2016 Annual Activity Report - European Commission · DG Budget (hereafter BUDG) is the central...

2016

Annual Activity Report

DG BUDGET

Ref. Ares(2017)1773948 - 03/04/2017

budg_aar_2016_final of 54

Table of Contents

THE DG IN BRIEF 3

EXECUTIVE SUMMARY 5

A) KEY RESULTS AND PROGRESS TOWARDS THE ACHIEVEMENT OF GENERAL AND SPECIFIC OBJECTIVES OF THE DG ...... 5 B) KEY PERFORMANCE INDICATORS (KPIS) ................................................................................... 10 C) KEY CONCLUSIONS ON FINANCIAL MANAGEMENT AND INTERNAL CONTROL .............................................. 11 D) INFORMATION TO THE COMMISSIONER(S) ................................................................................. 11

1. KEY RESULTS AND PROGRESS TOWARDS THE ACHIEVEMENT OF GENERAL AND SPECIFIC

OBJECTIVES OF THE DG 12

SO1.DRIVING THE PROCESS OF STRATEGIC BUDGETARY PLANNING: MULTIANNUAL FINANCIAL FRAMEWORK (MFF) ... 12 SO2. MANAGING THE EXPENDITURE OF THE EU BUDGET EFFICIENTLY WITHIN THE FRAMEWORK OF THE MFF ........... 13 SO3. EFFICIENTLY AND EFFECTIVELY MANAGE AND CONTROL THE REVENUES OF THE EU BUDGET ........................ 14 SO4. MAINTAIN A HIGH QUALITY CENTRAL ACCOUNTING /FINANCIAL FRAMEWORK ........................................ 16 SO5. SUPPORT TO COMMISSION SERVICES THROUGH TREASURY MANAGEMENT AND RECOVERY OF FUNDS MANAGEMENT AND A HIGH

QUALITY INFORMATION SYSTEM (ABAC) ...................................................................................... 17 SO6. PROMOTE CONSISTENCY AND SIMPLIFICATION OF FINANCIAL RULES, SOUND FINANCIAL MANAGEMENT AND COST-EFFECTIVENESS OF

CONTROLS ......................................................................................................................... 18 SO7. DRIVING THE STRATEGY OF EU BUDGET FOCUSED ON RESULTS ....................................................... 19 SO8. ENSURE EFFECTIVE MANAGEMENT OF THE RELATIONS WITH THE COURT OF AUDITORS AND OTHER INSTITUTIONS PAVING THE WAY FOR

THE ANNUAL DISCHARGE OF THE COMMISSION IN THE IMPLEMENTATION OF THE EU BUDGET .............................. 21

2. ORGANISATIONAL MANAGEMENT AND INTERNAL CONTROL 22

2.1 FINANCIAL MANAGEMENT AND INTERNAL CONTROL .................................................................... 22 2.1.1. CONTROL RESULTS ...................................................................................................... 22 A) OWN RESOURCES (OR) ................................................................................................. 23 B) EARMARKED REVENUES FOR THE USE OF FINANCIAL INFORMATION SYSTEMS BY EXTERNAL ENTITIES ........... 29 C) PROCUREMENT AND ADMINISTRATIVE EXPENDITURE .................................................................. 30 2.1.2. AUDIT OBSERVATIONS AND RECOMMENDATIONS ...................................................................... 38 A) FOLLOW-UP OF IAS RECOMMENDATIONS .............................................................................. 38 B) INTERNAL AUDIT SERVICE (IAS) LIMITED CONCLUSION ............................................................. 42 C) ECA AUDITS ............................................................................................................. 42 2.1.3. ASSESSMENT OF THE EFFECTIVENESS OF THE INTERNAL CONTROL SYSTEMS ........................................ 44 2.1.4. CONCLUSIONS AS REGARDS ASSURANCE .............................................................................. 47 2.1.5. DECLARATION OF ASSURANCE AND RESERVATION .................................................................... 48 DECLARATION OF ASSURANCE ................................................................................................... 48 RESERVATION ..................................................................................................................... 49 2.2 OTHER ORGANISATIONAL MANAGEMENT DIMENSIONS ................................................................. 53 2.2.1. HUMAN RESOURCE MANAGEMENT ....................................................................................... 53 2.2.2. INFORMATION MANAGEMENT ASPECTS ................................................................................. 54 2.2.3. EXTERNAL COMMUNICATION ACTIVITIES ............................................................................... 54


THE DG IN BRIEF

DG Budget (hereafter BUDG) is the central service of the European Commission in charge of the

management of the EU budget throughout the annual and multiannual cycle; from the preparation of the draft budget and Multiannual Financial Framework to its implementation and the

final discharge by the European Parliament. The DG is also responsible for the legal framework applicable to the implementation of the EU budget by the different institutions, agencies and Member

states, and it plays a key role in promoting sound financial management and a performance culture that focuses on maximizing the results of public expenditure on the ground.

The Treaty1 provides that the Commission shall execute the budget and manage programmes. It

details the Financial Provisions for the European Union, BUDG's mission and responsibilities.

BUDG has around 480 staff members. It is structured around five Directorates based in Brussels, which

deliver results in eight operational activities:

Driving the process of strategic budgetary planning: Multiannual Financial Framework (MFF)

Managing the expenditure of the annual EU budgets efficiently within the framework of the MFF

Managing and controlling the revenues of the EU budget

Maintaining a high quality central accounting /financial and reporting framework

Supporting budget execution through Treasury and recovery of funds management and a high

quality Information System (ABAC)

Promoting consistency and simplification of financial rules, sound financial management and cost-effectiveness of controls

Driving the strategy of EU budget focused on results

Overseeing the relations with the European Court of Auditors (ECA) and other institutions paving

the way for the annual discharge of the Commission in the implementation of the EU budget

The Deputy Director-General is the Accounting Officer of the Commission, responsible for the

management of the central treasury and preparation of the accounts of the Commission, as well as some other bodies and the consolidated accounts of the EU.

In order to ensure the integrity of the system, BUDG oversees the accounting data produced by the

different DGs or bodies implementing the EU budget. The accounts are prepared via ABAC, the Commission's corporate financial/accounting system. BUDG is the system owner and supports the

Commission's DGs/Services, the European External Action Service and 46 other External Entities, resulting in a user community of over 14 000 users around the world.

From an operational perspective, BUDG aims at maximizing the contribution of the EU Budget to the achievement of all the General objectives of the Commission. Beyond its direct economic impact, the

EU budget complements national budgets and plays a key role in a number of areas2.

On top of its own operational responsibilities, BUDG is the domain sponsor of the financial

management community inside the Commission. As a horizontal service, it leads a number of networks

and projects and provides support, advice and tools to enhance coherence and efficiency in the implementation of the EU budget. In addition, BUDG plays a central role in ensuring compliance with

Financial Rules and accountability for the management of tax payer's money.

BUDG leads the initiative ‘EU Budget Focused on Results’ at Commission level. This initiative is a

collective commitment of the DG embedded in all its operations.

Expenditure executed by BUDG is exclusively administrative, for the functioning of the DG as well as

maintaining and improving the Commission's corporate financial/accounting systems. To optimize the use of human resources, appropriations are managed centrally and a centralized financial circuit is in

place.

1 Article 17(1) TEU ; Articles 310 to 325 included in Title II of the TFEU. 2 It provides a stable source of funding for key economic activities, such as agriculture, investments to underpin economic cohesion and potential

growth throughout the EU, research and innovation. Moreover, it funds the European response to global challenges which range from the global warming to humanitarian crisis, from security risks to geopolitical developments in our neighborhood.


Organisational changes:

On 12/10/16 the College nominated Silvano Presa as Deputy to the Director-General of BUDG with a special responsibility to support the Director-General in the development of a Centre of expertise

regarding budgetary implementation tools.


EXECUTIVE SUMMARY

The Annual Activity Report is a management report of the Director-General of DG Budget to the

College of Commissioners. Annual Activity Reports are the main instrument of management accountability within the Commission and constitutes the basis on which the College takes political

responsibility for the decisions it takes as well as for the coordinating, executive and management

functions it exercises, as laid down in the Treaties3.

A) Key results and progress towards the achievement of general

and specific objectives of the DG

Adoption of the 2017 Budget

Budget 2017 was adopted on 1 December 2016 broadly following the initial Commission proposal. The parallel discussions on the mid-term review / revision of the Multiannual Financial Framework

(MFF) resulted in additional appropriations ("top ups") for:

key-programmes under heading 1a reinforcing competitiveness (Horizon 2020, Cosme,

Erasmus+, CEF-Transport)

programmes under headings 3 and 4, to deal with the migration and refugee influx; from the root causes in the countries of origin and transit to border control and support to host

communities.

The EU response to new challenges has been possible also through the recourse to innovative

financial instruments, trust funds and the Facility for Refugees in Turkey.

Implementation of payment appropriations in 2016

After several years of shortage of payment appropriations and accumulation of backlog of unpaid claims, 2016 has brought a completely different situation. Not only has the abnormal backlog been

absorbed, but appropriations available were more than sufficient to cover the existing needs, due to

the lower-than-expected submission of Member States' payment claims linked to delays in the implementation of structural funds.

Implementation of payment appropriations finally reached EUR 128.8 billion on 31 December 2016, i.e. 96.4 % (after carry-overs) and the under-implementation amounted to EUR 4.8 billion

Technical Adjustment of cohesion policy envelopes

On 30 June 2016, the Commission adopted its annual technical adjustment of the MFF which this time

also included an adjustment of cohesion policy envelopes for 2017-2020 by using the latest statistics in order to take account of the particularly difficult situation of Member States suffering from

the crisis. This adjustment resulted in an increase of the national envelopes of a number of countries4.

Midterm review/revision of the MFF (MTR)

On 14 September 2016, the Commission tabled its Communication on the mid-term review/revision

of the MFF (MTR) as well as a number of legislative proposals, notably a proposal for amending the MFF Regulation as well as a proposal to simplify financial rules under the Financial Regulation and

relevant basic acts. After intense negotiations in Council and several informal meetings between Council and Parliament, a compromise package emerged on 15 November 2016 which could underpin a

final agreement once the remaining pending reserve is lifted.

This political agreement would also provide in the coming years up to 6 billion EUR in additional

funding to:

reinforce spending for jobs, in particular youth employment, and growth address migration and security challenges inside and outside the Union.

3 Article 17(1) of the Treaty on European Union. 4 EUR 1.4 billion for Italy, EUR 1.8 billion for Spain and EUR 836 million for Greece. Further Member States also benefited, five Member States

saw their envelope marginally reduced (by less than EUR 100 million) mainly due to a better socio-economic performance than previously expected.


Report High Level Group on Own Resources (HLGOR)

After 2 years of intensive work, the HLGOR published its final Report and recommendations on 17 January 2017. On the basis of the Group's work, the Commission will now judge whether legislative

initiatives to reform the own resources system are appropriate in the preparation of the future MFF. BUDG contributed to the reflection on the future of EU financing through the coordination of the

secretariat of HLGOR and support to its Chairman. It also ensured coordination within the Commission via the internal network set up for this purpose.

Annual discharge of the Commission in the implementation of the EU budget

In April 2016, the European Parliament, on the basis of a recommendation by the Council, with a very

large majority granted discharge to the Commission for the 2014 financial year. The key

stakeholders in the European Parliament, Council, European Court of Auditors and the Commission were aligned on the need to increase the focus on results delivered by the EU budget while continuing

to further improve compliance with rules. The ECA's special reports also provided important input to the discharge procedure.

The positive opinion on the 2015 accounts from the ECA for the ninth consecutive time was a major achievement in 2016.

As part of the discharge procedure for the 2015 financial year, hearings of Commissioners in the European Parliament started in December 2016 and continued until the end January 2017. The ECA's

audit process of the 2015 budget finished with a reduction of the overall error rate (from 4.4 % to

3.8 %). This rate is broadly in line with the estimates of the Commission. Given the multiannual nature of many programmes and the importance of corrective mechanisms implemented before and after

payment, the Commission also estimates the "amount at risk at closure" of the main policy or "residual error rate" areas. As indicated in the Annual Management and Performance Report, the estimated

amount was between 0.8 % and 1.3 % in 2016, below the 2 % materiality threshold. This analysis shows that the existing mechanisms allow for an adequate protection of the EU budget.

Integrated Financial Reporting Package

The Commission published a 'suite' of reports in the form of the 'Integrated Financial Reporting

Package'. The information presented provides a comprehensive overview of how the EU budget is

supporting the Union's political priorities, while being spent in line with EU rule and puts a special emphasis on performance, thus making a big step forward in transparency and accountability

and achieving one of the concrete outcomes of this Commission's ‘Budget Focused on Results' initiative. This package consists of:

Annual Management and Performance Report (AMPR), the Financial Report,

the Communication on the Protection of the EU Budget, and the EU Annual Accounts.

Management and control of the revenues

The own resources of the EU continued to be effectively managed and controlled, as confirmed by the Declaration of Assurance from the ECA which concluded that concerning 2015 revenue of the European

Union was not affected by a material level of error:

no errors in the transactions tested were found

the examined systems were assessed as effective for GNI and VAT-based own resources and other revenue

the examined systems were assessed as overall effective for TOR and the key internal controls in MS visited were assessed as partially effective

On 1/3/2017 OLAF concluded its investigation (OF/2014/1274/B1), on the undervaluation of textiles and footwear imported in the UK between 2013 and 2016 and issued a final report. On closing its

investigation, OLAF addressed recommendations to Her Majesty's Revenue and Customs, to the Crown Prosecution Service, and to the Commission. As a consequence of this investigation as well as those

conducted by BUDG within the framework of own resources management, there exist serious doubts on the accuracy of the traditional own resources (TOR) amounts transferred to the

EU budget by the UK since 2013. This AAR is therefore qualified by a reservation (more detailed information can be found in sections 2.1.1.A. and 2.1.5).


The process of ratification by Member States of the new Own Resources Decision (ORD) has come

to an end, with the Decision and implementing regulations entering into force on 1 October 2016. The ORD applies retroactively as from 1 January 2014. This had a significant impact on own resources

payments from the different Member States, budgeted by means of an Amending budget 5/2016 adopted on 1 December 2016. The impact for the EU budget however was zero.

The proposed amendment to the Making Available Regulation5 has been adopted by the Council and entered into force along with the ORD but generally without retroactive effect. This is an example

of simplification which contributes to the BFOR initiative.

Treasury and recovery of funds management

Treasury management continued to be particularly challenging in the course of 2016 in view of the

persistence of a negative interest rate environment. In addition, the recurrence of shortages of cash resources in certain periods of the year required increased monitoring of cash flows to ensure the

orderly and timely execution of all payments, which is key to budget implementation. An effective treasury management and safeguarding of EU assets has therefore become increasingly critical.

The Commission continued during 2016 to recover all amounts due as efficiently and effectively as possible, using all the initiatives available to avoid unnecessary losses and applying an appropriate risk

management for provisional fines and bank guarantees.

Accounting financial System (ABAC)

During 2016 BUDG continued to support other DGs in the implementation of the annual budget, via an

efficient execution of payments and revenues and the correct management of the corporate information and accounting IT tool (ABAC).

2016 was a key year for making progress in the implementation of the new architecture, in order to maintain a high quality financial and accounting system that provides the optimal level of performance

while meeting the needs of its users. With this in mind, it was necessary to start to take the necessary actions to build the future architecture:

A first version of the business case assessing the financial domain was finalised

Strategic reflections were taken to ensure the Commission remains equipped with an IT landscape

capable of efficiently absorbing future challenges as the new multi-annual framework, the revision

of the Financial Regulation and the initiative Budget focussed on Results.

Financial rules

The Central Financial Service continued during 2016 to provide training and advice on the application of financial rules, in order to ensure an appropriate control but also efficiency in the implementation of

the EU budget. In this regard, in line with the better regulation agenda of the Commission and the Budget Focused on Results strategy (see below), BUDG focused during 2016 on the preparation of key

deliverables in an agenda of flexibility and simplification which fed into the Mid-Term Review of the MFF:

the monitoring of progress towards simplification in the implementation of the current legal and

financial rules with the publication of a Simplification Scoreboard assessing not only the efforts done by the Commission (direct and indirect management) but also, for the first time,

efforts made by the Member States (shared management); a proposal to revise the Financial Regulation was also presented in order to make the

current legal framework applicable to the implementation of the EU budget more simple and more flexible as well as more focussed on the delivery of concrete results on the ground;

Establishment of the new Early Detection and Exclusion System (EDES) , including the setting-up of the Panel.

During 2016 BUDG also upgraded its role as domain sponsor of the financial management

community inside the Commission, leading the process of synergies and efficiencies in this area.

BUDG also continued to support the negotiation of framework agreements with financial

institutions (such as the World Bank, or UN bodies) for the implementation of the EU budget and contribute to the correct and efficient implementation of financial instruments and the European Fund

for Strategic Investments.

