Niger, the decision was taken when there was a prospect of a formal agreement with the IMF in February 1996, as part of a concerted action by all donors participating in adjustment support, with the IMF's agreement. This concerted action led certain donors to make disbursements early, in late 1995, so as to ensure coverage of financing requirements for the period and overall financing of the programme to be presented to the IMF Board. The financing requirements identified in late 1995 would have been carried over to the 1996 programme if they had not been covered at least in part.

The coup d'état obviously could not have been predicted. It occurred on 27 January 1996, whereas the presentation to the IMF Board was planned for mid-February 1996.

The Commission's solution is defensible in view of the fact that the IMF reopened negotiations on an official programme in the course of the first half of 1996 (fiches 41 and 42).

Expenditure awaiting clearance

3.58. See reply to point 3.27 (b), (c) and (d).

Payments

3.60. The Commission shares the Court's view.

The underestimate of the advance to be recovered on the works contract for ECU 0.04 million arose because there was no precise formula for calculating recovery in the contract. The total advance was recovered in 1995 before the accounts were closed.

The advances on the other works contract worth ECU 1.1 million were incorrectly recovered according to the procedures in the special specifications rather than riders 1 and 2 of the tender dossier which set out exceptional rules. The advances were recovered in full in the course of the first half of 1996.

3.61. The Commission agrees with the Court, since at the time of the request for the advance no justification of the utilization of the funds for the previous six months had been supplied.

Nonetheless, the advance of 70% of the value of the contract was approved in February 1995 in view of the indicative timetable which provided for release of ECU 358 000 by the end of 1995. The use-of-funds report supplied to the Commission by the NGO in question in May 1996 shows that all the funds were disbursed.

3.62. The retention money was indeed deducted twice and the payment was underestimated to the tune of around ECU 9 500.

However, this anomaly was spotted by the official in charge of authorizing the expenditure, and corrected when the following payment was made, which illustrates that the internal checks introduced by the Commission do work.

3.63. See the Commission's replies in point 3.57.

3.64 and 3.65. The Commission views technical assistance contracts (carried out by government agencies) as contracts executed incrementally, the work being approved by the contracting authority as and when it settles the invoices received for the hours worked. Retention money is not consistent with final acceptance of each stage of work. The contracting authority could hardly withhold retention money on grounds of poor performance if it has accepted the services as and when they were provided.

The Commission therefore allows the ACP authorities to negotiate special conditions derogating from the general conditions (the three cases in which the Court estimates that some ECU 20 500 was overpaid () are therefore legitimate under the contract) or to authorize 100% of the value of the services provided (as in the case of the two payments in which the Court maintains that ECU 20 000 was overpaid). ()The Commission does not accept that there is no retention money 'as a rule`; some technical assistance contracts are negotiated with 10% withheld, and the payments are therefore authorized in accordance with that provision.

Formal legality/regularity errors

Decisions (primary commitments)

3.66. Financing decisions for structural adjustment programmes financed from national indicative programmes may be subject to increases decided by the chief authorizing officer as long as the increase does not exceed 20% of the initial commitment (Article 292 of the Convention and Article 62 of the Financial Regulation).

Failing a similar procedure for structural adjustment programmes financed from the structural adjustment instrument, the Commission applies the procedure described above, by analogy.

Moreover, the Internal Agreement for the eighth EDF authorizes the Commission to approve, without recourse to the EDF Committee, extra commitments needed to cover additional financing requirements for structural adjustment tranches provided that the additional requirement does not exceed 20% of the initial commitment set in the financing decision (Article 25(3)(a)).

3.67. The first and last page of structural adjustment financing decisions presented to the EDF Committee set out the origin of the resources financing the programme (the structural adjustment facility or the national indicative programme).

Since the national indicative programme is the basis for informing the Member States, whatever the financing proposal submitted for their opinion, they are informed of the proportion of the NIP allocated to structural adjustment.

