The Court of Auditors of the European Communities this week adopted its annual report concerning the financial year 2007. The Court identified the need for improvements in supervisory and control systems and recommends the simplification of regulations. The European Court of Auditors is the European Union institution established by the EC Treaty to carry out the audit of EU finances. As the EU's external auditor it contributes to improving EU financial management and acts as the independent guardian of the financial interests of the citizens of the EU. The annual activity report, covering the 2007 financial year, comprises the Court's 31st annual report on the implementation of the general budget of the EU. The replies of the Commission (or other EU institutions and bodies, where appropriate) are presented with the report. A separate annual report covers the European Development Funds. The general budget of the EU is decided annually by the Council and the European Parliament. The Court's annual report provides a basis for the discharge procedure that brings the annual budgetary process to an end. A central part of this report is the Court's Statement of Assurance on the reliability of the annual accounts of the European Communities and on the legality and regularity of the underlying transactions. The Court of Auditors informs the citizens of the results of its work, in an objective manner, through the publication of its reports and opinions. The Court of Auditors publishes: â€¢ an annual report concerning the implementation of the European Union budget for each financial year and an annual report on the activities funded by the sixth, seventh, eighth and ninth European Development Funds (EDFs); â€¢ special reports on subjects of particular interest â€¢ specific annual reports concerning European Union bodies. The Court of Auditors must be consulted for its opinion prior to the adoption of legislation with a financial impact, including combating fraud. The other EU institutions may also ask the Court for its formal opinion on specific matters. For the first time since the introduction of the accruals-based accounting rules, the Court provides an unqualified opinion on the consolidated accounts. It states that the 2007 annual accounts of the European Communities give a fair presentation, in all material respects, of the financial position of the European Communities and the results of their operations and cash flows. The Court gave an opinion on the legality and regularity in certain areas, such as the EU's administration. However, for most spending areas the Court cannot provide a clear opinion. Although most of the payments that the Court checks are made in compliance with the rules, the Court still finds that payments made to final beneficiaries, such as farmers and project promoters running EU-funded projects, have a too high level of error that does not comply with the rules. In agriculture and natural resources (â‚¬51 billion) the estimated overall error rate is still material. Rural development, with its often complex rules, accounts for a disproportionately large part of this error rate. For European Agricultural Guarantee Fund (EAGF) expenditure the Court estimates the value of the error rate to be slightly below materiality. The estimated error rates in some spending, notably that previously covered under the headings "internal policies" and "external actions" have fallen, but not enough to affect the overall picture. The Commission has, since 2000, been working on a reform program to improve the management of the EU budget, including an action plan launched in 2006. For 2007, the Court has identified further progress in the Commission's supervisory and control systems, in particular in the area of monitoring and reporting. By the end of the year the Commission had implemented two-thirds of the sub-actions in the action plan. It is too early to assess their impact. Improved high-level controls, such as Commission supervision of Member State controls, cannot compensate for inadequate lower-level controls, including on-the-spot checks. The benefits of increasing the number of the latter have to be balanced against the costs. The Court encourages the political authorities of the Union to conclude their analysis of what would be a tolerable level of risk of error. The Court calls for due consideration to be given to simplification; for example, in rural development and research. Well-designed rules that are clear to interpret and simple to apply decrease the risk of error. The Commission's Accounting Officer introduced a series of measures to consolidate the transition to modernized accruals-based accounts. A pilot study that was launched in July 2006 on the quality of accounting data has been completed. As a result, the Commission's Accounting Officer finalized a series of measures that were disseminated to all Directorates-General in March 2007. Their purpose is to improve the accounting control environment at the level of individual Directorates-General. They include the development of an accounting-risk analysis, the deployment of risk-based accounting review exercises, the elaboration of specific accounting manuals and the documentation of yearend accounting closure files. The project applies for the first time to the annual accounts of 2007. These measures have been said to contribute to strengthening of the financial reporting framework and accounting systems. However, certain weaknesses still exist that put at risk the quality of accounting data. Furthermore, it was noted in the report that the guidelines on the accounting control environment, issued by the Commission's Accounting Officer, were not fully applied by a limited number of operational Directorates-General for the calculation. firstname.lastname@example.org Ari Syrquin is head of the international department at GSCB Law Firm.