5 Council Regulation No 609/2014 modified by Regulation No 2016/804.

https://myintracomm.ec.europa.eu/budgweb/EN/imp/edes


Budget Focused on Results (BFOR)

The 'EU Budget Focused on Results' initiative was launched with the objective of presenting the performance features of the new MFF, making a first assessment of their effects, identifying actions for

strengthening further the performance orientation of the budget implementation and creating the conditions for convincing communication on Budget achievements. In the 2016 the strategy focussed

on:

improving transparency and accountability in order to streamline the information

concerning the performance of the EU Budget

o The Commission released for the first year the so-called Integrated Financial Reporting

Package. The package aims to improve transparency and to streamline the information

concerning the performance of the EU Budget. The package contains the accounts, the Annual Management and Performance Report, the Financial Report, and the

Communication of the protection of the EU budget.

o Among these reports, the Annual Management and Performance Report provides

information on the progress of the 2014-2020 MFF programmes and the latest available evidence on the results of the 2007-2013 MFF programmes. In addition, it demonstrates

that the EU budget contributed to the Commission's political priorities and the Europe 2020 objectives.

simplifying of spending rules in line with the Better Regulation agenda and higher

leverage of EU funds are two significant factors in improving the efficiency of delivery

o Revision of the Financial Regulation and 15 other sectorial regulations, which includes:

simplification for recipients of EU Funds, payment for results, cross-reliance on audits, harmonized reporting requirements, increased interoperability of funds and management

modes, citizens' involvement in local EU Budget implementation, simpler EU administration and a coherent framework for financial instruments

aligning of budget to political Priorities

o the MFF Mid-term revision, annual budget negotiations and the preparation of the next

MFF


Main milestones BUDG Strategy 2016-2020

CALENDAR STRATEGIC PLAN DG BUDGET

2015 2016 2017 2018 2019 2020

An

nu

al a

ctiv

itie

s

Annual budget

Adoption budget 2016 Implementation budget 2015 Adoption of annual accounts 2014






Discharge Discharge budget 2013

Discharge budget 2014





Stra

tegi

c m

ult

ian

nu

al a

ctiv

itie

s

Budget Focussed On Results

(BFOR)

Conference

Launch of strategy and work streams

Conference

Launch of experts group

Contribution to MTR

Conference

Contribution to post 2020 MFF and review of programmes legal basis

Conference

Conference

Conference

Multi-annual Financial Framework

(MFF)

Special Technical Adjustment6

Proposal Midterm review / revision

Report HLGOR

Proposals post 2020 MFF

Proposal programmes next MFF7

Adoption of 2020 MFF

Financial regulation

(FR)

Proposal for review of simplified FR

Proposal of alignment of FR to MFF

6 Recalculation of cohesion envelopes. 7 For information, responsibility of the operational DGs.


B) Key Performance Indicators (KPIs)

Indicator Baseline

(2014)

Target 2020 Milestones achieved in

2016

MFF midterm review /

revision and Proposal post

2020 MFF

MFF 2014-2020 adopted in

December 2013

Key milestones MTR proposal

2016

Conclusion of negotiations on

the post-2020 MFF package

of proposals

Commission Communication

on the mid-term

review/revision of the MFF

(MTR) – 14/9/2016

Adoption and

implementation of Annual

budget within the

deadlines set by the Treaty

, respecting the political

priorities and promoting

efficient allocation of

resources (including the

5% staff reduction target)

Budget 2016 adopted :

25/11/2015

Execution 2015

- commitment appropriations

(after carry-overs): [100] %

- payment appropriations,

implementation (after carry-

overs): [100] %

Payment Plan : March 2015

Allocation of human resources

consistent with 5% staff

reduction target

Adoption of annual Budget in

December at the latest

Full (100%) annual budget

implementation making use

of transfers and carryovers

Full use of resources within

the MFF

Optimal allocation of financial

and human resources to

address the political priorities

Budget 2017 adopted

Provisional implementation :

96.4 %

almost completed, as nearly

all institutions, including the

Commission, applied the final

step of the reductions in their

2017 budget proposals

Confirmation by ECA of the

effectiveness of the

Commission's Own

Resources control systems

Positive DAS Opinion on Own

resources for 2014 exercise

Positive DAS Opinion on Own

resources for 2015-2019

exercises

Positive DAS Opinion for 2015

on OR

Confirmation by ECA of

the reliability of the annual

accounts and discharge

resolution by EP with no

postponement or

reservations

Positive DAS on 2014

Accounts

No postponement of the

discharge

Positive DAS on annual

accounts 2015-2019

Annual discharge in EP

plenary for 2015-2019

budgets

Positive DAS Opinion for 2015

on accounts

Discharge 2014 given

Implementation of the

Budget Focused On Results

( BFOR) strategy and

adoption of simpler and

more coherent financial

rules promoting sound

financial management

SPP cycle and reporting

framework

DAS from the ECA based on

materiality threshold of 2 %

Programme statements in MFF

Simplification of financial

rules through the adoption by

2019 of the Simplified

Financial Regulation

Progress in cost-effectiveness

of controls

Implementation of residual

error methodology

Reinforcing performance

framework for evaluation,

reporting, budgeting and

programming

Simplification proposal made

with MTR

The estimated level of error

for expenditure further

declined from 4.4 % to 3.8 %.

Amount at "risk at closure

concept developed in the

context of the AAR

preparation

EU Budget Integrated

Financial Reporting Package

2015

2015 Annual management

and Performance report for

the EU Budget

Establishment of the expert

group on performance-based

budgeting.

Redesigning the DG planning

instruments


C) Key conclusions on Financial management and Internal control

In accordance with the governance statement of the European Commission, (the staff of) BUDG conducts its operations in compliance with the applicable laws and regulations, working in an open and

transparent manner and meeting the expected high level of professional and ethical standards.

The Commission has adopted a set of internal control standards, based on international good practice,

aimed to ensure the achievement of policy and operational objectives. The financial regulation requires that the organisational structure and the internal control systems used for the implementation of the

budget are set up in accordance with these standards. BUDG has assessed the internal control systems during the reporting year and has concluded that the internal control standards are implemented and

function as intended. Nevertheless further improvements are needed for standards 8, 11, 12 and 15

and the remedial measures are implemented or envisaged. Please refer to AAR Section 2.1.3. for further details.

In addition, BUDG has systematically examined the available control results and indicators, including those aimed to supervise entities to which it has entrusted budget implementation tasks, as well as the

observations and recommendations issued by internal auditors and the ECA. These elements have been assessed to determine their impact on the management's assurance as regards the achievement

of control objectives. Please refer to Section 2.1. for further details.

In conclusion, management has reasonable assurance that, overall, suitable controls are in place and

working as intended; risks are being appropriately monitored and mitigated; and necessary

improvements and reinforcements are being implemented. The Director-General, in the capacity as Authorising Officer by Delegation (AOD) has signed the Declaration of Assurance albeit qualified by a

reservation on the accuracy of the traditional own resources (TOR) amounts transferred to the EU budget by the UK since 2013. Please refer to sections 2.1.1.A. and 2.1.5. for further details.

D) Information to the Commissioner(s)

In the context of the regular meetings during the year between the DG and the Commissioner on

management matters, also the main elements of this report and assurance declaration, including the reservation envisaged, have been brought to the attention of Vice-President Georgieva, responsible for

Budget and Human Resources until 31 December 2016 and Günther H. Oettinger, responsible for Budget and Human Resources as of 1 January 2017.


1. KEY RESULTS AND PROGRESS TOWARDS THE ACHIEVEMENT OF GENERAL AND SPECIFIC OBJECTIVES OF THE DG8

SO1.Driving the process of strategic budgetary planning:

Multiannual Financial Framework (MFF)

The Commission presented its mid-term review / revision of the MFF (MTR) - ‘An EU budget

focused on results’ - on 14 September 2016, which was accompanied by a package of proposals

including quantitative aspects9 and qualitative aspects underpinning its strategy for a Budget focused on results10. This package of proposals aims at providing additional financial means for tackling

migration and security risks and fostering economic growth, job creation and competitiveness, to increase the flexibility of the EU budget and its ability to quickly and efficiently address unforeseen

circumstances and to simplify financial rules and reduce the administrative burden on recipients of EU funds.

Negotiations on the quantitative aspects have led to a broad agreement at the level of the Council on 15 November 2016, with one Member State, however, maintaining a reservation and needing

more time to assess the proposals. It is hoped that this reservation can be lifted in early 2017 so as to

pave the way for a final agreement between the European Parliament and Council. In the meantime, the top-ups for jobs and growth and migration and security have been introduced in the 2016 and

2017 Budgets.

Based on the Council Regulation laying down the MFF for the years 2014-2020 (MFF Regulation), the

national cohesion policy envelopes were adjusted in June 2016 (for the period 2017-2020) on the basis of the then available statistics, in order to take fully into account the impacts of the economic

crisis which hit Europe and its regions in 2009. Indeed the results of the recalculation of the envelopes provided additional resources to the countries and regions which were seriously hit: EUR 1.4 billion for

Italy, EUR 1.8 billion for Spain and EUR 836 million for Greece. Further Member States also benefited,

five Member States saw their envelope marginally reduced (by less than EUR 100 million) mainly due to a better socio-economic performance than previously expected.

The EU response to new challenges has been possible also through the recourse to innovative financial instruments, trust funds and the Facility for Refugees in Turkey.

Financial Instruments have proven to be useful tools to complement grants provided by the EU budget. They multiply the impact of public money on the ground, as we have seen in the areas of

transport, research and SME policy. Part of this funding is managed directly by the Commission but most of it is via shared management with the Member states and indirect management via the

European Investment Bank (EIB) and other financial institutions.

More recently, there has been a step change in terms of leverage with the creation of the European Fund for Strategic Investments (EFSI), intending to mobilize up to EUR 315 billion of private

investment via the provision of a public guarantee by the EU budget of up to EUR 16 billion (plus EUR 5 billion from the EIB).

In the framework of the MTR the Commission also presented an up-to-date medium-term payments forecast. It concludes that the overall payments ceiling of the current MFF should be just sufficient,

avoiding any new abnormal backlog of payment claims at the end of the period.

Amending Budget No 5/2016 was adopted by the Budgetary Authority on 1 December 2016. This AB

covers the implementation of the new Own Resources Decision (ORD 2014), following the

completion of the ratification process and the entry into force on 1 October 2016. AB 5/2016 takes into account the retroactive effect of ORD 2014 from 1 January 2014 onwards and therefore includes the

adjustments for the financial years 2014, 2015 and 2016 related to the new provisions introduced by ORD 2014.

Finally, during 2016 the Commission started the preparation of the package of proposals for the post-2020 MFF.

8 Detailed information on all outputs can be found in performance tables in annex 12. 9 strengthening flexibility and topping up programmes responding to highest policy priorities. 10 notably by simplifying financial rules.


SO2. Managing the expenditure of the EU budget efficiently within

the framework of the MFF

Budget 2017 was adopted in November 2016, broadly following the initial Commission proposal,

reflecting and supporting the political priorities, in particular contributing to the greatest extent possible to jobs, growth and investment, and providing a European response to the challenges of

migration management and the fight against terrorism and organised crime.

Commitment appropriations are set at around EUR 158 billion (increase of 1.7 % compared to 2016)

leaving a margin of about EUR 1 billion. Payment appropriations are set at EUR 134 billion (decrease of 1.6 % compared to 2016) leaving a margin of about EUR 10 billion. There is a political agreement to

extend the Youth Employment Initiative and to fund it with EUR 500 million in 2017. The additional

commitments were enabled by some redeployments and the mobilisation of the "special instruments" foreseen in the MFF:

the Flexibility Instrument for 2017 is mobilised for an amount of EUR 530 million for heading 3 Security and Citizenship.

the Global margin for commitments is mobilised for an amount of EUR 1.4 billion for heading 1a Competitiveness for growth and jobs.

The Contingency margin is mobilised for an amount of EUR 1.2 billion for Heading 3 Security and Citizenship and EUR 730 million for Heading 4 Global Europe.

Implementation of payment appropriations finally reached EUR 128.8 billion on 31 December

2016, i.e. 96.4 % of available appropriations (after carry-overs). This amount will be finalised after the closure of the accounts end of March and will consequently be included in the calculation of the surplus

2016 for which a Draft Amending Budget 2017 will be presented by the Commission by 12 April 2017. The preliminary estimate for the final amount of under-implementation is EUR 4.8 billion.

Most of the under-implementation results from a lower-than-expected level of submission of Member States' payment claims in cohesion funds (heading 1b). The new generation of programmes (2014-

2020) have not reached yet their "cruising" speed, partly due to delays in the designation of managing and certifying authorities, which is a prerequisite for the submission of interim payment claims.

The process of implementing a 5 % reduction in staffing level of all EU institutions, bodies and

agencies over five years is almost completed, as nearly all institutions, including the Commission, applied the final step of the reductions in their 2017 budget proposals. Furthermore, major efforts

continued to achieve all possible efficiency gains and to meet new challenges with a reduced level of staffing. Pressure continued on the administrative and human resources of all the Institutions,

especially the Commission in the light of the higher-than-expected 2016 salary and pension update. However, careful management of the occupation rate meant that the needs could be met through

redeployment for 2016, and the adoption of amending letter 1/2017 stabilised the situation for 2017.


SO3. Efficiently and effectively manage and control the revenues

of the EU budget

The own resources of the EU were continuously effectively managed and controlled, and this was

confirmed in 2016 by a Declaration of the Assurance from the ECA. The ECA considered that the Commission's control systems for the GNI and the VAT-based own resources were effective and those

for Traditional Own Resources (TOR) overall effective. However the key internal controls in MS visited by the ECA were assessed as partially effective.

For the TOR area, OLAF concluded on 1/3/2017 its investigation (OF/2014/1274/B1), opened on 16/01/2015, on the undervaluation of textiles and footwear imported in the UK and issued a final

report. On the basis of this investigation, OLAF concludes that the UK has failed to apply the appropriate

measures to prevent systematically undervalued imports of textiles and footwear from P.R. China from entering the EU through the UK, resulting in an estimated loss of EUR 1.9874 billion (gross) of

traditional own resources (customs duties) to the EU budget between 2013 and 2016.

BUDG's controls, such as the inspection carried out in the UK from 14 to 18 November 2016 and the

special monitoring additional debt establishments made by the UK in this area since 2014, have also confirmed significant weaknesses in Her Majesty's Revenue and Customs (HMRC) management and

control of undervalued imports of textiles and footwear in the traditional own resources area (see further information on the reservation set on TOR in sections 2.1.1.A. and 2.1.5.).

In 2016, the Commission originally planned for 13 inspection visits related to the VAT own

resource however, due to staff mobility the visit planned to Poland was postponed and is now included in the 2017 inspection programme. One desk inspection of the simulated VAT base provided by

Montenegro was also concluded as part of BUDG's pre-accession technical assistance activities.

For Traditional Own Resources (TOR), the Commission completed 19 inspections in Member

States, the B account11 (see result of inspections on UK in the paragraphs above) and corrections to the A account were examined in all the inspections12. A monitoring mission on TOR was also carried out

in Montenegro as part of the technical assistance to that candidate country13. TOR controls included the assessment of 251 write-off reports14 submitted by Member States. The process of ratification by

Member States of the new Own Resources Decision (ORD) has come to an end in 2016, with the

Decision and the implementing regulations entering into force on 1 October 2016. The ORD applies retroactively as from 1 January 2014. This had a significant impact on own resources payments from

Member States, budgeted by means of Amending budget 5/2016. The impact for the EU budget however was zero

The amendment to the Making Available Regulation (MAR) was adopted on 26 May 2016 and consequently entered into force together with the ORD. The main points are:

The annual adjustments of the VAT- and GNI- based OR ('balances') will be due at a later moment and netted immediately. This represents a major simplification for Member States of

the annual VAT and GNI balances exercise;

Fine-tuning of the formula to calculate late payment interest providing proportionality to old Own Resources cases long sought by Member States while increasing the short term deterrent

effect for Member States to pay monthly contributions on time; Greater flexibility in treasury management with an important increase in the amount of funds

that can be called-up from Member States to meet peaks in payments; The safeguarding of the EU budget from the costs of negative; the same protection is now

possible for the European Development Fund (EDF) due to the partial modification of the EDF regulation.

The Making Available Regulation now includes a derogation to protect Member States from

unjustified financial responsibility in cases involving criminal investigations.

11 Irregularities in TOR are accounted for in the so called B account and TOR is made available to the EU by the Member States in the so called A

account. 12 In addition to this general topic, preferential tariff measures, the reliability of the A & B accounts, tariff suspensions and quotas, the control

strategy in the field of customs value and the management of irrecoverable amounts were examined in specific Member States. Joint audits were also part of the programme.

13 Technical assistance work on candidate and applicant countries concerned also Serbia, Cyprus, Turkey and Bosnia-Herzegovina. 14 These reports concern TOR amounts that became irrecoverable allegedly for reasons not attributable to the Member States. When the

Commission's assessment concludes that the losses are attributable to Member States' though, the latter are required to make the relevant amounts available to the EU budget.


The threshold for reporting to the Commission TOR write-offs was raised from EUR 50 000 to

EUR 100 000

In December the Commission Decision on TOR reporting (97/245) was also replaced by two new

decisions:

Commission Implementing Decision 2016/2365 establishing forms for reporting on fraud and

irregularities affecting entitlements to traditional own resources and on inspections relating to traditional own resources pursuant to Council Regulation (EU, Euratom) No 608/2014 and

Commission Implementing Decision 2016/2366 establishing models for statements of accounts

for entitlements to own resources and a form for reports on irrecoverable amounts

corresponding to the entitlements to own resources pursuant to Council Regulation (EU, Euratom) No 609/2014.

Finally, BUDG continued to provide core support for the High level Group on Own Resources, by heading the Inter-institutional secretariat of the Group and an internal Commission network on own

resources. It contributed significantly to the successful completion of the Group's mandate, in particular:

the timely organisation of an interinstitutional Conference with national parliaments on the future financing of the Union, which took place on 7 September 2016;

the adoption by consensus of the final report and the recommendations of the Group before the

end of the year, with the public release of the report on 17 January 2017.