In the two cases to which the Court refers, the financing proposal was approved by the EDF Committee, which ipso facto endorsed the excess in accordance with Declaration No 7 annexed to the Internal Agreement. This provides for a 10% overrun of the national indicative programme for structural adjustment programmes, subject to the Committee's opinion. In both cases, the point was even the subject of some debate in the EDF Committee and in one case (that of Mauritania) it occasioned a written question from one of the Permanent Representations. The Commission's reply to the question was correct in the precise context of the question, which included risk capital programmed by the EIB in the national indicative programme of the ACP State concerned, and therefore expanded the basis of the calculation and correspondingly reduced the amount by which the limit was exceeded.

3.68. The ECU 9.2 million commitment was agreed by the Commission on 17 July 1995, quite openly, upon a favourable opinion from the EDF Committee.

Initially, it was understood that the declaration annexed to the final act of signature, as agreed by the parties of the interministerial negotiating conference of 30 June 1995 (in follow-up to the Cannes European Council) was a sufficient legal basis to enforce the transformation of special loans into grant aid.

Subsequently, in late July 1995, it was realized that the conversion of special loans into grants would not take effect until it was formally approved by the parties to the Convention, or at least the Member States. Consequently, a decision-making procedure of the representatives of the Member States' Governments meeting in the Council was introduced and completed on 20 December 1995.

The ECU 9.2 million commitment caused the grant-aid element of the Malawi NIP for the sixth EDF to be exceeded temporarily. This overrun disappeared when the special loans were converted into grants (in December 1995) before closure of the accounts.

When the financing decision was taken, the sum of the 'other grants` allocation provided for in the third Lomé Convention was sufficient to cover the Commission's commitment to Malawi. Strictly speaking, the actual allocation for Malawi was therefore not exceeded.

The knowledge that the special loans would be converted into grants and would therefore correct the overrun for Malawi meant that there was no need to take any further corrective action.

3.69. The Commission does not concur with the Court's view that underlying operations in respect of commitments for interest rate subsidies on EIB financing decisions are irregular on the grounds that the accounts do not conform to the rules.

The Convention, the Internal Agreement, and the Financial Regulation place the Commission under no such obligation. Article 60(3) of the Financial Regulation merely stipulates the way in which the EIB is to calculate interest rate subsidies.

1.The Lomé Convention charges the EIB with the management of interest rate subsidies and venture capital (Article 1(2) of the Financial Protocol to the fourth Lomé Convention).

This legal stipulation is incorporated into Article 10(2) of the Internal Agreement, which states that '... risk capital and interest rate subsidies financed from the Fund's resources shall be administered by the Bank on behalf of the Community...`.

It should be noted that the Bank acts not on behalf of the Commission, but on behalf of the Community.

The decision-making and implementing procedures to be followed by the EIB are set out in the Internal Agreement. Nowhere in the Agreement is the Commission given specific duties with regard to the management of risk capital or interest rate subsidies. The Commission is responsible only for the funds which it manages.

Article 60(2) of the Financial Regulation states: 'On the signing of each loan contract, the Bank shall communicate to the Commission the estimated total amount of the interest rate subsidy expressed in ECU.` No approval is provided for. This document has long provided the basis for the commitment of funds in the EDF accounts. The contract signed by the parties is received by the Commission some days later.

The EIB accepts responsibility for evaluating the interest rate subsidy granted to the borrower, in accordance with the Convention, the Internal Agreement and the Financial Regulation. The texts do not provide for verification of the EIB estimates by the Commission. Their accuracy is ensured by internal and external control procedures for which the EIB itself is responsible.

2.The EIB estimate is governed by provisions in the loan contract. The estimate will not be changed unless other provisions are changed, for example, a change in the transfer date or early repayment of the loan.

The Commission's view is that any inaccuracy in estimating the interestrate subsidy does not impinge upon the legality of the underlying transactions.

3.The Commission takes the Court's observation to reflect the audit's constraints (point 2 of the report) rather than a criticism addressed to the Commission with a view to the DAS.

3.70. The Commission considers the reduction in the transfer basis was justified. The Court's comment arises from a comparison between two ACP States in different circumstances. The reduction in the transfer basis was not proportional because:

(i) the precipitation factor was greater in the case of the second ACP State;

(ii) certain factors explaining the drop in production (the poor quality of the seed and the lack of it) resulted directly from the 1993 drought (the second worst on record since 1960, in terms of rainfall), which forced farmers to tap their seed stocks for groundnuts for consumption;

(iii) this phenomenon had a knock-on effect on producers' incomes, leaving them without the means to obtain fertilizers.

