# Official Journal C 344/2012

| | ISSN 1977-091X
  doi:10.3000/1977091X.C_2012.344.eng |
| --- | --- |
| Official Journal
  of the European Union | C 344 |
| | |
| English edition | Information and Notices | Volume 5512 November 2012 |

ISSN 1977-091X

doi:10.3000/1977091X.C_2012.344.eng

Official Journal

of the European Union

C 344

English edition

Information and Notices

Volume 5512 November 2012

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| Notice No | Contents | page |
| --- | --- | --- |
| | IV   Notices |
| | NOTICES FROM EUROPEAN UNION INSTITUTIONS, BODIES, OFFICES AND AGENCIES |
| | Court of Auditors |
| 2012/C 344/01 | Annual Report of the Court of Auditors on the implementation of the budget concerning the financial year 2011, together with the institutions’ replies | 1 |
| 2012/C 344/02 | Annual Report of the Court of Auditors on the activities funded by the 8th, 9th and 10th European Development Funds (EDFs) concerning the financial year 2011, together with the Commission's replies | 243 |

Notice No

Contents

page

IV   Notices

NOTICES FROM EUROPEAN UNION INSTITUTIONS, BODIES, OFFICES AND AGENCIES

Court of Auditors

2012/C 344/01

Annual Report of the Court of Auditors on the implementation of the budget concerning the financial year 2011, together with the institutions’ replies

1

2012/C 344/02

Annual Report of the Court of Auditors on the activities funded by the 8th, 9th and 10th European Development Funds (EDFs) concerning the financial year 2011, together with the Commission's replies

243

| EN | |
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EN

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IV Notices

NOTICES FROM EUROPEAN UNION INSTITUTIONS, BODIES, OFFICES AND AGENCIES

Court of Auditors

| 12.11.2012 | EN | Official Journal of the European Union | C 344/1 |
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12.11.2012

EN

Official Journal of the European Union

C 344/1

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In accordance with the provisions of Article 287(1) and (4) of the TFEU and Articles 129 and 143 of Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities, as last amended by Regulation (EU, Euratom) No 1081/2010 of the European Parliament and of the Council, and Articles 139 and 156 of Council Regulation (EC) No 215/2008 of 18 February 2008 on the Financial Regulation applicable to the 10th European Development Fund

the Court of Auditors of the European Union, at its meeting of 6 September 2012, adopted its

ANNUAL REPORTS

concerning the financial year 2011.

The reports, together with the institutions' replies to the Court's observations, were transmitted to the authorities responsible for giving discharge and to the other institutions.

The Members of the Court of Auditors are:

Vítor Manuel da SILVA CALDEIRA (President), David BOSTOCK, Ioannis SARMAS, Igors LUDBORŽS, Jan KINŠT, Kersti KALJULAID, Karel PINXTEN, Ovidiu ISPIR, Nadejda SANDOLOVA, Michel CRETIN, Harald NOACK, Henri GRETHEN, Szabolcs FAZAKAS, Louis GALEA, Ladislav BALKO, Augustyn KUBIK, Milan Martin CVIKL, Rasa BUDBERGYTĖ, Lazaros S. LAZAROU, Gijs DE VRIES, Harald WÖGERBAUER, Hans Gustaf WESSBERG, Henrik OTBO, Pietro RUSSO, Ville ITÄLÄ, Kevin CARDIFF, Baudilio TOMÉ MUGURUZA.

ANNUAL REPORT ON THE IMPLEMENTATION OF THE BUDGET

2012/C 344/01

TABLE OF CONTENTS

General introduction

| Chapter 1— | The Statement of Assurance and supporting information |
| --- | --- |

Chapter 1—

| Chapter 2— | Revenue |
| --- | --- |

Chapter 2—

| Chapter 3— | Agriculture: market and direct support |
| --- | --- |

Chapter 3—

| Chapter 4— | Rural development, environment, fisheries and health |
| --- | --- |

Chapter 4—

| Chapter 5— | Regional policy; energy and transport |
| --- | --- |

Chapter 5—

| Chapter 6— | Employment and social affairs |
| --- | --- |

Chapter 6—

| Chapter 7— | External relations, aid and enlargement |
| --- | --- |

Chapter 7—

| Chapter 8— | Research and other internal policies |
| --- | --- |

Chapter 8—

| Chapter 9— | Administrative and other expenditure |
| --- | --- |

Chapter 9—

| Chapter 10— | Getting results from the EU budget |
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Chapter 10—

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GENERAL INTRODUCTION

| 0.1. | The European Court of Auditors is the institution established by the Treaty to carry out the audit of European Union (EU) finances. As the EU’s external auditor it acts as the independent guardian of the financial interests of the citizens of the Union and contributes to improving EU financial management. More information on the Court can be found in its annual activity report which, together with its special reports on EU spending programmes and revenue and its opinions on new or amended legislation, are available on its website: www.eca.europa.eu. |
| --- | --- |

0.1.