SO4. Maintain a high quality central accounting /financial

framework

The Commission demonstrated its accountability by providing high-quality and timely financial and

other information to all its stakeholders, internal and external. During 2016 BUDG produced the annual accounts of the EU, the Commission and other EU entities15 and obtained for the ninth

consecutive time a positive opinion on the 2015 accounts from the ECA.

In line with the highest standards of transparency and accountability, the Commission published the

EU Budget Integrated Financial Reporting Package 2015, which includes four reports, providing key and detailed information for the reporting year on revenue, expenditure, management and

performance. The package provides a comprehensive overview of how the EU budget is supporting the

Union's political priorities, while being spent in line with EU rule and puts a special emphasis on performance, thus making a big step forward in transparency and accountability and achieving one of

the concrete outcomes of this Commission's ‘Budget Focused on Results' initiative.

These reports include: details on the results achieved by/with the EU budget (EU budget performance) and on how it

has been managed (management performance); a full overview of the sources of EU revenue and the allocation of funds to Member States;

actions taken by the Commission and Member States to ensure the proper use of taxpayers'

money; the EU Annual Accounts containing financial statements information on the activities of the

institutions, agencies and other bodies of the EU.

Work on the development of corporate reporting tools has continued with the design and partial implementation of the expenditure cycle dashboard allowing the senior and middle management to

visualise financial Key performance Indicators (KPI's) in a quick way. This enables an easy monitoring of budget implementation. In addition, a central Trust Fund report has been developed to meet the

requirements of the Budgetary Authority. Guidelines for EU bodies have been issued to harmonise the

budgetary reporting of all the Agencies and Joint Undertakings. The management of EFTA appropriations has been improved and standard reports implemented.

The Commission continued to raise the profile of its accounting services within the global accounting profession through participation in fora, conferences and standard setting activities, the

most relevant of which include confirmed status as observer of the IPSAS board, full membership of the IPSAS Consultative Advisory Group, member and regular contributor of the EPSAS task force and

participation in international treasury networks.

15 Using the resources and expertise at its disposal, BUDG's accounting services are already providing high quality services to 10 EU agencies and

joint undertakings and 4 trust funds and remain available to expand the offer to any other interested body. This allows these entities to reduce their headcount while maintaining (and often improving) their performance in this area. As the number of entities availing of this option grows, so do the cost savings and efficiency gains.


SO5. Support to Commission Services through Treasury

management and recovery of funds management and a high quality Information System (ABAC)

During 2016 BUDG has continued to support other DGs in the implementation of the annual budget, via an efficient execution of payments and revenues and the correct management of the

corporate information and accounting IT tool (ABAC).

Treasury management has continued to be particularly challenging in the course of 2016 due also to

the persistence of a negative interest rate environment. In this context the modification of the Making Available Regulation adopted in 2016 provides for the safeguard of the EU own resources from the cost

of negative interest; similarly the EDF resources have been granted the same safeguard in 2016 thanks to a modification of the EDF regulation. At the same time specific treasury management

procedures have been put in place to minimise any other potential impact of negative interest on the EU and EDF budgets as well as on the EU Trust Funds. In addition, the particularly high volatility of

currency rates over the year has required tight monitoring of their evolution and of the Commission's exposure in order to minimise the risk of any potential losses for the EU budget. Monitoring of cash

flows also remains key to budget implementation; in this context the modification in 2016 of the

Making Available Regulation has provided the Commission with the possibility to call increased amounts from Member States to cover its cash requirements during peak periods, which will

substantially reduce the risk of temporary cash flow shortages in the future. An effective treasury management and safeguarding of EU assets has become increasingly critical over the past years

In 2016, the Commission has recovered all amounts due as efficiently and effectively as possible, using

all the initiatives available to avoid unnecessary losses and applying an appropriate risk management for provisional fines and bank guarantees.

ABAC is the Commission's corporate finance and accounting system managing the financial

transactions, accounts and disclosure of the Commission and of 49 External Entities. ABAC's availability and reliability is essential, both from a daily business as political point of view. Throughout 2016 ABAC

ran in compliance to the provisions of the Service Level Agreement, letting a user community of over 14 000 users to operate EUR 150 billion in appropriations and over one million payments.

ABAC was aligned to the new obligations stemming from the entry into force of the new Early Detection Exclusion System (EDES) for Third Parties. As part of the continuous efforts to protect the

system and the interests of the Commission, the user authentication via ECAS is implemented as well as the context-driven validation of Legal Entity and bank Account.

With a view to propel the rationalisation of the Commission’s IT-landscape, ABAC successfully

absorbed DEVCO's user community as their local system CRIS is being phased out. In parallel, a new module "Legal Commitment Kernel" is being developed with a view to decommission ABAC Contracts in

2017. Further investments in interoperability between ABAC and its linked Local Systems were made.

These achievements fit into a roadmap which must lead to a new corporate Finance Platform which

is the successor of ABAC. The detailed analyses for the optimal business solution, completed in 2016, are paving the way for a strategic, corporate decision on the way forward. A first version of the

business case, evaluating all options, concluded that the next ABAC could be built on a SAP platform "S/4 HANA" with limited specific additional developments. Finally, strategic reflections were taken to

ensure the Commission remains equipped with an IT landscape capable of efficiently absorbing future

challenges as the new multi-annual framework, the revision of the Financial Regulation and the initiative Budget focussed on Results.

To ensure the timely setup and proper functioning of EU Trust Funds and of the Turkey Refugees Facility, the related tasks that are under the responsibility of the Accounting Officer were performed

timely. These include in particular:

Treasury management, cash flow monitoring and payment processing Accounting

Recovery of funds ABAC system and new functionalities in place including reporting


SO6. Promote consistency and simplification of financial rules,

sound financial management and cost-effectiveness of controls

In line with the results of the public consultation carried on in May/June 2016, BUDG coordinated an

ambitious revision of EU financial rules – both general (Financial Regulation) and sectorial16 aiming at making the current legal framework applicable to the implementation of the EU budget more flexible

and simple. This proposal was adopted by the Commission on 14 September 2016 as the qualitative part of MFF Midterm review/revision package. It constitutes also an important step towards a stronger

focus on the delivery of concrete results and is part of the better regulation agenda of the Commission.

In 2016 BUDG also resumed the monitoring of progress towards simplification in the implementation of

the current legal and financial rules with the publication as part of the MFF Midterm review/revision package, of a Simplification Scoreboard assessing not only the efforts done by the Commission

(direct and indirect management) but also, for the first time, efforts made by the Member States (shared management).

During 2016 BUDG upgraded its role as domain sponsor of the financial management community

inside the Commission. In cooperation with other Commission departments, BUDG collected proposals of simplification and rationalisation in the domain of financial management. The result of this work is

reflected in a report, which takes the form of an action plan with more than 40 proposed measures to

be implemented over the period 2017-2020. The report was presented to the General Directors Réseau in January 2017 and was overall very well received. Potential synergies and efficiency gains were

identified in five inter-connected areas:

simplification and harmonisation of rules/procedures;

modern and interconnected financial IT systems; further externalisation;

mutualising financial expertise; more efficient and risk based control strategies/financial circuits.

Furthermore BUDG led progress in other workstreams and networks, such as the Strategic Programming and Planning cycle, Staff professionalization, Cost-effectiveness of controls, Streamlining

of financial circuits and efficiency gains in developing a single entry point for third parties and public procurement (through the co-chairmanship with DIGIT of the working group leading the

implementation of e-procurement and SEDIA).

BUDG also continued to provide training and advice on the application of financial rules, in order to ensure an appropriate control but also efficiency in the implementation of the EU budget.

Priority was given to the implementation of the 2015 revision financial regulation, in particular in the

area of public procurement and of the Early Detection and Exclusion System (EDES), to the negotiation of framework agreements with financial institutions (such as the World Bank, or UN bodies) but as well

to complete guidelines for grants, for the implementation of the EU budget, to the correct and efficient implementation of financial instruments as well as to the establishment of the European Fund for

Strategic Investments.

Finally BUDG reviewed the draft 2015 AARs of the DGs, in particular as regards the conservativeness of the estimations of the error rates, overall amounts at risks and future financial corrections.

On this basis, the Commission has produced its first edition of the Annual Management and

Performance Report; alongside the information on the EU Budget performance this report contains an assessment of the Commission's management of the EU budget. For the first time, the Commission

provides information on the remaining amount at risk after all corrective mechanisms have been implemented – the so-called amount at risk at closure, showing that the Commission effectively

manages risks related to the legality and regularity of expenditure in a multi-annual perspective.

16 contained in 15 sectorial legal acts.


SO7. Driving the strategy of EU budget focused on results

EU Budget Focused on Results (BFOR) strives to make best use and further improve the possibilities offered by the EU budget performance framework introduced with the current Multiannual

Financial Framework to strengthen performance whilst ensuring continued compliance. In 2016 the strategy focussed on:

1. Improved transparency and accountability

In 2016 the Commission released for the first year the so-called Integrated Financial Reporting

Package. The package aims to improve transparency and accountability in order to streamline the information concerning the performance of the EU Budget. Further actions carried out to improve the

reporting on the performance of the EU Budget were the following:

The Annual Management and Performance Report provides information on the progress of the 2014-2020 MFF programmes and the latest available evidence on the results of the 2007-

2013 MFF programmes. In addition, it demonstrates that the EU budget contributed to the Commission's political priorities and the Europe 2020 objectives.

Programme Statements were attached to the Draft Annual Budget

Strategic Planning & Programming system has improved, clarifying the levels of

accountability17 and redesigning the DG's planning instruments18 along the Juncker priorities19.

2. Effectiveness and efficient implementation

Simplification of spending rules in line with the Better Regulation agenda and higher leverage of EU

funds are two significant factors in improving the efficiency of delivery. The elements that will allow focusing on results more than in spending are the following:

Allowing for payments based on conditions fulfilled, output or performance in all management modes

A "single lump sum" could in the future cover all eligible costs of the action. Checks and controls will focus exclusively on the outputs/deliverables

Priority given to simplified forms of grants where payment is triggered by output and results

To complement the stronger focus on results, a reinforced performance framework is proposed:

Linking performance, objective-setting, indicators, results and the principles of economy,

efficiency and effectiveness in the use of appropriations

Providing for performance based fees to remunerate organisations for managing EU funds

Considering programme statements as the main source of programme performance information

Aligning the terminology on evaluation to the provisions of the 2016 Inter Institutional

Agreement on better law making and creating a link between ex-ante evaluations under the Financial Regulation and Impact Assessments

3. Alignment of budget to political Priorities

A central factor in the EU budget allocation is alignment to priorities and analysis of performance,

through the:

MFF Mid-term revision and annual budget negotiations

Increasing the resources of high-performance programmes (EFSI, Youth Employment initiatives, COSME, etc.)

Redeployment towards maximum EU value added: addressing the root causes of migration, European Border and Cost Guard, new entry-exit system for better border control, creating support to

host communities inside the EU, etc.

And the preparation of the next MFF

17 for policy, budget and Commission performance. 18 Strategic Plans and Management Plans. 19 using as impact indicators relevant EU2020 references.


Since the launch of the BFOR initiative, attention has been given to the capacity building aspect,

including visits to some Member States, participation to the OECD Senior Budget meetings, meeting with WB, WFP, US Treasury. In 2016 particular attention was paid to the two-ways communication with

stakeholders:

on one side to explain the existing performance framework of the EU Budget, its features and

the continuous improvements applied within the BFOR initiative

on the other side to collect examples, insight, suggestions and experiences on how to improve the framework and on how it works at the Member States/Stakeholders level.

Particularly relevant has been the establishment of the expert group on performance-based

budgeting. This expert group brings together stakeholders from European Commission, Council and Member States administrations, European Parliament administration, academics and performance

experts to exchange best practices and develop a common understanding on performance of the EU budget. With the three technical meetings that took place in 2016 the expert group is now a

recognised forum that provides important input to the BFOR activities.

On 27 September, VP Georgieva hosted the 2nd edition of the BFOR annual conference. In the conference, high-level speakers discussed the performance of the EU Budget and implications for

European Added Value, the role of simplification and better regulation for the performance of the EU

Budget and its ability to address emerging priorities. The conference was also the occasion to launch the EU Results website with a new look and feel showing the results of the EU Budget's programmes

in an accessible, understandable manner to citizens.


SO8. Ensure effective management of the relations with the Court

of Auditors and other institutions paving the way for the annual discharge of the Commission in the implementation of the EU

budget

With a very large majority, the European Parliament granted discharge to the Commission for

the 2014 financial year on 28 April 2016. Throughout the 2014 discharge procedure, discussions among key stakeholders in the European Parliament, Council, the European Court of Auditors and the

Commission centred around the need to increase the focus on results delivered by the EU budget while

continuing to further improve compliance with rules.

In its report on the follow-up to the discharge for the 2014 financial year20, the Commission committed to taking action in reaction to requests made by the European Parliament and/or the

Council. This included inter alia seeking a financial programming with adequate budgetary means for longer term policy priorities; simplifying rules; improving reporting on performance issues; reporting

on the root causes of error and measures taken to address them; and assessing the level of error remaining after corrective measures taking into account the multi-annual nature of programmes. These

issues were in particular followed up in the 2015 Annual Management and Performance Report for the

EU budget21, the Communication on the Protection of the EU budget to end 201522, and the Mid-Term Review package of the 2014-2020 Multi-annual Financial Framework.

In addition to providing an overview of results achieved by the EU budget, the 2015 Annual

Management and Performance Report contained for the first time an estimate of the amount at risk at closure, i.e. the estimated amount at risk after all corrective mechanisms will have been

implemented at the end of the programmes. For 2015, the amount at risk at closure was estimated to be in the range between 0.8 % and 1.3 % of total expenditure.

In October 2016, the ECA published its Annual report for the financial year 2015, thereby also launching the start of the 2015 discharge procedure. The Annual report contained a clean opinion

on the EU accounts for the 9th year in a row, and also concluded that the collection of EU revenue was free from error. The estimated level of error for expenditure further declined from 4.4 % to 3.8 %. The

ECA welcomed the Commission's increased focus on results and stressed the importance of strengthening reporting to this end. Discharge hearings of selected Commissioners in the European

Parliament started in November 2016 and ended in January 2017. BUDG also coordinated the Commission's replies to the ECA's special reports. The Commission has

generally respected the much shorter deadlines for providing its replies23 which entered into force as of

1 January 2016.

Initial preparations were made for the 4th PIC Network Conference in mid-2017. The target audience is all Member States and enlargement countries. The centrepiece of the Conference will be

the debate on four discussion papers on internal control topics written by the Working Group; two of the topics selected directly concern the management of EU funds.

In addition to regular contacts with NEAR and the EEAS concerning annual reports, the Task Force liaised extensively with NEAR and OECD SIGMA24 to develop more clarity about the boundaries

between Public Administration Reform (PAR) and Public Financial Management (PFM) and Public

Internal Financial Control (PIFC) reform strategies; seeking to identify synergies and eliminate potential areas of overlap. This allowed providing extensive input for the internal control aspects of the

revised package SIGMA OECD will be using to evaluate performance with PAR and PFM reforms.

There were PIFC fact finding missions to 5 enlargement countries plus a visit to Ukraine25 to

consider whether a change in strategy leading to further involvement was opportune. The strategy remains unchanged involving regular liaison with SGUA and OECD SIGMA. The task force also provided

timely input to Commission reports for 7 candidate or potential candidate countries.

20 See COM(2016) 674 of 17 October 2016. 21 COM(2016) 446 of 5 July 2016. 22 COM(2016) 486 of 18 July 2016. 23 six weeks instead of two and a half months. 24 OECD SIGMA : Support for Improvement in Governance and Management - a joint initiative of the Organisation for Economic Co-operation

and Development (OECD) and the EU 25 at the request DG NEAR's Support Group for Ukraine (SGUA).


2. ORGANISATIONAL MANAGEMENT AND INTERNAL CONTROL

This section answers to the question how the achievements described in the previous section were

delivered by the DG. This section is divided in two subsections.

The first subsection reports the control results and all other relevant information that support

management's assurance on the achievement of the financial management and internal control objectives. It includes any additional information necessary to establish that the available evidence is

reliable, complete and comprehensive; appropriately covering all activities, programmes and

management modes relevant for the DG.

The second subsection deals with the other components of organisational management: human

resources, information management and external communication.

2.1 Financial management and internal control

Assurance is an objective examination of evidence for the purpose of providing an assessment of the effectiveness of risk management, control and governance processes.

This examination is carried out by management, who monitors the functioning of the internal control systems on a continuous basis, and by internal and external auditors. Its results are explicitly

documented and reported to the Director-General. The reports produced are:

Notes to Vice-President GEORGIEVA twice a year on audit, fraud and internal control matters.

The opinion of the Internal Audit Service (IAS) on the state of control and the observations and

recommendations issued by them. BUDG carries out internally a quarterly follow-up on the open recommendations.

Reporting on the existent risks twice a year to Senior Management

Yearly assessment on the implementation of the Internal Control Standards (ICAT exercise)

Observations and recommendations reported by the European Court of Auditors (ECA)

Reports on the exception and non-compliance reports and ulterior analysis of internal control

weaknesses

Ex-post controls carried out once a year on the administrative expenditure

Monitoring on the implementation of the Anti-Fraud Strategy of BUDG

This section reports the control results and other relevant elements that support management's assurance. It is structured into (a) Control results, (b) Audit observations and recommendations, (c)

Effectiveness of the internal control system, and resulting in (d) Conclusions as regards assurance.