Consequently, the Commission does not consider the commitment to have been overestimated.

Payments

3.71. The payment was authorized in accordance with the rules on delegating powers in such cases. However, it is true that there is a procedure requiring the Commission member to confirm proper utilization of the funds of the previous tranche, which was not followed. This was an oversight; all the basic conditions for the payment of the second tranche had otherwise been met; the delegation and the relevant headquarters staff had confirmed the proper utilization of the first tranche.

3.72. The key feature of Commission management of structural adjustment support is the evaluation of performance and compliance with the conditions set. Payment decisions always follow a rigorous assessment of the extent to which the preconditions have been met, in the light of the general context of the programme, and any external effects, in close consultation with other donors, notably the World Bank and the IMF.

The special conditions may list measures to be taken in certain priority areas; compliance is always checked prior to disbursement.

The Commission is of the view that in the five cases referred to, the overall assessment of both general and special conditions justified disbursement.

The issue of conditionality in adjustment programmes is highly topical with regard to the Special Programme of Assistance for Africa; donors are currently engaged, at the Commission's instigation, in a wide-ranging debate on the reform of conditionality.

3.73. The Commission does not share the Court's interpretation of Article 212 of the Convention. The Commission notes that among the cases cited by the Court are those of certain ACP States which submitted late reports for reasons which, in its opinion, were valid (particularly given the difficulty of certain programmes), stemming from problems caused by delays in implementing the mutual framework of obligations or blockages related to certain conditions, which may in turn have given rise to further delays.

It should be noted that Article 212(3) does not oblige the Commission to suspend the application of decisions on subsequent transfers if the ACP State fails to present the report on the use of funds within the time limit, but merely allows it to do so; the Commission is therefore entitled to use its discretion.

Note, too, that it can often take over a year to implement the framework of mutual obligations, the ACP States concerned cannot possibly present a full report as required under Article 212, only an interim report (or more than one), with the final report being drafted only after the programmes and operations set out in the framework are completed.

The Commission would also point out the ACP States' reports under Article 212(1) are purely factual. Since the fourth Lomé Convention entered into force, the Commission has carried out a major programme of evaluations of the use of Stabex transfers by each ACP State. These evaluations show that the new provisions of the fourth Convention on dual-signature accounts and frameworks of mutual obligations provide the best guarantees on the use of Stabex transfers that one could wish for.

3.74. The timetable established in the Convention provides for the Commission to notify the States of the situation regarding possible transfers in late April. Consequently, ACP States have only one month to carry out the substantial analysis required and submit it to the Commission.

Under those circumstances, it is questionable whether any exercise which was seriously required to meet such a tight deadline would be genuinely productive. While the substantial analysis is useful, in that it provides a nucleus of ideas to be developed in drafting the framework of mutual obligations subject to subsequent negotiation, one cannot realistically expect ACP States to supply the analysis within the time limit. Consequently, Article 209(1) needs to be interpreted loosely.

The Court makes a connection between the substantial analysis (Article 209) and the consultations provided for in Article 203 in the event of significant changes in the ACP State's eligible production or exports. The Commission acknowledges that some information in the substantial analysis may be taken into account in deciding upon reductions in the transfer basis under that Article; however, payment is not conditional on the substantial analysis.

Recourse to Article 203 also (and often primarily) arises from the appraisal procedure for transfer cases, and exchanges of information between the delegations and the department in charge of the system, which have expanded considerably in recent application years, following observations made by the Court in its special report on Stabex.

3.75. The Commission wishes to add clarifications on the following points:

(i) On the subject of consultations between the Commission and some ACP States, these may of course be influenced by the States' capacity and speed of response, given the strict deadlines imposed by the Convention.

(ii) Since the consultations cover countries facing different circumstances, the Commission views as arbitrary the tendency to draw comparisons supposedly proving that one country has not been treated in the same way as another.

(iii) While Article 203 lays down the circumstances requiring consultations, it does not suggest that the outcome should be automatic; the Commission is therefore entitled to suppose that certain situations, for example those of countries emerging from a period of dictatorship with their economies wrecked, may legitimately be taken into consideration.