The European Court of Auditors is the institution established by the Treaty to carry out the audit of European Union (EU) finances. As the EU’s external auditor it acts as the independent guardian of the financial interests of the citizens of the Union and contributes to improving EU financial management. More information on the Court can be found in its annual activity report which, together with its special reports on EU spending programmes and revenue and its opinions on new or amended legislation, are available on its website: www.eca.europa.eu.

| 0.2. | This is the Court’s 35th Annual Report on the implementation of the EU budget and covers the 2011 financial year. A separate Annual Report covers the European Development Funds. |
| --- | --- |

0.2.

This is the Court’s 35th Annual Report on the implementation of the EU budget and covers the 2011 financial year. A separate Annual Report covers the European Development Funds.

| 0.3. | The general budget of the EU is decided annually by the Council and the European Parliament. The Court’s annual report, together with its special reports, provides a basis for the discharge procedure, in which the European Parliament decides whether the Commission has satisfactorily carried out its responsibilities for implementing the budget. The Court forwards its annual report to national parliaments at the same time as to the European Parliament and the Council. |
| --- | --- |

0.3.

The general budget of the EU is decided annually by the Council and the European Parliament. The Court’s annual report, together with its special reports, provides a basis for the discharge procedure, in which the European Parliament decides whether the Commission has satisfactorily carried out its responsibilities for implementing the budget. The Court forwards its annual report to national parliaments at the same time as to the European Parliament and the Council.

| 0.4. | The central part of the annual report is the Court’s statement of assurance (the ‘DAS’) on the reliability of the annual accounts of the EU and on the legality and regularity of transactions (referred to in the report as ‘regularity of transactions’). The statement of assurance itself begins the report; the material which follows reports mainly on the audit work underlying the statement of assurance. |
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0.4.

The central part of the annual report is the Court’s statement of assurance (the ‘DAS’) on the reliability of the annual accounts of the EU and on the legality and regularity of transactions (referred to in the report as ‘regularity of transactions’). The statement of assurance itself begins the report; the material which follows reports mainly on the audit work underlying the statement of assurance.

| 0.5. | The report is organised as follows:






  — | Chapter 1 contains the statement of assurance and a summary of the results of the Court’s audit on the reliability of accounts and on the regularity of transactions, as well as a summary report on the management of the budget in 2011. Annex 1.3 to Chapter 1 provides information from the 2011 consolidated accounts. To a large extent, this annex replaces the annex to previous annual reports on ‘Financial information on the general budget’. More extensive 2011 financial information is presented in the published consolidated accounts and in the financial report prepared by the European Commission, both available on:
  www.ec.europa.eu/budget/biblio/documents/2011; |
| --- | --- | --- |

0.5.

The report is organised as follows:

—

Chapter 1 contains the statement of assurance and a summary of the results of the Court’s audit on the reliability of accounts and on the regularity of transactions, as well as a summary report on the management of the budget in 2011. Annex 1.3 to Chapter 1 provides information from the 2011 consolidated accounts. To a large extent, this annex replaces the annex to previous annual reports on ‘Financial information on the general budget’. More extensive 2011 financial information is presented in the published consolidated accounts and in the financial report prepared by the European Commission, both available on:

www.ec.europa.eu/budget/biblio/documents/2011;

| — | Chapters 2 to 9 provide detailed audit findings in the form of ‘specific assessments’ of EU revenue and expenditure. Chapter 2 deals with the revenue side of the EU budget; Chapters 3 to 9 with seven groups of policy areas within which spending from the EU budget is authorised and recorded. These groups of policy areas correspond broadly to the headings used in the 2007-2013 Financial Framework, which sets out the EU’s broad multiannual spending plans; |
| --- | --- |