2.1.1. Control results

This section reports and assesses the elements identified by management that support the assurance on the achievement of the internal control objectives26. The DG's assurance building and materiality

criteria are outlined in the AAR Annex 4. Annex 5 outlines the main risks together with the control

processes aimed to mitigate them and the indicators used to measure the performance of the control systems.

It refers to the resources managed by BUDG: the EU's own resources and the administrative expenditure in 2016. The main indicators and/or conclusions on each control objective and area are

summarised in the following table:

26 Effectiveness, efficiency and economy of operations; reliability of reporting; safeguarding of assets and information; prevention, detection,

correction and follow-up of fraud and irregularities; and adequate management of the risks relating to the legality and regularity of the underlying transactions, taking into account the multiannual character of programmes as well as the nature of the payments (Art 32 FR).


Activity/

Indicator

Legality &

regularity

Cost-

Effectiveness of

controls

Anti-Fraud

Strategy

Reliability of

information

and

reporting

Safeguard

of Assets

Collection and

control of Own

resources

Error rate

below 1 % on

Total Own

Resources

(2.5% on TOR)

Positive

conclusion

(Costs/funds =

0.27 %)

Area covered by

the AFS

Positive

conclusion

n/a

Management of

administrative

expenditure

Error rate below

2 %

Positive

conclusion

(Costs/funds =

(4.03 %)

Area covered by

the AFS

Positive

conclusion

n/a

A) Own resources (OR)

The three main streams of EU revenue are known as own resources. They are: traditional own

resources (primarily customs duties), the VAT-based own resource and the GNI-based own resource. The distribution in the budget is the following:

Amounts in € 2014 2015 2016

TRADITIONAL OWN RESOURCES 16 429 485 119 18 730 353 938 20 094 118 220

OWN RESOURCES ACCRUING FROM

VAT 17 667 362 373 18 086 962 720 15 895 098 431

OWN RESOURCES BASED ON GNI 98 864 478 291 100 517 359 019 96 185 062 177

SURPLUS AVAILABLE FROM

PRECEDING FINANCIAL YEAR 1 005 406 925 1 434 557 708 1 349 116 814

Total Own Resources 133 966 732 708 138 769 233 384 133 523 395 642

The starting point for all three is the provision of data by the Member States which is subject to later verification including on the spot inspections by the Commission. It is an inherent feature of these

arrangements that there will be later revisions to amounts paid after the end of any budget year.

Each own resource system has a 4-year cut-off after which no corrections may normally be made.

However, to protect the EU's financial interests the cut-off does not apply to those points notified by the Commission or the Member State concerned prior to the deadline. In these instances corrective

action may still take place. Although the possible financial impact of these items can rarely be quantified until they are resolved, experience shows that compared with the overall amounts paid their

impact is rarely material.

The management arrangements for each own resource vary. The Internal Control Template (ICT) for own resources in annex 5 demonstrates how the control system in place in the DG addresses the risks

related to own resources as well as the indicators used to measure the efficiency and cost-effectiveness of these controls.

Traditional Own Resources (TOR) – 15 % of Total OR

Member States, and not the Commission, are primarily responsible for (1) establishing TOR, accounting

for it, collecting and making it available within prescribed time limits and (2) implementing EU customs legislation and operating a framework of customs checks and controls to ensure that they collect the

correct amount of customs duties at the right time. Failure to comply with the rules may lead to a

financial liability to the EU budget.

Contributions for traditional own resources (TOR) are made on the basis of Member States' actual

collection of the relevant duties and levies which Member States declare via a monthly statement.

Reasonable assurance concerning the accuracy and completeness of Member State data is provided by

an annual inspection programme in which BUDG checks that Member States' administrations have complied with EU law when collecting TOR. BUDG monitors the timely and full receipt of traditional own


resource statements and the corresponding payments and manages the recovery of the amounts

related to detected errors resulting from the TOR control activity. Any delay in paying own resources gives rise to payment of interest by the Member State concerned.

VAT own resource - 12 % of Total OR

Contributions for the VAT own resources (VAT OR) are based on the value of supplies in a Member

State which are chargeable with VAT according to EU law (the harmonised VAT base). Member States provide the Commission with an annual statement showing how they have calculated their base and its

value.

As VAT OR data is only available annually and in arrears VAT own resource payments during any

particular year are based on forecasts (each month the Commission requests each Member State to

pay one twelfth of the budgeted forecast amounts). Adjustments are made in the year n+227 (and in future years if corrections to the data first supplied are necessary) to adapt payments to reflect the

actual VAT data.

Reasonable assurance concerning the accuracy and completeness of Member State data is provided by

an annual inspection programme in which BUDG checks that Member States' administrations have complied with OR regulations when calculating the value of their harmonised VAT base. Statement data

is analysed and verified in-house and during on-the-spot checks (assisted by ESTAT for the most statistically-reliant aspects of the calculation). Member States receive and react to reports of these

controls. BUDG monitors the receipt of VAT OR base data from Member States. It also monitors

proactively that amounts of own resources are paid promptly. Delay in paying own resources gives rise to payment of interest by the Member State concerned. Reservations are placed where Member States'

data cannot be accepted and lifted when the concern is overcome with any necessary corrective action concerning past payment being made.

GNI-based own resources – 72% of Total OR

GNI OR has a particular role to play as the balancing resource. Once the amount of agreed EU

expenditure that will be funded by the TOR and VAT OR is known then GNI contributions are fixed to fund the remainder within the ceiling of no more than 1.20 % of total EU GNI. Member States provide

the Commission with their GNI figures annually accompanied by a quality report and supplemented

after each five year verification cycle with a new inventory. As GNI own resources data is only available annually and in arrears the own resources payments during that year are based on the amounts

entered in the budget for the year concerned (i.e. each month the Commission - BUDG - requests each Member State to pay one twelfth of the budgeted forecast amounts). Adjustments are made in

subsequent years28 by BUDG to adapt payments to reflect the GNI data. BUDG monitors proactively that GNI own resource contributions are paid promptly. Any delay in paying own resources gives rise to

payment of interest by the Member State concerned.

The arrangements for the collection and verification of GNI own resources are governed by a

Memorandum of Understanding (MOU) agreed between ESTAT and BUDG. The data provided by

Member States is analysed and verified by ESTAT which also makes on-the-spot checks (Member States may choose to participate in these controls). Member States receive and react to reports of

these controls and oversee their treatment in the GNI Committee. To prevent possible time-barring, reservations are placed where Member States' data are considered unacceptable. Reservations are a

protective measure. A reservation should not be assumed to imply that a MS's contribution to the Union's budget has necessarily been affected. Reservations are lifted when the concern is overcome

and any necessary corrective action concerning past payments is made.

During 2013, the MOU was expanded to include a new annex setting out the good practice to be

observed when setting (GNI) reservations.

Reasonable assurance on the accuracy and completeness of Member State data is provided by the opinion of the GNI Committee, and the results of ESTAT's verification activities29 to which Member

States contribute by taking part in controls in other Member States. The annual opinion of the GNI committee is a key element of assurance since it refers to the appropriateness of using the GNI data

provided by Member States for own resources purposes and it means the acceptance of the data by all the Member States together with the Commission.

27 In June of the second year following the financial year – from the new ORD 2014. 28 Same modalities as for the VAT-based own resource. 29 See ICT on Verification of GNI data by ESTAT in annexe 5.


Coverage of the Internal Control Objectives and their related main indicators

Control effectiveness as regards legality and regularity

BUDG has set up internal control processes aimed to ensure the adequate management of the risks

relating to the legality and regularity of the data provided by Member States. As outlined above, separately for each of the resources, the control objective is to ensure that the DG has reasonable

assurance that amounts of OR collected during the reporting year are in conformity with the applicable regulatory provisions.

The internal control objective related to the management and processing of the incoming revenues by BUDG itself has been fixed at 1 %. For details see Annex 4 Materiality criteria.

Indicators of control performance for Own Resources are described in the corresponding Internal Control Template in Annex 5 throughout four stages: MS statements and collection of resources,

verification of TOR collected and VAT-base OR calculated by Member States/ Calculation of GNI

contributions, follow-up of verification results and UK correction calculation. Control results in terms of legality and regularity are described under the following sections:

A – MS statements and collection of resources

During 2016, 100 % of national contributions and amounts reported in Traditional Own Resource, A-

statements were dully collected and made available on time. Any deviation noted for other own resources were promptly followed. In addition 253 requests for accounting action and 715 accounting

documents were generated30.

At the end of the year there were five open TOR infringement files. There were no new procedures

initiated during 2016 and one case was closed with respect to the six open procedures in 2015. In addition, five TOR Commission infringement decisions were taken in 2016.

BUDG has set a reservation on TOR amounts collected in view of the final report of OLAF's investigation (OF/2014/1274/B1) of 1/3/2017, which not only confirms the conclusions arising from BUDG controls in

terms of the lack of appropriate measures in the UK to prevent the systematic undervaluation of textiles

and footwear from P.R. China imported into the EU, but moreover estimates the loss of Traditional Own Resources at EUR 1.9874 billion (gross) between 2013 and 2016. For further details see section 2.1.5.

B – Verification of TOR collected and VAT-base OR calculated by Member States/

Calculation of GNI contributions

Traditional Own Resources

For TOR, Member States are responsible for operating an appropriate administrative framework by

which they collect customs duties and sugar levies to finance the EU budget. The indicators refer to the

annual inspection programme which covers various customs regimes, control methods, plus the procedures for accounting, recovering and making available of TOR. The programme varies from year

to year and is based on risk analysis. The focus of the inspections is identifying and testing the adequacy of the key procedures and systems in each Member State that ensure correct and timely

collection of TOR and its being made available to the Commission.

During 2016 the annual inspection programme was implemented at 90.5 % since two inspections of

the 2016 programme had to be cancelled31. A total of 19 inspection reports were produced and sent to the corresponding Member States respecting in 89.5 % of the cases the legal deadlines. All anomalies

identified during the inspections are closely followed up by BUDG in collaboration with the Member

States. The partial implementation of the 2016 inspection programme does not have any implications on the assurance building, because the MS concerned will be inspected the following year. This is usual

practice as not all MS can be inspected in a given year and a risk-based approach is applied.

30 Global figures representing all accounting activities for all the kind of own resources (TOR, VAT and GNI). 31 The inspections of Lithuania and Luxembourg had to be cancelled for service reasons.


Inspections and controls conducted by BUDG have detected significant weaknesses in HMRC's

management and control of undervalued imports of textiles and footwear in the traditional own resources. In particular the inspection carried out in the UK from 14 to 18 November 2016 concluded

that customs debts amounting to GBP 357.1 million (gross) concerning undervalued imports had been wrongly cancelled. The follow up to this inspection is currently ongoing (see section 2.1.5.for further

details).

For the 2016 reporting year, the financial impact of these ineffective controls at on is estimated at EUR

517.4 million (net). Although this represents 0.4% on total Own Resources, it amounts to 2.5% of TOR. This explains the need for a qualification of the assurance and the immediate actions undertaken

by BUDG for the protection of the EU budget.

In addition, 251 write-off reports from Member States were assessed, involving an amount of EUR 87.5 million, in co-operation with the legal service, TAXUD and OLAF within the legal six month deadline in

100 % of the reports.

The last ECA’s annual report on financial year 2015 concluded that the examined systems were overall

effective for TOR. In addition, no errors were found in the transactions tested. The key internal controls in Member States visited by ECA however were assessed as partially effective.

The Customs Audit Guide, defined by the Commission services was distributed to all Member States to strive for a more uniform approach to audit for the purposes of customs controls and to promote

recognised audit controls. A new version of the guide was issued during 2014 which sets up indicators

for the post clearance audits and has the objective to improve controls carried out by Member States. In on-the-spot inspections the use of the guide or national instructions implementing the guide by the

Member States is systematically checked.

VAT- based Own Resource

All Member States are obliged to administer a value added tax system. The own resources legislation requires Member States to provide an annual statement detailing the calculation of their harmonised

VAT. BUDG monitors the timely receipt of these annual statements and checks their completeness and coherence with previous years, primarily by a programme of inspections. The indicators chosen show

whether inspections were carried out on time and if Member States' statements didn't became time

barred so it is guaranteed that complete and accurate information is recorded in the VAT OR database.

During 2016, 12 out of 13 inspections of the agreed inspection programme were implemented as

planned32. The results of inspections also show that 100 % of statements have been subject to verification prior to becoming time-barred. The partial implementation of the 2016 inspection

programme does not have any implications on the assurance building, because the inspection programme of 2017 includes the MS concerned. Furthermore, it is usual practice not to inspect all MS

in a given year but to do so by inspecting several financial years before time-barring. A risk-based approach is used when deciding on a year's work programme.

GNI

BUDG draws its assurance concerning the accuracy and completeness of GNI data for own resource purposes from the verification work undertaken by ESTAT33 together with MS. This inter-relationship is

governed by the MOU agreed between ESTAT and BUDG, supplemented by the scrutiny of data by all Member States in the GNI Committee.

Where this process raises concerns and ESTAT wishes to prevent a particular year becoming time-barred then it requests BUDG to set or lift reservations on its behalf. The indicators chosen for GNI

(see stage follow-up of verification results) show the timeliness with which BUDG notifies Member States of changes in their reservation position.

The results show that the activity to notify reservations was carried out promptly, since 100% of the

45 notifications were sent within the deadlines.

Assurance is also obtained from the annual opinion of the GNI committee since it represents the

acceptance of GNI data by both Member States and Commission. Following its examination during the year the GNI Committee, at its 33rd meeting on 18-19 October 2016 concluded that, in its opinion, the

GNI data transmitted through the GNP/GNI Questionnaire 2016 are appropriate for use for own resource purposes with respect to reliability, comparability and exhaustiveness, in accordance with

32 One inspection was postponed to the 2017 work programme owing to staff mobility. 33 See ICT on Verification of GNI data by ESTAT in annexe 5.


article 5(2)(b) of the GNI Regulation.

During 2016 the main focus of ESTAT control activity was the start of the verification cycle for the new GNI inventories. To add to this, the cooperation between all parties involved allowed lifting GNI

reservations covering the years until 2009 for all Member States but Greece. The existence of one specific GNI reservation for Greece provides assurance that revisions to that item for the period 2002-

2009 will still be taken into account for own resources purposes, contrary to the normal rule that GNI data becomes time-barred after 4 years. Moreover, the risk of occurring major revisions to the Greek

GNI data for the period 2002-2009 is now significantly lower, as at the end of 2015 there were eight different reservations for specific items of Greece's GNI data for the period 2002-2009 together with a

general reservation covering the years 2008 and 2009, while at the end of 2016 there was only one

specific GNI reservation.

The latest ECA’s annual report on financial year 2015 concluded that the examined systems were

effective for GNI and VAT-based own resources. The ECA found no errors in the transactions tested in these two OR categories.

C – Follow-up of verification results

Recovery orders both for principal and belated interest totalling EUR 75 million were issued in 2016 on TOR, out of which 61.14 % was already paid in 2016. The recovery rate for 2016 is expected to

increase further as many recovery orders issued in the second semester of 2016 are likely to be paid in later years. The average recovery rate since 2009 of ROs issued following inspection work is

89.89 %34. The recovery rate on global TOR35 is 99.95 %.

The proportion of VAT reservations set by the Commission and in place for more than 5 years is 11 %,

which is considered a reasonable percentage. A third of these reservations are related to on-going infringement cases.

In addition, 100 % of VAT and TOR inspection reports have been presented at the first available ACOR meeting for information and review.

The annex included since April 2013 in the MOU between ESTAT and BUDG concerning the good practice when using GNI reservations, guarantees that criteria for placing specific reservations is clear

and aims to reduce significantly the number of general reservations.

D- UK correction calculation

Calculation of UK correction was made on time. With regard to the update of the 2013 correction, the

update included also the correction of input data identified in the 2015 calculation. The strengthened procedures on checking the inputs were followed.

Globally, for all Own resources, the most recent ECA’s opinion (ECA’s annual report for financial year 2015) concluded that revenue collected is not affected by a material level of error and that control

systems are effective for VAT and GNI and overall effective for TOR. Nevertheless, in view of the already mentioned BUDG investigations and the recent OLAF report on the undervaluation of textiles

and footwear imported in the UK, there are doubts on the accuracy of the traditional own resources (TOR) amounts transferred to the EU budget by the UK since 2013. This AAR is therefore qualified by a

reservation (see section 2.1.5.).

The EU’s own resources managed by BUDG do not fall in the scope of the average recovery / error rate

best estimate due to its particular nature. Reasonable assurance on the adequate functioning of

systems and controls in this area is built on other elements as described in this section 2.1.1.A.

34 Total amounts recovered up to the end of 2016 out of the recovery orders issued since 2009. 35 The global TOR includes the monthly payments made by the MS and the payments made following our inspections.


Cost-effectiveness and efficiency Based on an assessment of the most relevant key indicators and control results, BUDG has assessed

the cost-effectiveness and the efficiency of the control system and reached a positive conclusion.

The principle of efficiency concerns the best relationship between resources employed and results

achieved. The principle of economy requires that the resources used by the institution in the pursuit of its activities shall be made available in due time, in appropriate quantity and quality and at the best

price.

BUDG has quantified the costs of the resources and inputs required to carry out the relevant controls on OR for the four stages described above. Benefits of those controls have also been identified. When

possible they have been quantified. In some other cases benefits have been expressed through the corresponding relevant non-quantifiable indicator as indicated in the OR Internal Control Template in

annex 5.