In short, the Commission would point out that it will continue to be as objective as possible, as regards consultations under Article 203, taking into account the diversity of the countries and situations concerned. To this end, the Commission has made greater use of the delegations since the 1993 application year, as a way of ensuring that the consultations take place on the basis of the most accurate information possible.

In the case of Uganda, coffee prices were very low in 1992, so it was quite proper that the reduction imposed as a result of falling commercial output was not applied in full.

In Kenya's case, the substantial analysis was not the only document on which the consultations were based. From information in the file one may infer that cyclical drought affects commercial production.

As regards Haiti, the non-application of the reduction with regard to the fall in exports was explained by a number of factors outside the Government's control, such as disease, soil erosion and falling world prices. Moreover, in that particular case the Commission was concerned to avoid penalizing the country for the political situation prior to 1990, which had caused massive economic damage.

With reference to Senegal, see the Commission's reply in point 3.70.

In the case of Saint Vincent and the Grenadines, the period of drought in question lasted from late 1993 until August 1994, so that its impact on falling output was greater than the Court appears to think, particularly as there was less scope for reviving production in the four months following the drought. This was made clear in the Delegation's note of 17 May 1995, which was one of the documents supporting the transfer. In accordance with the manual for Stabex recipients, the reduction is not as a rule applied in the event of natural disasters.

The Commission is of the view that these cases were sufficiently well-documented.

3.76. The Commission cannot confirm the Court's estimate of the value of price revisions as ECU 3 million, since this would require it to apply the real exchange rates prevailing at the time of payments including price revisions.

Commission officials' failure to reply arose from a misunderstanding regarding the Court's request.

3.77. The Commission reiterates that it is not responsible for the management of EIB operations and is therefore not competent to conduct checks on them (see point 3.69). The Commission takes the Court's observation to reflect the audit's constraints (point 2 of the report) rather than a criticism addressed to the Commission with a view to the DAS.

With regard to the payments examined by the Court, the Commission confirms that details of the calculations appear in the payment file. However, the Commission is willing to supply, on request, any document the Court deems necessary.

3.78. In the three cases to which the Court refers, the delays in submitting the interim reports were the fault of the contracting authority and not the contractor.

The Commission believes that intermediate deadlines should not be subject to formal riders to the contract, especially since the contracts do not impose any penalties for failing to meet them. It considers such changes to be a prerogative of contract management, which should be flexible. However, in the three cases cited, the alterations were documented in correspondence with the contractor.

3.79. In the Commission's view, delays in payment must be assessed in terms of the difference between the date of the request for payment and the value date of the debit in the EDF accounts.

By definition, there is never any delay in payment because the EIB's request is dated after the value date of payment, which is always stipulated in the request (in accordance with Article 60(4) of the Financial Regulation).

The 21-day time limit was not met, therefore, but it cannot be considered a contractual obligation between two parties since the failure to meet it does not affect the payment date.

3.80. Article 319(6) of the fourth Lomé Convention stipulates that 'procedures for clearance, authorization and payment.... shall be completed within a period of 90 days from the date on which the payment becomes due. The national authorizing officer shall... (notify) the delegate not later than 45 days before the due date.` Under Article 319(7), the Commission bears that part of the claim for delayed payment for which it is responsible from its own resources. It is therefore liable under the Convention, not the contract.

In the cases to which the Court refers, the Commission did indeed exceed the 45-day time-limit under the Lomé Convention.

However, the holder of an EDF services contract is entitled to receive late interest under Article 38(1) on request.

Other observations

3.81. The Commission took its decision to grant final discharge in the light of all relevant information received.

3.82. With regard to the UNHCR contract (ECHO/TPS/ART 254/94/0501), the extensions beyond 31 December 1995 were justified by the gravity of developments in the Great Lakes Region at the time, and the precise nature of the UNHCR's project in the region. The level of the advance (80%) was justified by the sums devoted to the numerous projects covered by the allocation (see the lists attached to the contract).