—

Chapters 2 to 9 provide detailed audit findings in the form of ‘specific assessments’ of EU revenue and expenditure. Chapter 2 deals with the revenue side of the EU budget; Chapters 3 to 9 with seven groups of policy areas within which spending from the EU budget is authorised and recorded. These groups of policy areas correspond broadly to the headings used in the 2007-2013 Financial Framework, which sets out the EU’s broad multiannual spending plans;

| — | Chapter 10 analyses the assessment of performance set out in the annual activity reports presented by three of the Commission’s directors-general; identifies significant common themes in the special reports which the Court has adopted in 2011 and covers briefly the Commission’s evaluation report. |
| --- | --- |

—

Chapter 10 analyses the assessment of performance set out in the annual activity reports presented by three of the Commission’s directors-general; identifies significant common themes in the special reports which the Court has adopted in 2011 and covers briefly the Commission’s evaluation report.

| 0.6. | The structure of the specific assessments has been altered. In this year’s Annual Report the single Chapter on agriculture and natural resources as presented in recent annual reports is replaced by two specific assessments and chapters:






  — | agriculture: market and direct support; and |
| --- | --- | --- |

0.6.

The structure of the specific assessments has been altered. In this year’s Annual Report the single Chapter on agriculture and natural resources as presented in recent annual reports is replaced by two specific assessments and chapters:

—

agriculture: market and direct support; and

| — | rural development, environment, fisheries and health. |
| --- | --- |

—

rural development, environment, fisheries and health.

| 0.7. | In addition, the single Chapter on cohesion, energy and transport is replaced by two specific assessments and chapters:






  — | regional policy, energy and transport; and |
| --- | --- | --- |

0.7.

In addition, the single Chapter on cohesion, energy and transport is replaced by two specific assessments and chapters:

—

regional policy, energy and transport; and

| — | employment and social affairs. |
| --- | --- |

—

employment and social affairs.

| 0.8. | The specific assessments are mainly based on: the results of the Court’s testing of the regularity of transactions; on an assessment of the effectiveness of the principal supervisory and control systems governing the revenue or expenditure involved; and on a review of the reliability of Commission management representations. |
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0.8.

The specific assessments are mainly based on: the results of the Court’s testing of the regularity of transactions; on an assessment of the effectiveness of the principal supervisory and control systems governing the revenue or expenditure involved; and on a review of the reliability of Commission management representations.

| 0.9. | As in previous years, the Annual Report comments on the European Commission's ‘synthesis report’, in which the Commission accepts political responsibility for management of the EU budget: see paragraphs 1.24 to 1.30. The Commission has chosen to include in its synthesis report for 2011 critical comments about the possible impact on estimates of error of the Court's current audit methods and of their developments being planned for 2012 and subsequent years. |
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0.9.

As in previous years, the Annual Report comments on the European Commission's ‘synthesis report’, in which the Commission accepts political responsibility for management of the EU budget: see paragraphs 1.24 to 1.30. The Commission has chosen to include in its synthesis report for 2011 critical comments about the possible impact on estimates of error of the Court's current audit methods and of their developments being planned for 2012 and subsequent years.

| 0.10. | The Court regards these comments as inaccurate and premature. Furthermore, the Court points out that such developments in its audit approach and methodology reflect evolutions in its audit environment, including the way expenditure is managed by the auditees. As it always does, the Court will adequately explain any developments in its methodology and their effects in a transparent manner at the appropriate time. |
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0.10.

The Court regards these comments as inaccurate and premature. Furthermore, the Court points out that such developments in its audit approach and methodology reflect evolutions in its audit environment, including the way expenditure is managed by the auditees. As it always does, the Court will adequately explain any developments in its methodology and their effects in a transparent manner at the appropriate time.

| 0.11. | The Commission’s replies to the Court’s observations — or those of other EU institutions and bodies, where appropriate — are presented within the document. The Court’s description of its findings and conclusions takes into account the relevant replies of the auditee. However it is the Court’s responsibility, as external auditor, to report its audit findings, to draw conclusions from those findings, and thus to provide an independent and impartial assessment of the reliability of the accounts as well as of the regularity of transactions. |
| --- | --- |

0.11.