Results show that controls performed have ensured the timely and dully collection of Own resources

during the year. The total cost of controls performed in all the stages described in Annex 5 represent 0.27 % of Own resources collected in 2016 (EUR 133 523 395 642).

The cost of controls carried out to verify the amounts collected represent 0.01 % of TOR collected (EUR

18 730 353 938) and 0.006 % of VAT-based OR collected (EUR 18 086 962 720). These amounts collected during financial year 2015 have been verified by ECA in their most recent annual report.. The

costs of controls are considered to remain steady and can thus be also applied to calculate cost-effectiveness on this year’s TOR and VAT-based OR collection (EUR 20 094 118 220 and EUR 15 895

098 431)

The controls performed in the area of Own Resources, which represent a low amount on the resources

verified, have allowed to comply with the legality and regularity control objective as detailed in the previous section, i.e. 90.5 % and 92 % of TOR and VAT inspection programmes respectively have been

implemented as expected, 89.5 % of TOR inspection reports have been sent on time, 100 % of VAT

statements have been inspected before they become time barred, 100 % of GNI notifications have been sent within the legal deadlines and the UK correction was made on time. 100 % of GNI

reservation changes (setting, variation of lifting) were communicated to Member States in their national language within four working-weeks. It can also be concluded that compliant and timely

management of GNI reservations has been achieved with a reasonable cost.

As detailed above, verification of GNI data is carried out by ESTAT and therefore other indicators on

the verification of GNI data are reported in ESTAT AAR and in annex 5 of this report36.

The cost of controls in place related for the follow-up of results of the verification stage represents

0.002 % of TOR and VAT-base resources collected in 2016 (EUR 35 989 216 651). These include

administrative, legal or financial deficiencies detected in Member States local systems, submission of TOR and VAT inspection reports to ACOR meetings, initiation of infringement procedures and

management of VAT reservations.

In particular, the costs of controls to guarantee the recovery of TOR amounts due to the EU budget

derived from irregularities detected by controls represent 3.89 % of the amounts paid in 2016 (EUR 45 729 million37).

Furthermore it can also be concluded 2016 BUDG inspections detected significant weaknesses in HMRC's management and control of undervalued imports of textiles and footwear in the traditional own

resources. In particular the inspection carried out in the UK from 14 to 18 November 2016 which

concluded that customs debts amounting to GBP 357.1 million (gross) concerning undervalued imports had been wrongly cancelled, this is being currently addressed, for further details see sections 2.1.1.A.

and 2.1.5. The costs of controls in place to mitigate the risk of errors when calculating the UK correction represent 0.07 % of the amount calculated and paid.

36 See ICT on Verification of GNI data by ESTAT in annexe 5. 37 This figure relates to all payments received in 2016 following recovery orders issued as of 2009.


In addition, there are a number of relevant non-quantifiable benefits resulting from controls carried out. These are the following:

Timely and comprehensive collection of Own Resources and the compliance with relevant regulatory provisions and internal rules has been ensured;

Improvements on MS Internal control systems have been identified and best practices have been shared amongst Member States during ACOR meetings (i.e. Common audit tools have been

provided); Controls continue to have a deterrent effect;

Transparency of the control activity has been delivered and Member States have been reassured

that they have all been measured against agreed standards and received equal treatment when controls have been performed;

Commission fulfilment of its obligation under regulation 1553/89; Assurance gained concerning the correct and compliant distribution of Member States share of GNI;

VAT and GNI data used for calculations don’t become time-barred in case corrective action should be applied.

BUDG considers that the necessity of these controls, even if benefits cannot be quantified, is

undeniable since Own Resources area would be at risk in case they would not be in place. The non-

quantifiable (n.q) benefits of controls are identified in the corresponding ICT in Annex 5 for each stage.

Taken together, these provide a reasonable assurance for 2016 that the OR contributions made by

Member States comply with the requirements of the Union's own resources legislation and control systems on own resources are effective, albeit qualified by a reservation on the accuracy of the

traditional own resources (TOR) amounts transferred to the EU budget by the UK since 2013. Please refer to sections 2.1.1.A. and 2.1.5. for further details.

The conclusion of the evaluation of costs and benefits of controls performed in BUDG and of the indicators used to measure their efficiency as indicated the ICT’s in Annex 5, is that controls performed

in BUDG during 2016 have been cost-effective as the estimated benefits exceeded the estimated costs

and the cost of controls compared to the funds managed are at a reasonable level. Also the results of controls show the efficiency of those since they served to mitigate the risks to which they address.

B) Earmarked revenues for the use of Financial Information

Systems by External Entities38

The intrinsic risk for earmarked revenues for the use of Financial information systems managed by

BUDG (ABAC and BadgeBud) by the External Entities is considered low because of the limited revenues (EUR 3 085 213). Since this activity is much less significant than the other two, described in sections

2.1.1.A. and 2.1.1.C., neither an internal control template nor indicators are presented for this area.

However, it is presented in this section for completeness purposes.

The risks related to these earmarked revenues are effectively mitigated by means of ex ante

verifications in the recovery order process covering 100 % of the transactions. In addition, all related procedures, as well as how the fees are calculated are laid down in detail in the Service Level

Agreement for the provision of services in relation to the implementation of the ABAC System signed between the External Entity and BUDG.

The risk analysis concerning these processes has shown that the risks are very low thanks to the applicable procedures/circuits and the relatively low number of transactions. Moreover, the risk of non-

payment is mitigated by the possibility to recover the amounts due by offsetting.

The internal control objective related to the incoming revenues by BUDG itself has been fixed at 1 %. For details see Annex 4.

38 External Entities: general term used to indicate EU Institutions, Committees, Regulatory Agencies, Joint Undertakings or Executive Agencies.


C) Procurement and administrative expenditure

The intrinsic risk for administrative expenditure managed by BUDG including procurement is considered relatively low because of the limited budget as well as the centralised and direct mode of budget

implementation. The Internal Control Template for Procurement and Administrative expenditure in annex 5 demonstrates how the control systems in place in the DG addresses the risks related to this

type of expenditure.

The risks related to public procurement are effectively mitigated by means of independent ex ante

verifications covering 100 % of transactions. In addition, all related procedures are documented in detail and up to date in the BUDG Financial Vademecum. Tender documents have been approved by

the Financial Cell of BUDG before they have been published. Tenders have been evaluated by

evaluation committees, as foreseen by the Financial Regulation. The absence of conflicts of interest of the evaluators has been ensured.

The total amount of 2016 credits appropriations39 represents EUR 14 995 857. The execution rate of these appropriations for 2016 is 89.72 % which represents EUR 13 454 883. The remaining

appropriations will be executed in 2017.

The authorized payment appropriations40, including the amounts carried over from 2015, represent

21 175 185. Payments made during the financial year amount to EUR 12 405 397, which represents an execution rate of 58.60 %.

During 2016, one negotiated procedure has been launched under article 134(1)(b) RAP concerning

SWIFT - Security Excellence Programme amounting EUR 38.000.

In addition, 1 open procedure was organised during 2016, the Inter-institutional procedure for

provision of on- and off-site information technology assistance for financial management systems. This procedure was cancelled in order to enable the comprehensive evaluation of concordant criticism

expressed by a number of potential tenderers concerning the selection criteria related to one specific profile. The procedure was then re-launched for a total amount of EUR 171 300 000 and was

structured in three lots.

At the end of the year, 1.21 % of the maximum value of the framework contract granted for 4 years

had been used.

The internal control for the signature and execution of specific contracts include ex-ante controls on 100 % of transactions. These consist in cross-checks by a member of the financial cell different than

the one who carries out the financial initiation, before being passed to the financial verifying agent. Before the payments are completed, the timely execution of contracts is checked and a financial

verification is performed by the Financial Cell of BUDG. All errors detected are corrected or reported. In addition, a risk-based ex-post revision, due to the very low residual risk of executed financial

transactions, is also carried out on financial transactions twice per year by the accountant correspondent in BUDG.

The analysis of the risks concerning both processes in 2016 has shown that these are very low thanks

to the strong procedures in place, the relatively low number of transactions and the nature of the financial circuit.

The internal control objective for the error rate related to the budget executed by BUDG has been fixed at 2 %. For details see Annex 4.

39 This amount includes the contributions from Agencies and other Institutions as well as the co-delegated lines but not the reserves (budget line

40). 40 This amount includes the payments made from the co-delegated lines but not the reserves (budget line 40).


Coverage of the Internal Control Objectives and their related main indicators

Control effectiveness as regards legality and regularity

BUDG has set up internal control processes aimed to ensure the adequate management of the risks relating to the legality and regularity of the underlying transactions as well as the nature of the

payments concerned.

The objective is to ensure that the DG has reasonable assurance that the total amount of any financial

operation authorized during the reporting year which would not be in conformity with the applicable contractual or regulatory provisions does not exceed 2 % of the total expenditure.

During 2016 a total of 765 payments41 amounting EUR 12 405 397 million were made, 98.82 % of

them on time, with an average payment deadline of 16 days.

Ex-ante controls are performed on 100% of payments, in order to detect and correct any procedural

errors with or without financial impact. This has allowed payments to be free of financial material error, as also confirmed by ex-post controls (see next paragraph). The majority of errors detected were of a

procedural nature and they were corrected before the payment was made. This confirms the strong deterrence effect that ex-ante controls have on financial transactions.

Ex-post controls were performed on a value targeted sample of 37 transactions out of 765 for a value of EUR 1 543 080 representing 15.2 % of BUDG's administrative expenditure in 201642 (EUR 10 130

710 million). No financial errors were detected. Other non-financial errors were found representing

0.05 % of the value of the transactions checked.

Over the past years the implementation of these ex-ante and ex-post controls has not resulted in any

ex-post financial correction/recovery order. This is due to the fact that no financial error has been detected and administrative errors were corrected before payments were made. These results are

expected to continue, having as a result no estimated future financial corrections.

The results of the accounting quality revisions carried out in 2016 have been satisfactory since none of

these controls unveiled material errors with financial or non-financial impact on compliance. In relation to procurement procedures completed in 2016, no relevant incidents have occurred or been detected

(except the cancellation of one procedure as indicated above under section 2.1.1.C.) and there is

reasonable assurance that compliance has been achieved with the relevant regulation and internal rules.

BUDG also reviews the reporting of exceptions and non-compliance events, defined as control overrides or deviations from policies and procedures, and the results of the ex post controls and

supervisory activities.

During 2016, a total of three exception reports derived from non-compliance events have been

communicated to the Internal Control Coordinator representing a potential total value of EUR 160 351. Nevertheless no financial impact on the EU budget was suffered; all costs were deemed eligible and

therefore no amount was unduly spent. Moreover the issues have been addressed immediately and

mitigating controls have been put in place so they do not occur in the future.

The reports concerned:

1. an exception to the principle of annuality (Art. 9 FR) which allowed PMO to proceed to the reimbursement of experts on the 2016 Budget even though the provisional commitment had a final

date of 31/12/2015. The cause of the non-compliance was the omission of sending the file to PMO. The BUDG Financial Cell procedures have been updated in order to avoid this from happening in the

future.

2. an exception to the principle of non-retro-activity (Art. 130(1) FR) whereby an action was executed

prior to the signature of the contract. The exception was requested to sign the grant agreement

with start date for the action on the 15 March 2016 even if the submission of the grant application was only formally received on the 31 March 2016. This event had no impact on the performance of

the contract since all aspects of the proposal had been agreed prior to the commencement of any activities. In order to avoid this from happening in the future BUDG will advance the sending of

invitations for proposals.

3. the late signature of the order for a mission which was urgently done to ensure the signature of

41 This amount includes the payments made from the co-delegated lines but not the reserves (budget line 40). 42 As posted in the accounts at the moment of the accounting closure.


Framework Contracts to minimize the side effect of the "stand still" period. Taking into account that

the mission was correctly carried out an exception was requested and approved in order to pay the expenses incurred. The colleague concerned was reminded of the procedure and of the importance

of obtaining a prior authorisation before incurring any expenditure.

Furthermore a total of two non-compliance events have been communicated to the Internal Control

Coordinator representing a potential total value of EUR 960 893. Nevertheless no financial impact on the EU budget was suffered as all costs were deemed eligible and therefore no amount was unduly

spent. Moreover the issues have been addressed immediately and mitigating controls have been put in place so they do not occur in the future.

The reports concerned:

1. the acceptance by the operational unit in charge of external contractor deliverables before the specific contracts were counter-signed by the Authorising Officer by sub delegation (AOSD). The

probability of changes in the final contract was extremely low. In addition commitments had been already validated by the AOSD. In order to prevent such a situation in the future, the contractor

shall send the signed contracts back to the operational unit rather than to BUDG Financial Cell and will be given a maximum delay (10 days) to do so. This way the operational unit will be able to

better monitor if the contract has effectively been signed by all parties before the deliverables are accepted. A note has been addressed by BUDG Financial Cell to all operational units to raise

awareness on this matter.

2. a specific contract number was granted to another DG to sign a contract thereby exceeding of the framework contract ceiling amount. This was due to the lack of update of the encoded contracts

already signed by other DGs in ABAC Contracts caused by turnover of staff in BUDG Financial Cell. The consumption of the ceiling amount is monitored via ABAC contract and also via an Excel table

as ABAC doesn't include all external entities. In order to reinforce the controls in the future, a warning message has been included in the Excel table when the ceiling amount of the framework

contract reaches 80 %. Moreover, the attention of the colleagues of BUDG Financial Cell has been drawn on the need to put the team leader in copy of all outgoing e-mails by which specific contract

numbers are granted.

No other internal control weaknesses have been identified during 2016.

In conclusion, the analysis of the available control results, the assessment of the weaknesses

identified and that of their relative impact on legality and regularity has not unveiled any significant weakness which could have a material impact as regards the legality and

regularity of the financial operations and it is possible to conclude that the control objective as regards legality and regularity has been achieved.

In the context of the protection of the EU budget, the Commission consolidates the DGs' estimated overall amounts at risk and their estimated future corrections and publishes the corporate estimate in

the Annual Management and Performance Report.

Ex-post controls (performed on 15.2 %) of BUDG's administrative expenditure resulted in no financial errors detected. Over the past years the implementation of ex-ante and ex-post

controls has not resulted in any financial correction/recovery order after payment. This is due to the fact that no financial error has been detected and administrative errors were corrected

before payments were made. These results are expected to continue, having as a result no estimated future financial corrections (0.0%). See table below

Yet, in order to avoid any potential underestimation, BUDG calculates the ECA's Material Level of Error for the Commission's administrative expenditure (0.5%) as a conservative estimate in

order to allow the consolidation of data when determining the amount at risk at payment at

Commission level. This percentage corresponds to an estimated overall amount at risk at payment43 for 2016 of EUR 62 027. This is the AOD's best, conservative estimation of the amount of relevant

expenditure44 during the year (EUR 12 405 397) not in conformity with the applicable contractual and regulatory provisions at the time the payment is made.

For BUDG, the estimated overall amount at risk at closure equals the estimated overall amount at risk at payment since there is no expectation of any future financial correction.

43 In order to calculate the weighted average error rate (AER) for the total relevant expenditure in the reporting year, the detected, estimated or

other equivalent error rates have been used. 44 "relevant expenditure" during the year = payments made, minus new pre-financing paid out, plus previous pre-financing cleared


Estimated overall amount at risk at closure

DG

BUDG

"payments

made" (FY;

m€)

minus newa

prefinancing

[plus

retentions

madeb] (in FY;

m€)

plus cleared

prefinancing [minus

retentions (partially)

released and

deductions of

expenditure made by

MS]

(in FY; m€)

= "relevant

expenditure"d

(for the FY;

m€)

Average

Error Rate

(weighted

AER; %)

estimated

overall

amount at

risk at

payment (FY;

€)

Average Recoveries and

Corrections (adjusted

ARC; %)

estimated

future

corrections

[and

deductions]

(for FY; €)

estimated

overall

amount at

risk at

closure (€)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Budget

line

as per AAR

annex 3,

table 2

as per ABAC

DWH BO report

on prefinancing

as per ABAC DWH BO

report on prefinancing

= (2) – (3) +

(4)

Detected error

rates, or

equivalent

estimates

= (5) x (6) based on 7Y-avg historic

ARC (as per ABAC DWH

BO report on corrective

capacity)f: (1.9 %), but to

be adjusted to the best but

conservative estimate for

the current MFF

= (5) x (8) = (7) – (9)

12 405 397 0 0 12 405 397 0.5% 62 027 0 % 0 62 027

(8) the ARC includes ROs on OR which do not fall under the scope of the estimated overall amount at risk exercise, therefore the adjusted recovery rate for BUDG is 0%


Efficiency and Cost-effectiveness

Based on an assessment of the most relevant key indicators and control results, BUDG has assessed the cost-effectiveness and the efficiency of the control system and reached a positive conclusion.

The principle of efficiency concerns the best relationship between resources employed and results

achieved. The principle of economy requires that the resources used by the institution in the pursuit of its activities shall be made available in due time, in appropriate quantity and quality and at the best price.

BUDG has made an estimation of the costs of the three main control processes on Procurement and administrative expenditure: Procurement, financial transactions and ex-post supervisory measures.

Benefits of those controls have also been identified. When possible they have been quantified. In some other cases benefits have been expressed through the corresponding relevant non-quantifiable indicator.

The criteria for the calculation and the indicators used to assess the efficiency of controls are shown in the internal control templates in annex 5.

The costs of ex-ante controls performed by the DG on the verification of financial transactions represent

3.87 % of payments made in 2016. Cost of controls of ex-post verifications represent 0.16 % of payments made in 2016.