3.83. The amount in question was credited to the normal EDF account in Italy, which meant that the Commission was not obliged to draw an equivalent sum from the treasury accounts of the Member States. In other words, it was the Member States that benefited from the income accruing, not Kenya, which, in the absence of any agreement on the matter, had no claim to it.

ANNEX

Reforms achieved and under way for financial management of the EDF

I. Legal framework

1. Budgetization

Report of the Commission to the Council and European Parliament dated 6 June 1994 proposing budgetization on the grounds of:

(a) the main budgetary principles including that of a single consolidated budget;

(b) the principle of subsidiarity;

(c) an integrated European approach to development aid world wide.

2. Financial Regulation

The Commission will propose the following changes and that the draft be submitted to the European Parliament for an opinion.

(i) Modification of Articles 17 and 19 to distinguish a commitment (based on a financing decision) from a contract subsequently entered into between an ACP state and a third party;

(ii) Implication of the Accountant in movements of appropriations and in commitments;

(iii) Precision of the role of Financial Control in particular regarding the moment at which they intervene in giving their visa for commitments and for payments executed by delegations in the ACP States;

(iv) Creation of deputy accountants in the delegations for greater decentralization and faster payments without legal ambiguity;

(v) Preparation by the Accountant of accounting norms.

II. Improvement of EDF financial management

1. ACP administrations

It should be recalled that the underlying philosophy of the Lomé Convention is one of partnership, where the developing countries are responsible for their own development and, in particular, for the entering into and execution of contracts. To improve the quality of financial management in the ACP states the Commission has:

(i) developed and delivered 26 training courses for some 560 ACP administration personnel. It is planned to deliver 25 courses per year; thus all administrations could be covered by 1998;

(ii) reinforced technical assistance for financial execution by the national authorising officers (NAOs);

(iii) developed a decentralized accounting system (Solas-on) allowing NAOs to register accounting movements and to receive up-to-date information from the Commission's central accounts (first test will be undertaken during third trimester 1997);

(iv) prepared draft revised standard contracts.

In addition, the Commission is now examining other ways to strengthen sound financial management by the ACP States themselves. This is particularly important since the Commission is obliged to reduce its personnel in the ACP delegations, already considered insufficient by the Court and the Parliament, in order to strengthen delegations in other, non-ACP, regions where staffing is even less adequate.

2. Within the Commission's services

(i) Higher informative value of the annual report on the accounts.

(ii) Improvement of the accounting central systems (OLAS), notably:

(a) introduction of true accounting for advances;

(b) introduction of the management of global authorizations into the accounts;

(c) introduction of the management of subregional allocations for regional cooperation;

(d) development of automatic treatment of fellowship payments;

(e) further development of management information instruments, e.g. detection of sleeping projects and contracts;

(f) many improvements to the internal controls of OLAS.

(iii) Preparations to develop a new accounting system within the new Commission system for the budget (Sincom II) scheduled for tests late 1997.

(iv) Development of a decentralized accounting system (SOLAS), allowing delegations to register accounting movements in the central accounts (OLAS and later Sincom II). First tests in delegations during November 1996; generalized use in delegations from mid-1997.

(v) Dissemination of a user guide for EDF financial procedures including simply presented guidelines on all commonly used procedures.

(vi) Updating of the manual of instructions.

(vii) Preparation and delivery of training courses in EDF financial and tender procedures for Commission officials in delegations and in headquarters, budget obtained for five courses in 1996 to cover 100 officials.

(viii) Strengthening of the human resources of the financial unit and rationalization of its internal management and control structure in order to improve its capacity for financial management.

(ix) Progressive decentralization of accounting and financial execution responsibilities to delegations with parallel redeployment of some personnel of financial services in headquarters to tasks of audit and supervision of systems.

(x) Increased delegation of authorizing officer powers, both within headquarters and the delegations.

() For reasons of convenience the Court has decided to use the French acronym DAS for all the Union's languages.

() See in this connection the Special Report in support of the Statement of Assurance concerning activities financed from the general budget for the financial year 1994, paragraphs 1.27 - 1.44, OJ C 352, 30.12.1995.

() See also the methodological lexicon in the introductory pages.