The Commission’s replies to the Court’s observations — or those of other EU institutions and bodies, where appropriate — are presented within the document. The Court’s description of its findings and conclusions takes into account the relevant replies of the auditee. However it is the Court’s responsibility, as external auditor, to report its audit findings, to draw conclusions from those findings, and thus to provide an independent and impartial assessment of the reliability of the accounts as well as of the regularity of transactions.

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CHAPTER 1

The Statement of Assurance and supporting information

TABLE OF CONTENTS

The Court’s Statement of Assurance provided to the European Parliament and the Council — Independent auditor’s report

Introduction

Audit findings for the 2011 financial year

Reliability of accounts

Regularity of transactions

Summary of the DAS specific assessments

Comparison with previous year(s)’ results

Reliability of Commission management representations

Introduction

Annual activity reports and declarations by directors-general

Synthesis report of the Commission

Budgetary management

Budgetary appropriations for commitments and payments

Utilisation of payment appropriations at year end

Outstanding budgetary commitments (RAL)

| THE COURT'S STATEMENT OF ASSURANCE PROVIDED TO THE EUROPEAN PARLIAMENT AND THE COUNCIL — INDEPENDENT AUDITOR’S REPORT |
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   (2) |

THE COURT'S STATEMENT OF ASSURANCE PROVIDED TO THE EUROPEAN PARLIAMENT AND THE COUNCIL — INDEPENDENT AUDITOR’S REPORT

(1)
   (2)

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(3)

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Reliability of the accounts

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Legality and regularity of the transactions underlying the accounts

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Revenue

Commitments

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Payments

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6 September 2012

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Vítor Manuel da SILVA CALDEIRA

President

| European Court of Auditors |
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| 12, rue Alcide De Gasperi, 1615 Luxembourg, LUXEMBOURG |

European Court of Auditors

12, rue Alcide De Gasperi, 1615 Luxembourg, LUXEMBOURG

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

| 1.1. | This Chapter of the Annual Report:






  — | sets out the background to the Court’s Statement of Assurance (DAS) (4) and summarises and analyses the audit findings and conclusions which underlie this statement (see paragraphs 1.2 to 1.30); |
| --- | --- | --- |

1.1.

This Chapter of the Annual Report:

—

sets out the background to the Court’s Statement of Assurance (DAS) (4) and summarises and analyses the audit findings and conclusions which underlie this statement (see paragraphs 1.2 to 1.30);

| — | analyses key 2011 budgetary management data (see paragraphs 1.31 to 1.38); |
| --- | --- |

—

analyses key 2011 budgetary management data (see paragraphs 1.31 to 1.38);

| — | explains how the Court carries out its DAS audit (see
  Annex 1.1
  ); and |
| --- | --- |

—

explains how the Court carries out its DAS audit (see
  Annex 1.1
  ); and

| — | presents the actions taken by the Commission as regards the observations on the reliability of the accounts of previous years. It also includes the Commission’s response to the Court’s recommendations, in particular on recoveries and financial corrections as well as on the increased use of pre-financing, in its previous annual reports (see
  Annex 1.2
  ). |
| --- | --- |

—

presents the actions taken by the Commission as regards the observations on the reliability of the accounts of previous years. It also includes the Commission’s response to the Court’s recommendations, in particular on recoveries and financial corrections as well as on the increased use of pre-financing, in its previous annual reports (see
  Annex 1.2
  ).

| 1.2. | The Court of Auditors provides the European Parliament and the Council with a Statement of Assurance concerning the reliability of the accounts and the legality and regularity of the underlying transactions. The Court may supplement this statement with specific assessments of each major area of EU activity (5). |
| --- | --- |

1.2.

The Court of Auditors provides the European Parliament and the Council with a Statement of Assurance concerning the reliability of the accounts and the legality and regularity of the underlying transactions. The Court may supplement this statement with specific assessments of each major area of EU activity (5).

| 1.3. | The aim of the work on the reliability of the accounts of the European Union is to obtain sufficient appropriate evidence to conclude on the extent to which revenue, expenditure, assets and liabilities have been properly recorded and that the consolidated accounts faithfully reflect the financial position as of 31 December 2011, and the results of its operations and cash flows for the year then ended (see paragraphs 1.6 to 1.8). |
| --- | --- |

1.3.