The controls performed in this area are considered reasonable and have allowed complying with the legality and regularity control objective as detailed in the previous section, i.e. 98.82 % of payments

made on time, time to pay far below the maximum allowed of 30 days (16.17 days for 2016) and no relevant deficiencies detected by ex-post controls.

Controls in place during the procurement stage ensured that the granting of the open procedures during 2016 was made in compliance with regulation and internal rules.

In addition, it should be highlighted that there are a number of non-quantifiable benefits resulting from

the controls operated during the implementation of BUDG Administrative expenditure. These benefits are mainly to ensure compliance with relevant regulatory provisions and internal rules, to have a strong

deterrence effect, to improve existing procedures and avoid possible litigations.

BUDG considers that the need of these controls is undeniable, as the totality of the procurements granted

and appropriations would be at risk in case they would not be in place. The non-quantifiable (n.q) benefits of controls are identified in the corresponding ICT in Annex 5 for each stage.

The conclusion of the evaluation of costs and benefits of controls performed for the management of the budget appropriations and of the indicators used to measure their efficiency, as indicated the ICT in Annex

5, is that controls performed in BUDG during 2016 have been cost-effective as the estimated benefits

exceeded the estimated costs and the cost of controls compared to the funds managed are considered reasonable. Also the results of controls show the efficiency of those since they served to comply with the

deadlines and mitigate the risks that they address.

Fraud prevention and detection

BUDG has developed and implemented its own anti-fraud strategy since December 2013, elaborated on

the basis of the methodology provided by OLAF. It has been last updated in October 2015. The strategy covers the inherent risks derived from the main activities of BUDG: Collection and control of Own

resources and management of administrative expenditure and the mitigating measures currently in place. In this context a number of actions were defined and implemented during 2016 which aimed to achieve

the strategy objectives45:

Publication of the correct replies to the questionnaire in BUDGWEB (Published last 29 January

2016) and in the "Fight against Fraud" page of the Intranet. Flag as sensitive those tasks managing procurement procedures in BUDG (during 2016).

Continued with the organisation of Ethics information sessions per Unit during 2016.

No case of fraud concerning BUDG has been brought to my attention.

The controls aimed at preventing and detecting fraud are not essentially unlike those intended to ensure

the legality and regularity of the transactions. During the year 2013 and in the context of the Anti-Fraud strategy BUDG documented in a risk register the risks of fraud inherent to the activity of the DG. These

45 1- Raise awareness amongst the staff on the fight against fraud and ethics. 2- Improve the internal procedures for fraud prevention and detection purpose.

https://myintracomm.ec.europa.eu/dg/budg/NewsPortal/Pages/All-you-wanted-to-know-about-Fraud-Control-and-you-never-dared-to-ask.aspx


fraud risks are mitigated by the specific controls implemented. Activities and operations that are at a

higher risk of fraud are subjected to more in-depth monitoring and control. BUDG fraud risk register is integrated in the risk management exercise which is performed twice a year. The fraud risk register has

remained stable in comparison with 2016 and no new risks have been identified in 2017.

On 1/3/2017 OLAF concluded its investigation (OF/2014/1274/B1), opened on 16/01/2015, on the

undervaluation of textiles and footwear imported in the UK between 2013 and 2016 and issued a final report. On closing its investigation, OLAF addressed recommendations to Her Majesty's Revenue and

Customs, to the Crown Prosecution Service, and to the Commission (more detailed information can be found in sections 2.1.1.A. and 2.1.5)

Budget implementation tasks entrusted to other DGs and entities

This section reports and assesses the elements that support the assurance on the achievement of the

internal control objectives as regards the results of the DG’s supervisory controls on the budget

implementation tasks carried out by other Commission DGs and entrusted entities distinct from the Commission.

Cross-sub-delegations

BUDG has given crossed sub-delegations to COMM (coverage of bank charges incurred by the Imprest

Accounts of Representation Offices), ECHO (clearance of bank charges for accounts held by the offices of ECHO) for which assurance letters have been received. The AODs of those Commission services are

required to implement the appropriations subject to same rules, responsibilities and accountability arrangements.

Co-delegations

The Commission may delegate powers concerning a given budget line to one or more AODs. In other words, various AODs are responsible for the same item of expenditure, but each one for a specific type of

transaction.

For BUDG, this was the case in 2016 with DIGIT, with total commitments amounting to EUR 680 000.

Being a Commission services themselves, DIGIT is required to implement the appropriations subject to the same rules, responsibilities and accountability arrangements as BUDG

BUDG has given co-delegations to COMM (coverage of bank charges incurred by the Imprest Accounts of Representation Offices), ECHO (clearance of bank charges for accounts held by the offices of ECHO) and

DIGIT (maintenance and support of ABAC Assets, ABAC contracts and MUS/DICE – RAD) for which

assurance letters have been received. The AODs of these Commission services are required to implement the appropriations subject to same rules, responsibilities and accountability arrangements.

BUDG has received co-delegations from COMM (management and update of the MFF 2014-2020 website, Organization of BFOR Conference), DEVCO (developments on CRIS module in ABAC) and HR (delivery of

services related to Financial Training). Being a Commission service, the AOD is required to implement the appropriations subject to same rules, responsibilities and accountability arrangements.

It can therefore be concluded that reasonable assurance has been received/given from/to other Authorising Officers for crossed sub-delegation and co-delegations concerning the legality and regularity

of the financial operations including sound financial management of funds as no major issues were noted

which could have an impact on the declaration of assurance.

ESTAT – Verification of GNI data

The arrangements for verification of GNI for own resources purposes are governed by a Memorandum of Understanding (MOU) agreed between ESTAT and BUDG. The data provided by Member States are

analysed and verified by ESTAT which also makes on-the-spot checks (Member States may choose to

participate in these controls). Member States receive and react to reports of these controls and oversee their treatment in the GNI Committee. To prevent possible time-barring, reservations are placed where

Member States' data require further scrutiny. Reservations are a protective measure and should not be assumed to imply that a Member State's contribution to the Community budget has necessarily been

affected. Reservations are lifted when the concern is overcome and, where appropriate, any necessary corrective action concerning past payments is made.


In order to present the whole control activity performed on GNI data at Commission level, and purely for

information purposes, the Internal Control Template of controls performed by ESTAT has been included in Annex 5 together with the controls performed by BUDG.

Other control objectives: use of resources for their intended purpose, reliability of

reporting, safeguarding of assets and information

ABAC is a transversal, transactional information system allowing for the execution and monitoring of all

budgetary and accounting operations by the Commission and Agencies. The system has been developed by the Commission and includes a comprehensive set of features to ensure compliance with the Financial

Regulation and its rules of application. BUDG, as a horizontal DG, issues guidance to ensure the quality of

the information contained in the system and the reliability of reporting. An audit on "IT Governance in BUDG" was finalised in 2015 which had the objective to assess whether IT Governance in DG Budget

ensures optimal alignment between business and IT, sound management of resources and effective IT solutions. IAS has now informed BUDG that they assess that all the recommendations that resulted from

the above-mentioned audit have been adequately and effectively implemented. Consequently, all the recommendations will be closed. Furthermore, given the limited number of recommendations involved, no

formal report, as envisaged in the Mutual Expectations Paper, will be issued. Furthermore, as mentioned in section 2.1.2.C., the favourable assessment of the accounts and of BUDG's AAR by the ECA can also be

seen as an indication on the reliability of reporting.

BUDG is also in charge of the validation of the systems laid down by Authorising Officers to supply or justify accounting information; namely by verifying compliance with the validation criteria defined by the

Accounting Officer. The validation team evaluates the systems set up or modified by each of the 58 Directorate Generals, Agencies and other EU bodies covered over a multiannual cycle. This is intended to

provide assurance to the Accounting Officer as of their capacity to provide data to the central accounting system. A total of six FTEs were effectively to this activity in 2016.

BUDG is currently developing a revised risk-based control strategy aimed at simplifying and speeding the process up in the framework of improving efficiency, as well as reducing the administrative burden while

better achieving its goals. The new approach is to be rolled out in the second half of 2017.

In addition to the revision of the methodology and the development of the necessary tools to implement it, the main work carried out in 2016 was to evaluate the compliance with the validation criteria in DGs

RTD, FISMA and HR. The main findings and recommendations refer to data quality in invoice registration, documentation of procedures and controls and the consistency of data between local IT systems and

ABAC. In general, improvements were observed regarding the quality of data in ABAC contracts and the timeliness of payments.

The number of notifications for newly developed or modified local systems remains high, in line with previous years, as new modules are developed in order to complete the grant cycle and programme

closure processes. These applications promote increased automation and include embedded controls for

ensuring the respect of applicable regulations.

The amount of cash and cash equivalents (A.II.6) in table 4 of annex 3 (Balance sheet) concerns funds

that the Commission keeps at year end in its bank accounts with Member States' treasuries and central banks, as well as in commercial bank accounts.

Own resources contributions by Member States are the main source of EU finances and represent most of the Commission's cash balance. These are kept in the Commission's bank accounts held with Member

States' treasuries and central banks, are centrally managed by BUDG and used to execute payments. Cash balances are also kept in commercial bank accounts to the extent needed for the execution of

payments.

The main components of the cash balance at the end of 2016 are related to:

1. Amounts of own resources to be returned to Member States in early 2017 as result of amending

budgets adopted late in 2016

2. Payment appropriations and assigned revenue that were not executed by the end of the year

3. Competition fines definitively cashed in 2016


Regarding the contingent liabilities (OB.2.4) in annex 3 - table 5bis, this amount is considered correct46 and concerns fines imposed by the Commission for infringement of competition rules that have been

provisionally paid and where either an appeal has been lodged or where it is unknown if an appeal will be made. The contingent liability will be maintained until a decision by the Court of Justice on the case is

final.

Regarding the contingent liabilities (OB.2.6) in annex 3 - table 5bis, this amount is considered correct47

refers to contingent liabilities for custom duties. It includes two types of cases:

1. Infringement procedures where a letter of formal notice has been sent by the Commission to the

Member State claiming the debt. The contingency will be maintained till the Court of Justice issues

a sentence.

2. An early estimate of the potential impact of a Court judgment annulling anti-dumping duties on

footwear. There is the possibility that those duties would have to be reimbursed.

46 At the date of the report. 47 At the date of the report.


2.1.2. Audit observations and recommendations

This section reports and assesses the observations, opinions and conclusions reported by auditors in their reports as well as the limited conclusion of the Internal Auditor on the state of control, which could have a

material impact on the achievement of the internal control objectives, and therefore on assurance, together with any management measures taken in response to the audit recommendations.

A) Follow-up of IAS recommendations

As of December 2016 there were 20 recommendations for BUDG, out of which:

6 are considered implemented by the services and have been sent for review to IAS

6 have been closed by IAS

8 remain open out of which only 2 recommendations are delayed, the 6 other recommendations are due in 2017 or later and stem from the audits finalised in 2016

The detail of audits concerned is as follows:

AUDITS

N°

of issued recs

Recommendation status January – December 2016

Open Sent for

Review

Closed by IAS

Delayed (< 6

months)

Not due

yet

Charge-back process in the

Commission (multi-DGs) 2 2

Audit on validation of local systems by Unit C3

2 2

IAS Audit on IT Governance in DG BUDG

6 6

IAS audit on Management Plan and objective setting

1 1

Audit reports issued in 2016

IAS Audit on Design and

Implementation of EU Trust Funds 2 1 1 1

IAS audit on effectiveness of measures to handle manual interventions in ABAC

3 3 1 2

IAS Audit on the Performance of

anti-fraud activities in the OR,

customs and taxation areas

2 2 2

IAS Audit on the Management of Intra-muros contractors

1 1 1

IAS Audit on Procurement process in BUDG

1 1 1

TOTALS

20 8 2 9 2 6

No critical recommendations, which might give rise to a reservation in the AAR, were issued. The risks

derived from the open recommendations do not have an impact on the assurance for year 2016 as also confirmed by the IAS positive opinion on the functioning of BUDG audited internal control systems (see

section 2.1.3. below)


Detailed overview of audits finalised in 2016 & open recommendations

IAS audit on Design and Implementation of EU Trust Funds in DEVCO, NEAR and BUDG

The final report was issued on 29 January 2016 (Ares(2016)503448). The overall objective of this audit

was to assess the adequacy of the design and implementation of the Trust Funds' (TFs) governance

processes, their compliance with the legal provisions, and the efficiency and effectiveness of their internal control systems, including financial management and accounting aspects.

The audit focused on:

The design of the existing regulatory framework for TFs (Commission decisions, Constitutive

Agreement, Guidelines on EU TFs);The implementation of two TFs: TF "Bêkou" and TF "Madad"

The implementation of the ongoing projects financed via the TFs was not included in the scope of the audit.

IAS acknowledges the progress achieved so far in launching the implementation of several actions by the Trust Funds and the signature of the first grants and delegation agreements. The IAS concludes that there

are significant deficiencies in the design and implementation of the Trust Funds' governance processes and in operational performance management. In this context two very important issues have been

identified for DGs NEAR and DEVCO: the governance process and performance management.

Furthermore, three important recommendations have been issued, out which two concern BUDG:

1. Treasury and Financial management (Finding n° 3 - Important)

This recommendation was implemented before the finalisation of the audit report and has been sent for review to IAS.

2. Management costs (Finding n° 4 - Important)

The action plan for this recommendation has been established and was due by 15 September

2016. The finalisation draft of the instructions has proven a little more complicated than initially expected. A new draft is being prepared.

IAS Audit on Effectiveness of measures to handle manual interventions in ABAC (IAS.B1-2015-

BUDG-001)

The final audit report was issued on 6 April 2016 (Ares (2016)1641321). The overall objective of the audit was to provide re-assurance on the controls over Manual Interventions (MIs), specifically by reviewing

and assessing the effectiveness of BUDG's processes and procedures in the management of MIs in ABAC Accounting (ABAC-ACC) and ABAC Workflow (ABAC-WF). This audit aimed to complement the previous

work of the European Court of Auditors by testing the implementation of the new procedure for MIs and performing a more detailed substantive transaction testing.

The audit focused on the following aspects:

The ABAC-ACC and ABAC-WF systems. These are the two main central financial information

systems dealing with and consolidating information on payments, commitments, recovery orders,

invoices, etc. and therefore carry a higher risk related to MIs; The process for requesting and approving privileged user accounts with the necessary

authorisations to perform MIs; The process for requesting, performing and documenting MIs in production systems;

The process for reviewing the actual usage of privileged user accounts; The process for detecting and analysing recurrent MIs and for the identification of measures aimed

at reducing their frequency.

The IAS recognises the ongoing efforts of BUDG to strengthen the internal controls on operations

performed through MIs. In particular, the key risks of the audited processes have been identified by BUDG

and have been subject to continuous improvements by a competent and motivated staff. The IAS considers that the MI procedures, which were put in place following the ECA audit in 2013, have

contributed to a reduction of the inherent risks. This is the result of efforts made in the last eighteen months as part of a continuous improvement process.

The IAS concludes that despite these recent efforts significant weaknesses still exist as the controls in place do not yet fully and effectively mitigate the inherent risks typically associated with such manual


interventions. The IAS acknowledges that MIs offer a fast way of performing changes directly in the

production environment, but the current emphasis placed on speed to get things done in an efficient manner occurs at the expense of security. In this regard, the following three issues have been identified:

1. Extensive use of the Manual Intervention procedures (Finding No 1 – Very Important)

The action plan for this recommendation has been established and the five actions will be

implemented by 31/12/2017. While the open points will be implemented, the main risks have already been mitigated to a certain extent and therefore pose no impact on the assurance.

2. Too few controls over privileged user accounts (Finding No 2 – Very Important)

The action plan for this recommendation has been established and foresees an implementation by

30/06/2017; some parts of the action plan are already well advanced and are being implemented.

The analysis for the necessary IT development for the 3rd point of this recommendation is finalised and now timing for the implementation of this part will depend on the actual IT development.

Nevertheless this will not impact the assurance as the main risks are already being mitigated.

3. Lack of clear, formalised MI procedures (Finding No 3 –Important)

The action plan for this recommendation has been established and the action to review the MI procedure was foreseen to be implemented by 31/12/2016, it has been sent to the auditors for

review on 9 February 2017.

IAS Audit on the Management of Intra-muros contractors (IAS.B4-2015-Y COMM-004)

The final audit report was issued on 13 July 2016 (Ares(2016) 3376572). The overall objective of the

audit was to assess if the Commission uses the external contractors working intra-muros in an effective and efficient way. The audit covered the arrangements both at the corporate level aimed at facilitating the

management of intra-muros contractors by DGs and the way in which they are managed in practice at the individual DG level.

The audit covered the overall framework put in place by HR, responsible for coordinating the personnel and administrative policy of the Commission, as well as by BUDG, responsible for laying down the

procurement procedures and contract templates. The audit also focussed on DIGIT, given that a large number of intra muros contractors work in the IT domain.

The IAS recognised the efforts of the Commission to effectively manage intra-muros contactors to ensure

that it obtains value for money and to mitigate the risks associated with the use of these contractors. However, the IAS concluded that, in the absence of a corporate framework to provide steer and guidance

to DGs, the Commission was exposed to significant risks in ensuring an efficient and effective use of intra-muros contractors.

In this context, the following very important issues were identified for BUDG :

1. Lack of a corporate framework for the use of intra-muros contractors (Finding No 1 –

Very Important)

The action plan for this recommendation has been established by HR as the lead DG with BUDG

and DIGIT as contributors. The due date is 31/7/2018.