() Article 188 C of the Treaty establishing the European Community, Article 160 C of the Treaty establishing the European Atomic Energy Community and Article 45 C of the Treaty establishing the European Coal and Steel Community with regard to the ECSC's former administrative budget, which was incorporated into the general budget by the Merger Treaty of 8 April 1965.

() The EDF and the ECSC are covered by separate Statements of Assurance.

() Regulation of 21.12.1977, as last amended by Council Regulation No 2335/95 (OJ L 240, 7.10.1995).

() Volume IV should not be confused with the Financial Report, which is also published by the Commission for its own public relations purposes, even though this is not required under the regulations. This report, which is published later in the year, covers most of the financial statements detailed in Volume IV. It is not submitted to the Court officially and is not covered by the DAS.

() These charts and diagrams are the same as those numbered I to VII, and illustration VIII is the same as that numbered XIII, in the Annual Report concerning the financial year 1995.

() With regard to the VAT resource, Article 11 of Regulation 1553/89 stipulates that Community control must cover the reliability and efficiency of the systems in force in the Member States. Lastly, the statistical and macroeconomic nature of the GNP resource does not allow an audit of the procedures used to determine this resource to be carried out.

() See in this connection the Special Report in support of the Statement of Assurance concerning activities financed from the general budget for the financial year 1994, paragraph 1.11, OJ C 352, 30.12.1995.

() See in this connection the Special Report in support of the Statement of Assurance concerning activities financed from the general budget for the financial year 1994, paragraphs 1.18 - 1.19, OJ C 352, 30.12.1995.

() See in this connection the Special Report in support of the Statement of Assurance concerning activities financed from the general budget for the financial year 1994, paragraphs 1.21 - 1.23, OJ C 352, 30.12.1995.

() OJ C 352, 30.12.1995.

() See in this connection the Special Report in support of the Statement of Assurance concerning activities financed from the general budget for the financial year 1994, paragraphs 2.1 - 2.10, OJ C 352, 30.12.1995.

() OJ C 352, 30.12.1995.

() See the definition given in the methodological lexicon.

() Revenue and expenditure account and balance sheet for the financial year 1995, Volume IV, Explanatory notes, pages 28-41.

() OJ C 352, 30.12.1995, paragraph 3.14, Table 3.1, part (A), columns 3 - 6.

() Revenue and expenditure account and balance sheet for the financial year 1995, Volume IV, page 14 (unpublished document).

() See in this connection the Special Report in support of the DAS concerning the activities financed from the general budget for the financial year 1994, paragraphs 3.18 - 3.26, OJ C 352, 30.12.1995.

() See the Annual Report concerning the financial year 1993, paragraph 14.10 (b), OJ C 327, 24.11.1994.

() Special Report No 1/89, pages 27-28 (OJ C 128, 24.5.1989).

() Special Report No 1/89, page 42 (OJ C 128, 24.5.1989).

() Preliminary Draft Budget, 1995, Overview, page 9 (SEC(94) 800 of 16.5.1994).

() Report on the impact on EAGGF-Guarantee expenditure of movements of the dollar/ECU exchange rate and increases in the correcting factor resulting from monetary realignments within the EMS (COM(95) 517 of 14.11.1995).

() Court of Auditors' Annual Report 1995 (OJ C 340, 12.11.1996, paragraph 2.24).

() OJ C 352, 30.12.1995.

() Decisions C(96) 916 final and C(96) 844 final.

() OJ C 340, 12.11.1996.

() OJ C 352, 30.12.1995, paragraphs 3.77 - 3.80.

() Revenue and expenditure account and balance sheet for the financial year 1995, Volume IV, Explanatory notes, pages 68 and 69.

() See in this connection the Special Report in support of the Statement of Assurance concerning the activities financed from the general budget for the financial year 1994, paragraphs 3.53 - 3.55 and 3.59 - 3.61, OJ C 352, 30.12.1995.

() Revenue and expenditure account and balance sheet for the financial year 1995, Volume IV, p.48.

() See in this connection the Special Report in support of the Statement of Assurance concerning the activities financed from the general budget for the financial year 1994, paragraph 3.62, OJ C 352, 30.12.1995.

() Revenue and expenditure account and balance sheet for the financial year 1995, Volume II, page 801.