The aim of the work on the reliability of the accounts of the European Union is to obtain sufficient appropriate evidence to conclude on the extent to which revenue, expenditure, assets and liabilities have been properly recorded and that the consolidated accounts faithfully reflect the financial position as of 31 December 2011, and the results of its operations and cash flows for the year then ended (see paragraphs 1.6 to 1.8).

| 1.4. | The aim of the work on the regularity of the transactions underlying the 2011 accounts is to obtain sufficient appropriate evidence to conclude on whether those transactions are in accordance with the applicable regulations or contractual provisions, and have been correctly calculated (see paragraphs 1.9 to 1.15 for an overview of the results and Chapters 2 to 9 for more details). |
| --- | --- |

1.4.

The aim of the work on the regularity of the transactions underlying the 2011 accounts is to obtain sufficient appropriate evidence to conclude on whether those transactions are in accordance with the applicable regulations or contractual provisions, and have been correctly calculated (see paragraphs 1.9 to 1.15 for an overview of the results and Chapters 2 to 9 for more details).

| 1.5. | The aim of the work on the reliability of Commission management representations, i.e. the declarations by the directors-general and the annual activity reports of the Commission’s services and the related synthesis report, is to assess the extent to which they provide a fair assessment of the quality of financial management (including residual levels of error), and contribute to the Court’s overall assurance (see paragraphs 1.16 to 1.30 and related observations in the sections ‘Effectiveness of systems’ in Chapters 2 to 9). |
| --- | --- |

1.5.

The aim of the work on the reliability of Commission management representations, i.e. the declarations by the directors-general and the annual activity reports of the Commission’s services and the related synthesis report, is to assess the extent to which they provide a fair assessment of the quality of financial management (including residual levels of error), and contribute to the Court’s overall assurance (see paragraphs 1.16 to 1.30 and related observations in the sections ‘Effectiveness of systems’ in Chapters 2 to 9).

AUDIT FINDINGS FOR THE 2011 FINANCIAL YEAR

Reliability of accounts

| 1.6. | The Court's observations concern the consolidated accounts of the European Union for the financial year 2011 prepared by the Commission's accounting officer and approved by the Commission in compliance with the Financial Regulation (6) and received by the Court on 31 July 2012. The consolidated accounts comprise:






  (a) | the consolidated financial statements covering the balance sheet (setting out the assets and liabilities at the end of the year), the economic outturn account (covering the income and expenses of the year), the cash-flow table (showing how changes in the accounts affect cash and cash equivalents) and the statement of changes in net assets as well as the related notes; |
| --- | --- | --- |

1.6.

The Court's observations concern the consolidated accounts of the European Union for the financial year 2011 prepared by the Commission's accounting officer and approved by the Commission in compliance with the Financial Regulation (6) and received by the Court on 31 July 2012. The consolidated accounts comprise:

(a)

the consolidated financial statements covering the balance sheet (setting out the assets and liabilities at the end of the year), the economic outturn account (covering the income and expenses of the year), the cash-flow table (showing how changes in the accounts affect cash and cash equivalents) and the statement of changes in net assets as well as the related notes;

| (b) | the consolidated reports on the implementation of the budget covering the revenue and expenditure for the year as well as the related notes. |
| --- | --- |

(b)

the consolidated reports on the implementation of the budget covering the revenue and expenditure for the year as well as the related notes.

| 1.7. | The Commission's accounting officer provided the Court with a representation letter confirming that the consolidated accounts are complete and reliable in all material respects. |
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1.7.

The Commission's accounting officer provided the Court with a representation letter confirming that the consolidated accounts are complete and reliable in all material respects.

| 1.8. | The Court’s audit of the 2011 consolidated accounts found that these were free from material misstatements (see also
  Annex 1.2
  ). |
| --- | --- |

1.8.

The Court’s audit of the 2011 consolidated accounts found that these were free from material misstatements (see also
  Annex 1.2
  ).

Regularity of transactions

Summary of the DAS specific assessments

| 1.9. | The Court provides specific assessments on revenue in Chapter 2 and on the different expenditure policy groups based on Activity Based Budgeting (ABB) policy areas in Chapters 3 to 9 (see
  Table 1.1
  ). |
| --- | --- |

1.9.

The Court provides specific assessments on revenue in Chapter 2 and on the different expenditure policy groups based on Activity Based Budgeting (ABB) policy areas in Chapters 3 to 9 (see
  Table 1.1
  ).