IAS Audit on Performance and Coordination of Anti-fraud activities in the Traditional Own Resources area (IAS.C3-2015-Y COMM-001)

The final audit report was issued on 5 December 2016 (Ares(2016)6785329). The overall objective of the audit engagement was to assess whether or not the anti-fraud activities in the area of TOR are planned,

managed and coordinated in an effective manner to ensure the best protection of the Commission's financial interests. The audit focused on the activities of OLAF, BUDG and TAXUD. The scope of this audit

engagement covered the Commission’s anti-fraud activities in the TOR area with a particular focus on

customs duties and cigarette smuggling48.

The audit covered:

48 Anti-fraud activities of the Commission on smuggling of cigarettes and other tobacco products involves a joint evasion of customs duties, VAT and

excise duties. However, excise duties on tobacco products are not part of the TOR of the EU, but represent national revenues of MS. For this reason they are not covered by the present audit.


The Commission Anti-Fraud Strategies (CAFS) and high level coordination and policy in the TOR area,

Anti-Fraud Strategies (AFS) of the main DGs involved in TOR-related activities, Operational activities in the audited DGs to address the fraud risks at each stage of the anti-fraud

cycle49, Communication and information within the framework of Commission governance and reporting such

as the annual risk assessment exercise, the AARs, Management Plans (MPs), etc.

The IAS recognises the ongoing efforts by the audited DGs and has identified the following strengths:

BUDG cooperation on annual inspections,

An IT Coordination Group TAXUD - OLAF on Customs matters ,

TAXUD prepares the Customs Union Performance (CUP) annual report, TAXUD's work on new developments in the area of customs controls,

OLAF has put in place Guidelines on Financial Monitoring.

The IAS acknowledges the steps taken by OLAF, BUDG and TAXUD to prevent and detect fraud in the Traditional Own Resources (TOR) domain, within the remit of their own individual responsibilities.

Nevertheless, the IAS concludes that significant weaknesses related to the planning, management and coordination of fraud prevention and detection activities in the TOR area still exist. The IAS observed that

despite the high risk of fraud in the TOR area, the focus of the CAFS and the individual AFSs is primarily

on prevention and detection in the expenditure area and less on TOR. In this respect, the support provided by OLAF to the DGs in the TOR area is less structured than in the expenditure area and there is

limited cooperation among services when defining their own AFS for TOR as well as when dealing with MSs.

In particular, the IAS identified the following two issues for BUDG:

1. Roles and responsibilities in the TOR area (Finding No 3 –Very Important)

OLAF, BUDG and TAXUD should review and formalise the different current practices for MS Committees and Working Groups. Each DG should ensure that all relevant risks and related actions

from other TOR DGs concerned receive appropriate attention in the respective meetings. DGs that

lead MS Committees involved in TOR should ensure that the other TOR DGs are defined as "Associate members" in the Commission Expert Group and Comitology Register. The action plan for

this recommendation has been established and the action will be implemented by 1/7/2017.

2. Performance Monitoring and reporting on Anti-Fraud Activities in the TOR area (Finding

No 4 – Important)

BUDG should improve the quality of the data recorded in OWNRES to facilitate their performance

review and reporting. The improvement of OWNRES should be done in consultation with the other TOR DGs and in the context of the revision of Commission Decision 97/24550 on OWNRES. The

action plan for this recommendation has been established and the four actions foreseen will be

implemented by 31/12/2017 for the first and 31/7/2018 for the remaining three.

IAS Audit on the Procurement Process in BUDG (IAS.B4-2016-Y COMM-004

The final audit report was issued on 21 December 2016 (Ares(2016)7096403). The objective of the audit

was to assess the adequacy of the design and the effective implementation of DG BUDG's internal control systems for the management of the procurement process and the effectiveness and efficiency of the

related financial circuits. This audit tested the key controls as well as management and monitoring controls throughout the procurement process, from the identification and planning of the needs until the

signature of the contract, including amendments and price revisions, if applicable. Based on the results of

our audit as described in the objectives and scope of the audit engagement, IAS believes that the internal control system in place provides reasonable assurance regarding its compliance with the

Financial Regulation and its Rules of Application as well as its efficient and effective management.

The auditors recognised the ongoing efforts made by BUDG to create a strong control environment. In

particular, the following elements can be identified as good practices:

49 The stages of the Anti-fraud cycle are : Prevention, Detection, Investigation, Sanctions and Recoveries. 50 Decision 97/245 is repealed and replaced by Commission Implementing Decisions 2016/2365 and 2016/2366.


The principle of segregation of duties and BUDG's financial circuit were followed in all cases examined.

The IAS did not find any case of non-compliance with sub-delegations. The process for reporting on exceptions and non-compliance events is well organised and documented.

The IAS audit issued one important recommendation because no audit trail could be established for

the following two cases: the review of ABAC access rights and the documentation of the exact scope of the ex-ante controls. The action plan for this recommendation has been established and approved by IAS

and the two actions will be implemented by 30/06/2017.

Detailed overview of recommendations sent for review

Audit on Charge-back process in the Commission

After a second follow-up, IAS concluded that the 2 recommendations should remain open: Governance of the Charge-back process

Central guidance and instructions

The draft guidance on the provision of services to other EU Institutions, Agencies and Bodies is applicable

as from 1st January 2017, therefore the two 2 recommendations with due dates 30/9/2016 have been reported as implemented and sent for review to IAS on 31/12/2016.

B) Internal Audit Service (IAS) Limited conclusion

Based on the work undertaken by the IAS for the period 2014-2016 on the audits detailed in section 2.2.1

and taking in account that:

for the accepted recommendations made by the IAS in 2014-2016 management has adopted plans

to implement them which the IAS considers adequate to address the residual risks identified by the

auditors,

the implementation of these plans is monitored through reports by management and through

follow-up audits by the IAS,

management has assessed a number of action plans not yet followed up by the IAS as implemented, and

management has not rejected any critical and/or very important recommendation.

The IAS concludes that the internal control systems audited are overall working satisfactorily although a

number of very important findings remain to be addressed in line with the agreed action plans as listed above.

C) ECA audits

ECA's Annual Report

The ECA maintained the green light on the reliability of the accounts and furthermore no very

important recommendations were raised. In its Annual Report 2015 the ECA concluded that the Annual accounts of the European Union:

were reliable for the 9th consecutive year

were not affected by material misstatement

ECA also concluded that that revenue of the EU is not affected by a material level of error in

2015 as:

no errors in the transactions tested were found

the examined systems were assessed as effective for GNI and VAT-based own resources and other revenue

the examined systems were assessed as overall effective for TOR and the key internal controls in MS visited were assessed as partially effective

The ECA reviewed BUDG's 2015 AAR and gave a favourable conclusion. ECA concluded that the 2015 AARs of BUDG and EUROSTAT provide a fair assessment of financial management in relation to the

legality and regularity of underlying transactions concerning own resources and other revenue and the information provided corroborates ECA's observations and conclusions.


The 2015 Annual report also shows the result of the progress in addressing recommendations made in

previous annual reports.

Follow-up of ECA recommendations

As of 31 December 2016 there were 12 recommendations for BUDG51, regarding the following audits:

Annual report concerning the financial year 2015 (2 recs):

1) Reduce outstanding commitments by, for example, quicker decommitment, where appropriate, faster closure of the 2007-2013 programmes, where appropriate, wider use of net correction in

cohesion, reducing cash held by fiduciaries and the compilation of payment plans and forecasts in those areas where outstanding commitments and other obligations are significant (31/12/2019)

2) Ensure that MS correctly declare and make available the amounts collected from the B accounts

(31/12/2017)

Immediate actions have been undertaken by BUDG in this area, via the existing inspection cycle

and the additional checks of amounts made available in the B accounts. Nevertheless, the final report of OLAF's investigation (OF/2014/1274/B1) of 1/3/2017 has confirmed the findings of

BUDG own resources controls regarding the lack of appropriate measures in the UK to prevent the systematic undervaluation of textiles and footwear from P.R. China imported into the EU.

A reservation on the accuracy of Own Resources amounts collected by the UK since 2013 has

therefore been set in this AAR (see section 2.1.5) and actions have been taken to protect the EU

budget through the recovery of amounts due.. Furthermore, in line with the action plan submitted in the context of the IAS' audit on the Performance of anti-fraud activities in the OR, customs and

taxation areas, DG BUDG will work together with OLAF and TAXUD to strengthen the co-operation among the services and to achieve a more efficient risk-based approach of TOR control systems

aimed at fraud prevention and detection (see section 2.1.1.A above).

SPECIAL REPORT No 02 - 2016 "2014 report on the follow-up of the European Court of Auditors’ Special Reports"(3 recs for BUDG, one reported as implemented)

In light of the shortcomings identified in the Commission’s current follow-up system (ECA recommendations' follow-up), and the Commission’s previous acknowledgment of the need for

improvements (SR 19/2013 - 13), we recommend that the Commission should carry out the necessary improvements to its systems in order to bring its practices into line with the relevant internal control

standards.

Recommendations: 1) Explaining and/or documenting the status of actions taken on the recommendations;

2) Reviewing recommendations assessed as partially implemented by the Court to reflect their actual

status. 3) Report more fully in the Annual Activity Reports or elsewhere on the actions taken in addressing

recommendations - Reported as partially implemented

SPECIAL REPORT No 17 2016 "The EU institutions can do more to facilitate access to their public procurement" (3 recs for BUDG)

ECA overall conclusion was that the management and control arrangements of the EU Institutions are

robust and in general mitigate the risk of errors, which could otherwise adversely affect the possibility

for economic operators to participate and their fair treatment. Nine recommendations, of which six are also addressed to the other EU Institutions, were made to more systematically monitor the level of

participation, foster competition on the broadest possible basis and increase the visibility of procurement opportunities. One recommendation to amend the Financial Regulation to allow for a

rapid review of complaints from economic operators was rejected, the Commission considering that the Financial Regulation already provides for the necessary arrangements.

51 As encoded in the RAD database.


Recommendations:

1) EU institutions should collect and analyse data, procedure by procedure (31/12/2020)

2) Commission should propose a single rulebook for public procurement (31/12/2017) 3) EU institutions should use peer reviews (31/12/2018)

SPECIAL REPORT No 19 2016 "Implementing the EU budget through financial instruments

— lessons to be learnt from the 2007-2013 programme period"(1 rec for BUDG)

In its report concerning financial instruments under the Cohesion policy ECA notes that improvements

were made in the legal framework for the 2014-2020 programme period as regards financial instruments (FIs) based on the expertise gained during the 2007-2013 programme period, but certain

issues remain. The overall conclusion of the Court was that a significant number of FIs were oversized and continued to face significant problems to disburse their capital endowments. Overall, they

remained unsuccessful in attracting private capital and only a limited number of ERDF and ESF FIs have been successful in providing revolving financial support. For ERDF and ESF FIs, the Court has

found that management costs and fees were overly high as compared to the actual financial support to final recipients and to those in centrally managed FIs.

Recommendation:

1) Define the general risk‑sharing principles which may have an impact on the EU budget, for centrally

managed financial instruments, in the legislation governing the instrument concerned (31/12/2020)

SPECIAL REPORT No 27 2016 "Governance at the European Commission — best practice"(3

recs for BUDG, one of them partially implemented)

ECA concluded that the actual governance arrangements, largely based on the recommendations of the "Wise Men" and the "White Paper of Reform" from 2000, were appropriate at the time of their

implementation, but did not reflect any longer the current best practices in some areas, such as the composition and coverage of the Audit Progress Committee, the scope of IAS audits, the timing of the

presentation of the EU accounts and the type of information published alongside these accounts. In this context, the Commission will continue to publish a 'suite' of reports in the form of the 'Integrated

Financial Reporting Package'. The information presented in this package is as exhaustive as that

provided by the benchmark entities selected by the ECA and the Commission does not consider adequate to issue a single accountability report.

Recommendations:

1) Bring forward publication date of Annual Accounts (16/7/2018)

2) Publish as part of the annual accounts or accompanying information an estimate of the level of error based on a consistent methodology (April 2018)

3) Complete the process of aligning its internal control framework with the COSO 2013 principles-

reported as partially implemented

2.1.3. Assessment of the effectiveness of the internal control systems

The Commission has adopted a set of internal control standards, based on international good practice, aimed to ensure the achievement of policy and operational objectives. In addition, as regards financial

management, compliance with these standards is a compulsory requirement.

BUDG has put in place the organizational structure and the internal control systems suited to the

achievement of the policy and control objectives, in accordance with the standards and having due regard to the risks associated with the environment in which it operates.


Internal Control Assessment (ICAT Exercise) - Results 2016

In February 2017 BUDG carried out the annual assessment of the effective implementation of the Internal Control Standards of the Commission in the DG.

The overall participation rate for "2016 exercise" has been of 42 % which is considered weak and

represents a serious decrease compared to last year (79 %). The ICAT exercise resulted in an overall positive assessment rate of 80 % which is lower than in 2015 (84.5 %) but above the 75 % benchmark

rate established (same as last year).

The low overall participation rate as well as the individual results of some of the ICS which are below the

benchmark can be explained by a lack of understanding of the internal control concept in general as well as by the need to raise awareness and apply a top-down approach as was done for the Planning

documents. The benefits of this approach is well reflected in the overall scores of ICS 1 (90 %) – Mission , ICS 5 (83 %) - Objectives and Performance indicators as well as the ICS 3 (87 %) – Ethical and

organisational value. These three areas were targeted in the last years by top-down communications and

targeted awareness raising actions.

The following ICS scored slightly below the benchmark of 75 %, by staff and management:

ICS 8 – Processes and procedures (73.89 % instead of 83.33 %) in particular the processes and procedures posted on our intranet are not all up to date and some need more clarifications

ICS 11 (71.25 % instead of 75.57 %) –Document management, in particular the use of ARES.

ICS 15 (72.73 %) – Assessment of Internal control system, the level did increase compared to last

year (70.83 %) but is still perceived as a bureaucratic burden.

It should be noted that staff and management had very incomparable results; management had an

overall assessment of 81.5 % while staff had 79.84 %. Only one ICS was rated below the benchmark by management. As last year this was the case for ICS 12 – Information and communication, regarding the

use of the DGs scoreboard (66.67 %).

As a result of this year's exercise and taking the opportunity of the review of the Internal Control

Framework which is due to be adopted in Spring 2017, the following actions will be suggested for 2017 :

Awareness raising on the new Internal Control Framework in general and ICS assessment in particular

Targeted actions on specific issues, such as the updating of the procedures and processes

Adapt the DGs scoreboard by renewing the indicators, in accordance with the indicators that will be set as a result of the new Internal control framework.

Monitoring of the scoreboard will be done quarterly instead of monthly and reporting to Management will only be done twice per year (midterm review + year-end)

Conclusion

The functioning of the internal control systems has been closely monitored throughout the year by the

systematic registration of exceptions (ICS 8) and internal control weaknesses (ICS 12). The underlying causes behind these exceptions and weaknesses have been analysed and corrective and alternative

mitigating controls have been implemented when necessary. Furthermore no financial impact on the EU

budget was suffered due to the fact that all costs were deemed eligible and therefore no amount was unduly spent.

Further enhancing the effectiveness of the DG's control arrangements in place, by inter alia taking into account any control weaknesses reported and exceptions recorded, is an on-going effort in line with the

principle of continuous improvement of management procedures.

Concerning the overall state of the internal control system, generally the DG complies with the three

assessment criteria for effectiveness; i.e. (a) staff having the required knowledge and skills, (b) systems and procedures designed and implemented to manage the key risks effectively, and (c) no instances of

ineffective controls that have exposed the DG to its key risks.

BUDG has assessed the internal control systems during the reporting year and has concluded that the internal control standards are implemented and functioning as intended. Nevertheless further

improvements are needed for standards 8, 11, 12 and 15, the remedial measures implemented or envisaged are:


Awareness raising on the new Internal Control Framework in general and ICS assessment in particular

Targeted actions on specific issues, such as the updating of the procedures and processes

Adapt the DGs scoreboard by renewing the indicators, in accordance with the indicators that will be set

as a result of the new Internal control framework.

Monitoring of the scoreboard will be done quarterly instead of monthly and reporting to Management

will only be done twice per year (midterm review + year-end)

Considering that these improvements are not so impactful it can be concluded that the low scoring on

certain standards does not undermine the assurance.


2.1.4. Conclusions as regards assurance

This section reviews the assessment of the elements reported above (Sections 2.1.1., 2.1.2., 2.1.3. and 2.1.4.) and draws conclusions supporting the declaration of assurance and whether it should be qualified

with reservations.

The information provided in the various preceding sections covers all budget delegated to the AOD of

BUDG as well as the EU's own resources. The information reported is complete and reliable, as confirmed by the statement of the Internal Control Coordinator in annex 1.

In the area of Own Resources, the key indicators presented in section 2.1.1.A. Own Resources support the

reasonable assurance drawn that Member States comply with the relevant regulations for TOR, VAT and GNI own resources when discharging their responsibilities albeit qualified by a reservation on the accuracy

of the traditional own resources (TOR) amounts transferred to the EU budget by the UK since 2013.

The intrinsic risk for administrative expenditure managed by BUDG including procurement is relatively low

because of the limited budget as well as the centralised and direct mode of budget implementation. The risks are effectively mitigated by means of controls put in place.

Further assurance is obtained by the risk management process put in place, by the limited number and significance of exception and non-compliance reports issued in 2016, as well as that they did not have any

financial impact on the EU budget due to the fact that all costs were deemed eligible and therefore no

amount was unduly spent.