() OJ L 246, 13.10.1995.

() OJ L 254, 22.9.1984.

() OJ C 115, 6.5.1994.

() See in this connection the Special Report in support of the Statement of Assurance concerning the activities financed from the general budget for the financial year 1994, paragraph 3.115, OJ C 352, 30.12.1995.

() See the definition given in the methodological lexicon.

() OJ L 175, 13.7.1996, p. 3.

() OJ L 155, 7.6.1989, p. 1.

() OJ L 175, 13.7.1996, p. 3.

() In the case of the sixth and seventh EDFs, this means the Third and Fourth Lomé Conventions respectively.

() In the case of the sixth EDF, the Internal Agreement of 19 February 1985, OJ L 86, 31.3.1986; for the seventh EDF, the Internal Agreement of 16 July 1990, OJ L 229, 17.8.1991.

() Includes 1 658 Mio ECU supplied directly by the EIB in the form of loans from its own funds.

() At 31.12.1995 the residual balances had been used for payments amounting to 50,2 Mio ECU in the case of the sixth EDF and 91,2 Mio ECU for the seventh EDF.

() At 31 December 1995 the statements of EIB operations showed that subsidized-interest loans amounting to 741,2 Mio ECU had been granted complementary to the sixth EDF and 897,6 Mio ECU complementary to the seventh EDF.

() Opinion on the Financial Regulation of the seventh EDF (OJ C 113, 29.4.1991), Annual Reports on 1991 (OJ C 330, 15.12.1992), 1992 (OJ C 309, 16.11.1993) and 1993 (OJ C 327, 24.11.1994), 1994 EDF DAS Special Report (OJ C 352, 30.12.1995).

() See paragraph 15.1 of the Annual Report of the Court of Auditors concerning the financial year 1993 (OJ C 327, 24.11.1994) and paragraph 3.2. of the Special Report in support of the 1994 EDF DAS (OJ C 352, 30.12.1995).

() This level is a function of the volume of transactions concerned and the resources available for the audit. It represents approximately 3% of the estimated payments figure for the 1995 financial year.

() In the case of Stabex, 70% of commitments and 75% of payments; for structural adjustment, 94% of commitments and 78% of payments.

() See Special Report in support of the 1994 EDF DAS, paragraph 3.15.

() Zaire: 2,75 Mio ECU; Somalia: 0,16 Mio ECU.

() Special Report No 2/95, paragraph 3.11, OJ C 167, 3.7.1995; Special Report in support of the 1994 EDF DAS, paragraph 3.15, OJ C 352, 30.12.1995.

() See the Special Report in support of the 1994 EDF DAS, paragraphs 3.19 and 3.20.

() See the Special Report in support of the 1994 EDF DAS, paragraphs 3.30 - 3.33.

() See Special Report No 2/95 concerning Stabex under the Fourth Lomé Convention, paragraph 3.4 (OJ C 167, 3.7.1995), and paragraphs 3.40 - 3.42 of the Special Report in support of the 1994 EDF DAS.

() The financial statements show 730,3 Mio ECU deposited in bank accounts in Europe for Stabex and 89,7 Mio ECU for structural adjustment. On the basis of the Delegations' replies to the Court's questionnaire there are further balances amounting to at least 101 Mio ECU for Stabex and 164,5 Mio ECU for structural adjustment in the bank accounts used for counterpart funds.

() See the Special Report in support of the 1994 EDF DAS, paragraph 3.48.

() Council Decision No 3/90 of 30 December 1990, OJ L 382, 31.12.1990.

() Similar observations have already been made by the Court in several Special Reports: paragraphs 4.30 - 4.33 of Special Report No 2/94, OJ C 97, 6.4.1994, and paragraph 3.50 of the Special Report concerning the 1994 EDF DAS, OJ C 352, 30.12.1994.

() See paragraphs 14.17 - 14.21 of the Court's Annual Report concerning the financial year 1992.

() See the Special Report concerning the 1994 EDF DAS, paragraph 3.58.

() 6 SL 24, 7 PNG 23 1 and 7 SEY 4 1.

() 6 RPR 171 35, 7 ZIM 3 4 and 7 IVC 52 1.