Table 1.1 —   Payments in 2011 by Annual Report chapters

| (million euro) |
| --- |
| Sections (S), Titles (T) and Chapters (C)
   (36)
  corresponding to the 2011 budgetary nomenclature allocated per chapter of the Court’s Annual Report | Payments made in 2011
   (37) | in % of total |
| Annual Report chapters |
| Chapter 3: Agriculture: market and direct support | 43 809 | 33,9 % |
| European Agricultural Guarantee Fund (T.05 C01-03, 06-08) | 43 809 | 33,9 % |
| Chapter 4: Rural development, environment, fisheries and health | 13 876 | 10,7 % |
| Rural development (T.05 C04-05) | 12 399 | 9,6 % |
| Environment and climate action (T.07) | 240 | 0,2 % |
| Maritime affairs and fisheries (T.11) | 731 | 0,6 % |
| Health and consumer protection (T.17) | 506 | 0,4 % |
| Chapter 5: Regional policy, energy and transport | 34 842 | 26,9 % |
| Mobility and transport (T.06) | 1 042 | 0,8 % |
| Regional policy (T.13) | 32 911 | 25,4 % |
| Energy (T.32) | 889 | 0,7 % |
| Chapter 6: Employment and social affairs | 10 299 | 8,0 % |
| Employment and social affairs (T.04) | 10 299 | 8,0 % |
| Chapter 7: External relations, aid and enlargement | 6 201 | 4,8 % |
| External relations (T.19) | 3 156 | 2,4 % |
| Development and relations with ACP States (T.21) | 1 175 | 0,9 % |
| Enlargement (T.22) | 835 | 0,6 % |
| Humanitarian aid (T.23) | 1 035 | 0,8 % |
| Chapter 8: Research and other internal policies | 10 591 | 8,2 % |
| Economic and financial affairs (T.01) | 319 | 0,2 % |
| Enterprise (T.02) | 1 213 | 0,9 % |
| Competition (T.03) | 0 | 0,0 % |
| Research (T.08) | 4 283 | 3,3 % |
| Information society and media (T.09) | 1 357 | 1,0 % |
| Direct research (T.10) | 89 | 0,1 % |
| Internal market (T.12) | 34 | 0,0 % |
| Education and culture (T.15) | 2 283 | 1,8 % |
| Communication (T.16) | 134 | 0,1 % |
| Area of freedom, security and justice (T.18) | 868 | 0,7 % |
| Trade (T.20) | 11 | 0,0 % |
| Chapter 9: Administrative and other expenditure | 9 777 | 7,6 % |
| Parliament (S. I) | 1 580 | 1,2 % |
| Council (S. II) | 547 | 0,4 % |
| Commission (S. III) | 6 264 | 4,8 % |
| Court of Justice (S. IV) | 334 | 0,3 % |
| Court of Auditors (S. V) | 137 | 0,1 % |
| European Economic and Social Committee (S. VI) | 126 | 0,1 % |
| Committee of the Regions (S. VII) | 91 | 0,1 % |
| European Ombudsman (S. VIII) | 9 | 0,0 % |
| European Data-protection Supervisor (S. IX) | 7 | 0,0 % |
| European External Action Service (S.X) | 682 | 0,5 % |
| Grand Total | 129 395 | 100,0 % |

(million euro)

Sections (S), Titles (T) and Chapters (C)
   (36)
  corresponding to the 2011 budgetary nomenclature allocated per chapter of the Court’s Annual Report

Payments made in 2011
   (37)

in % of total

Annual Report chapters

Chapter 3: Agriculture: market and direct support

43 809

33,9 %

European Agricultural Guarantee Fund (T.05 C01-03, 06-08)

43 809

33,9 %

Chapter 4: Rural development, environment, fisheries and health

13 876

10,7 %

Rural development (T.05 C04-05)

12 399

9,6 %

Environment and climate action (T.07)

240

0,2 %

Maritime affairs and fisheries (T.11)

731

0,6 %

Health and consumer protection (T.17)

506

0,4 %

Chapter 5: Regional policy, energy and transport

34 842

26,9 %

Mobility and transport (T.06)

1 042

0,8 %

Regional policy (T.13)

32 911

25,4 %

Energy (T.32)

889

0,7 %

Chapter 6: Employment and social affairs

10 299

8,0 %

Employment and social affairs (T.04)