Results from audits during the reporting year give an overall positive feedback and did not include any

critical findings. The residual risks from audit recommendations remaining open from previous years are not considered to have a bearing on the declaration of assurance (see section 2.1.2.).

Management has obtained satisfactory evidence that the internal control system in general is implemented effectively in BUDG.

Assurance letters have been received for cross sub-delegations and co-delegations given to other DGs.

In view of the control results and all other relevant information available, the AOD's best estimation of the

risks relating to the legality and regularity for the administrative expenditure authorised during the

reporting year (EUR 12 405 397 million) is below 0.5 % which implies an amount at risk below EUR 62 027.

Overall Conclusion

In conclusion, management has reasonable assurance that, overall, suitable controls are in place and

working as intended; risks are being appropriately monitored and mitigated; and necessary improvements and reinforcements are being implemented. The Director-General, in her capacity as AOD has signed the

Declaration of Assurance albeit qualified by a reservation on the accuracy of the traditional own resources (TOR) amounts transferred to the EU budget by the UK since 2013.


2.1.5. Declaration of Assurance and Reservation

Declaration of Assurance

I, the undersigned,

Director-General of BUDG

In my capacity as authorising officer by delegation

Declare that the information contained in this report gives a true and fair view52.

State that I have reasonable assurance that the resources assigned to the activities described in this

report have been used for their intended purpose and in accordance with the principles of sound financial

management, and that the control procedures put in place give the necessary guarantees concerning the

legality and regularity of the underlying transactions.

This reasonable assurance is based on my own judgement and on the information at my disposal, such as

the results of the self-assessment, ex-post controls, the limited conclusion of the Internal Auditor on the

state of control and the lessons learnt from the reports of the Court of Auditors for years prior to the year of

this declaration.

Confirm that I am not aware of anything not reported here which could harm the interests of the

institution.

However the following reservation should be noted: Inaccuracy of the traditional own resources (TOR)

amounts transferred to the EU budget by the UK since 2013.

Brussels, 3 April 2017

Nadia Calviño

"signed"

52 True and fair in this context means a reliable, complete and correct view on the state of affairs in the DG.


Reservation

DG BUDG

Title of the reservation,

including its scope

Inaccuracy of the traditional own resources (TOR) amounts transferred to the

EU budget by the UK since 2013

Possible losses of EU customs duties between 2013 and 2016 are estimated at EUR

1.9874 billion (gross). Further losses may have occurred in 2017.

Domain

Direct centralized management. According to Article 8 of Council Decision of 26 May 2014 on the system of own resources of the European Union, the responsibility for

collecting and making available TOR falls on Member States.

On behalf of the Commission, DG Budget's role is to seek reasonable assurance that

traditional own resources are collected and made available to the EU budget in

conformity with EU law. It does so by carrying out on-the-spot TOR inspections and documentary checks and also by following on findings from investigations and audits

conducted by the European Court of Auditors and OLAF namely when the actions taken autonomously by Member States does not protect satisfactorily the EU financial

interests.

Programme and amount affected

(="scope")

The revenue part of the budget is concerned. Directly, the scope is limited to the TOR. Chapter 12, article 1.2.0 Customs duties and

other duties referred to in Article 2(1)(a) of Decision 2014/335/EU, Euratom.

The amounts concerned are the following:

Year Traditional Own Resources

EUR millions (net)

2013 15 365.3

2014 16 429.5

2015 18 730.4

2016 20 094.1

Total 2013 - 2016 70 619.3

Indirectly, given the lower TOR revenues, also the correctness of the GNI-related

resources is affected.

Reason for the reservation

OLAF has concluded its investigation (OF/2014/1274/B1), opened on 16/01/2015, on the undervaluation of textiles and footwear imported in the UK and issued a final report

together with recommendations to the UK, to DG TAXUD and to DG BUDG. The OLAF

final report and the recommendations to DG BUDG were received on 3 March 2017.

OLAF concludes that the UK has failed to apply, even after repeated warnings and

requests to that effect by OLAF, the appropriate measures to prevent systematically undervalued imports of textiles and footwear from P.R. China from entering the EU

through the UK, resulting in a calculated loss of EUR 1.9874 billion (gross) of traditional own resources (customs duties) to the EU budget between 2013 and 2016. Indirectly,

"by consequence", also the VAT-basis in the destination Member States as well as the correctness of the GNI-related resources are affected.

OLAF recommended to Her Majesty's Revenue and Customs (HMRC) that it takes all appropriate measures to recover the customs duties evaded and to DG BUDG that it

ensures their recovery to the EU budget and assesses the compliance by the UK with its obligations under the own resources legislation with regard to the protection of the

financial interest of the EU with a view to instituting infringement proceedings in relation to the facts set out in OLAF's final report.


DG BUDG's controls also confirmed significant weaknesses in HMRC's management and

control of undervalued imports of textiles and footwear in the traditional own resources

inspection carried out in the UK from 14 to 18 November 2016. The inspection concluded that the UK had wrongly cancelled customs debts amounting to GBP 357.1

million (gross) concerning undervalued imports. (This is already being addressed in the follow-up of DG BUDG's Report 16-11-1 on the inspection carried out in the UK from 14

to 18 November 2016 – see below).

Materiality criterion/criteria

The seriousness of the weakness, ineffective or inexistent controls to detect and stop the undervaluation fraud, which was uncovered by a report of the

European Anti-Fraud Office and by DG BUDG traditional own resources inspections;

The duration of the fraud which concerns four years, from 2013 to 2016, and

which is still ongoing according to the OLAF report; The amounts at stake are quantified below. For the 2016 reporting year, the financial impact of these

ineffective controls at on is estimated at EUR 517.4 million (net). Although this represents 0.4% on total Own Resources, it amounts to 2.5% of Traditional

Own Resources. This explains the need for a qualification of the assurance and the immediate actions undertaken by BUDG for the protection of the EU budget.

Indirectly, given the lower TOR revenues, also the correctness of the GNI-related resources is affected.

Quantification of the impact

(= actual

exposure")

According to OLAF, the UK should have made available an estimated amount of EUR

1.9874 billion (gross), or EUR 1.5736 billion (net), more of traditional own resources

than it did from 2013 to 2016 (the customs duties potentially evaded from 2017 have yet to be assessed). The quantification of the possible loss (in net terms, after the

deduction of collection costs) compared to the total own resources and traditional own resources actually made available by the EU-28 during the same period can be found

below:

Years

Possible traditional own resources losses in EUR millions

(net)

Own Resources made available

by EU-28 EUR mill

Traditional Own

Resources (net) made available by

EU-28 EUR mill

Possible Loss in % of Own

Resources made

available by EU-28

Possible Loss in %

of Traditional

Own Resources

made available by EU-28

2013 243.9 139 743.6 15 365.3 0.2% 1.6%

2014 384.1 132 961.3 16 429.5 0.3% 2.1%

2015 428.2 137 334.7 18 730.4 0.3% 2.1%

2016 517.4 132 174.3 20 094.1 0.4% 2.5%

Total 1 573.6 542 213.9 70 619.3 0.3% 2.1%

In compliance with Article 12 of Regulation No 609/2014, interest for late-payment

may also be due. If this is confirmed, the interest will be calculated and requested when the relevant dates are known.

Impact on the

assurance

As a result of the fraud and the serious control and management weaknesses

uncovered by the OLAF report and also by DG BUDG traditional own resources UK

inspections regarding the importation of undervalued textiles and footwear from P.R. China through the UK, it is estimated that EUR 1.9874 billion (gross) of traditional own

resources may not have been made available to the EU budget during four years.

Although the responsibility for collecting and making available TOR falls on Member

States, the management of the system of own resources is a direct competence of the Commission.


The effectiveness of the UK's national control systems was and is likely to remain

partial at least until the UK puts in place effective measures to address the problem.

Therefore, and in view of the financial impact, a reservation is considered necessary.

Responsibility for the weakness

The possible losses for the EU budget are due to the failure of the UK to act and in particular to implement the EU-wide risk profiles defined by OLAF to identify

undervalued imports of textiles and footwear and carry out appropriate customs controls. The OLAF report indicates that OLAF has repeatedly informed the UK about

the extent of the fraud and requested the UK to take measures to tackle it, to no effect. DG BUDG has also asked the UK for explanations in this domain and the UK was

aware that DG BUDG was monitoring its action in this context.

In accordance with Article 8 of the Council Decision of 26 May 2014 on the system of

own resources of the European Union and with Article 2(2) of Regulation No 608/2014,

Member States are responsible for collecting the Union's own resources and for taking all measures that are necessary to ensure that the own resources are made available

to the Commission.

As a consequence, the UK will be held responsible for any traditional own resources

possibly lost and will be requested to make them available to the EU budget.

Responsibility for

the corrective

action

Corrective actions to be taken by the UK

Member States are responsible for collecting and making available timely and in full

the traditional own resources to the EU. They are also required to put in place effective management and risk-based control systems to that effect. So the UK must take the

necessary action to overcome the failures identified and make available to the EU

budget any TOR lost, including interest due for belated payment if applicable. To that effect, OLAF has sent to the UK several recommendations. The UK is now responsible

for giving them an appropriate follow-up. OLAF will monitor the progress made regarding its recommendations.

OLAF requested to be informed by the UK of the actions taken to recover evaded customs duties (from the customs debtors) as a result of these recommendations as

soon as possible and in any event no later than 12 months.

However, for what regards the UK's obligations towards the EU budget, it should take

action to reassure the Commission that all amounts due to the EU budget are made

available without delay.

If the UK fails to take appropriate and timely action and cannot prove that all amounts due to the EU budget were made available, the Commission will consider launching a

formal infringement procedure under article 258 of TFEU.

Follow-up action by the Commission

DG BUDG has been monitoring additional debt establishments made by the UK in connection with possible undervaluation of imports of textiles and footwear since 2014.

As the UK authorities did not provide clear and satisfactory answers regarding the

cancellation of those debts, these were inspected in DG BUDG's inspection 16-11-1 of 14 to 18 November 2016 in the UK.

This inspection confirmed weaknesses in the management and control systems of the UK and this is being addressed in the follow-up of the inspection 16-11-1 with a view

protect the EU financial interest and ensure the recovery of any possible TOR losses to the EU budget. DG BUDG inspection report was sent to the UK authorities on 15

February 2017.

Once it received OLAF report OF/2014/1274/B1 and the associated recommendations,

DG BUDG took swift action to require the UK to inform DG BUDG of the actions taken

to protect the EU financial interest and provide reassurance that the UK's obligations towards the EU budget for what concerns the making available of the traditional own

resources at stake, including since the beginning of 2017, have been met in full. If that


would not be the case, DG BUDG will take appropriate follow-up action as further

specified below.

The follow-up of the potential TOR losses identified in DG BUDG's inspection 16-11-1 of 14 to 18 November 2016 in the UK is already underway. It is part of the 'open

points' on TOR with the UK – completing the implementation of the ECA's 2012 Recommendation to "strengthen customs supervision in order to maximise the amount

of TOR collected". DG BUDG will continue to address the undervaluation issue in the follow-up of its 2016 UK inspection and also in the inspections planned for the UK in

2017.

After OLAF completed all necessary investigative activities the UK authorities were

invited on 24 March 2017, by letter of the Director-General of DG BUDG, to inform the Commission of any measures taken to prevent the under-evaluation fraud, in

particular through the use of risk profiles. If no such measures have been taken, the

UK authorities were requested to take action without delay and to submit to the Commission the elements necessary to determine the amount of customs duties that

may have not been collected and the amount of own resources that, by consequence, may have not been made available to the EU budget.

In the absence of information to the contrary, the Commission will be obliged to call on the UK to make available an amount in traditional own resources corresponding to the

losses identified by OLAF. The Commission will also assess the UK authorities' potential financial liability for continued losses of traditional own resources due to

undervaluation of textiles and footwear from the beginning of 2017. Further follow-up,

including, where appropriate, the legal action envisaged by the Treaties, will be decided in the light of the UK's response to the Commission's letter.

Furthermore, in line with the action plan submitted in the context of the IAS' audit on the anti-fraud strategy for TOR, DG BUDG will work together with OLAF and TAXUD to

strengthen the co-operation among the services and to achieve a more efficient risk-based approach of TOR control systems aimed at fraud prevention and detection.


2.2 Other organisational management dimensions53

2.2.1. Human resource management

During 2016, BUDG was not affected by massive retirements or loss of competencies; its human

resources situation remained quite stable.

The major challenge for BUDG in 2016 in terms of Human Resource Management has been to achieve further staff reductions without endangering the achievement of the key objectives and maintaining at the

same time the level of engagement and motivation of staff. With this aim, BUDG continued to scrutinize

the allocation of human resources to the identified priorities by analysing the profile of each post which became vacant.

Even though the full implementation of two major synergies and efficiencies initiatives within the

Commission: the full roll-out of the OIB Proximity Team for logistics and the HR Modernisation will take place in 2017, in 2016 BUDG already participated as a pilot DG for the OIB centralisation and signalled its

intention to take part in second wave of the HR Modernisation starting February 2017. Furthermore four Middle Managers took part in the 2016 Inter-DG Mobility Exercise.

Furthermore BUDG focused in 2016 on the following main areas:

1. Further staff reductions required additional efforts to seek efficiency gains wherever possible. To this purpose, building further on the Efficiency Gains exercise realised in 2012, a Business Process

Analysis (BPA) exercise took place in 2016 with the aim at identifying better ways of working or negative priorities. In 2016 Directorates A and B were analysed and work started on the analysis of

Direction C; this process will continue in 2017.

2. The necessary flexibility in terms of HR allocation was provided so that BUDG could achieve its

objectives by building bridges between units/directorates to respond quickly to extra workload. Flexibility in this context was ensured by enhancing the "working together" traineeships and taking

more advantage of their potential.

3. The target set for the Representation of women in middle management positions for BUDG is 35 % by 2019, with a representation of 26,9% in 2016, which is in an increase of 3 % since 2015,

BUDG will continue its actions to provide high potential women with the best guidance.

4. In response to the 2014 Staff Survey the following activities continued :

A 360° evaluation exercise for the managers was launched in 2015 and continued in 2016. Results

were analysed together with a coach and a personalised follow-up was offered to all interested managers.

Working breakfasts of the Director-General with different groups of interest.

Individual talks with all managers, ADs and ASTs.

Personalisation of the training offer for BUDG staff, namely the organisation of internal lunchtime conferences on subjects of interest, grouping several units.

5. While addressing the results of the 2016 Staff Survey: five areas of interest were identified and

discussed with Management: logistics, health and private/work balance, career and mobility, learning

and development and the attention given to the results of the staff survey. A series of actions will be put in place as of 2017 involving training, more visibility to internal vacancies, discussions with staff

and communication on the actions taken following the survey.

53 Detailed information of all indicators can be found in annex 2. Reporting – Human Resources, Information Management and External Communication


2.2.2. Information management aspects

Document management

All incoming and outgoing documents are registered and filed in Nomcom files. Procedures are in place to

follow up on the correct and timely attribution and filing. 97 % of BUDG files are readable by all units; the other 3 % have a more restrictive nature and are only accessible by the stakeholders.

On the basis of a screening of the existing files by the responsible units in 2016 we will decide on opening the visibility to Commission level of approx. 10 % of our files in 2017. From 2018 on, the "Commission file

reader" will be proposed by default for the creation of new files. All files have a retention code metadata to ensure the correct follow up in terms of archiving and accessibility at the long term.

Training and awareness campaigns have been organised on document management and the use of Ares, Decide and Basis throughout the year.

Internal communication

Internal communication focused on reinforcing staff's commitment to the Commission’s political priorities

and the mission of BUDG. Interactive communication between staff and management to enhance mutual understanding was supported through various means: regular Management Meetings videos,

regular all-staff meetings and informal meetings of different staff groups with the DG. These channels,

combined with ad-hoc and regular directorate or unit level meetings kept staff informed of any upcoming issues or challenges the Commission, or BUDG in particular, were facing.

BUDGnet concentrated on relevant information for BUDG staff. The increased ownership of communication activities was promoted through the renewed BUDGnet network of correspondents across

the DG. Thanks to this, BUDGnet continued to engage colleagues through regular quotes, weekend tips and spotlight videos, as well as covering outside work events (exhibitions, charitable auctions, etc.) taking

place.

BUDG Connected platform was set up and the first working groups have been established. This pilot

phase helped to create a small pool of experienced colleagues who have formed a core group which

promotes further use of the platform through individual and group trainings.

2.2.3. External communication activities

2016 saw a growing need to stress the value added of the EU budget, this required showing practical

results in an efficient and convincing manner by employing new communication tools and channels. In line with the highest international standards for transparency and accountability, the European

Commission, for the first time, reported on the EU budget in an integrated package including four reports with detailed information on revenue, expenditure, management and performance. Accompanied

by variety of communication materials this reporting package helped both to increase the understanding

on how the EU budget works as well as to promote the results achieved by targeted investments in priority areas.

Consultations with the public and stakeholders on the proposals for revision of the Financial Regulation and the Midterm Review/Revision of the MFF 2014-2020 gave visibility to the EU budget and

promoted its understanding. The "EU Results" project website demonstrated concrete results in EU Member States and third countries that were achieved thanks to EU budget. The existence of this public

database has brought positive effects since European citizens can identify with concrete achievements in their immediate environment.

Web-based interactive communications and increased use of visuals especially on social media prevailed

over traditional paper-based publications. Apart from high quality complete information for experts and interested stakeholders simplified information material was made available online to explain the

complexities of the EU budget and its impact on the daily life of European citizens.

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