10 299

8,0 %

Chapter 7: External relations, aid and enlargement

6 201

4,8 %

External relations (T.19)

3 156

2,4 %

Development and relations with ACP States (T.21)

1 175

0,9 %

Enlargement (T.22)

835

0,6 %

Humanitarian aid (T.23)

1 035

0,8 %

Chapter 8: Research and other internal policies

10 591

8,2 %

Economic and financial affairs (T.01)

319

0,2 %

Enterprise (T.02)

1 213

0,9 %

Competition (T.03)

0

0,0 %

Research (T.08)

4 283

3,3 %

Information society and media (T.09)

1 357

1,0 %

Direct research (T.10)

89

0,1 %

Internal market (T.12)

34

0,0 %

Education and culture (T.15)

2 283

1,8 %

Communication (T.16)

134

0,1 %

Area of freedom, security and justice (T.18)

868

0,7 %

Trade (T.20)

11

0,0 %

Chapter 9: Administrative and other expenditure

9 777

7,6 %

Parliament (S. I)

1 580

1,2 %

Council (S. II)

547

0,4 %

Commission (S. III)

6 264

4,8 %

Court of Justice (S. IV)

334

0,3 %

Court of Auditors (S. V)

137

0,1 %

European Economic and Social Committee (S. VI)

126

0,1 %

Committee of the Regions (S. VII)

91

0,1 %

European Ombudsman (S. VIII)

9

0,0 %

European Data-protection Supervisor (S. IX)

7

0,0 %

European External Action Service (S.X)

682

0,5 %

Grand Total

129 395

100,0 %

| 1.10. | The Court concludes that revenue (130 000 million euro) (7) and payments in the policy group administrative and other expenditure (9 777 million euro) were free from material error and that the examined supervisory and control systems were effective (see
  Table 1.2
  and paragraphs 2.35 to 2.36 and 9.30 to 9.32). Commitments in all policy groups were also free from material error. |
| --- | --- |

1.10.

The Court concludes that revenue (130 000 million euro) (7) and payments in the policy group administrative and other expenditure (9 777 million euro) were free from material error and that the examined supervisory and control systems were effective (see
  Table 1.2
  and paragraphs 2.35 to 2.36 and 9.30 to 9.32). Commitments in all policy groups were also free from material error.

| 1.11. | The Court concludes that the policy group external relations, aid and enlargement (6 201 million euro) was free from material error and that the examined supervisory and control systems were partially effective. However, interim and final payments were subject to material error (see
  Table 1.2
  and paragraphs 7.26 to 7.27). |
| --- | --- |

1.11.

The Court concludes that the policy group external relations, aid and enlargement (6 201 million euro) was free from material error and that the examined supervisory and control systems were partially effective. However, interim and final payments were subject to material error (see
  Table 1.2
  and paragraphs 7.26 to 7.27).

| 1.11. | The Commission has designed its controls to cover the full lifecycle of its multiannual projects. It believes that these supervisory and control systems are effective and have significantly improved year on year. |
| --- | --- |

1.11.

| 1.12. | The Court concludes that the following policy groups were affected by material error: agriculture: market and direct support (43 801 million euro reimbursed expenditure (8), rural development, environment, fisheries and health (13 310 million euro reimbursed expenditure (8)), regional policy, energy and transport (33 373 million euro reimbursed expenditure (8)), employment and social affairs (10 171 million euro reimbursed expenditure (8)) and research and other internal policies (10 591 million euro payments). Furthermore, the Court concludes that for these policy groups the examined supervisory and control systems were partially effective (see
  Table 1.2
  and paragraphs 3.42 to 3.43, 4.51 to 4.52, 5.70 to 5.71, 6.27 to 6.28 and 8.37 to 8.38). |
| --- | --- |

1.12.

The Court concludes that the following policy groups were affected by material error: agriculture: market and direct support (43 801 million euro reimbursed expenditure (8), rural development, environment, fisheries and health (13 310 million euro reimbursed expenditure (8)), regional policy, energy and transport (33 373 million euro reimbursed expenditure (8)), employment and social affairs (10 171 million euro reimbursed expenditure (8)) and research and other internal policies (10 591 million euro payments). Furthermore, the Court concludes that for these policy groups the examined supervisory and control systems were partially effective (see
  Table 1.2
  and paragraphs 3.42 to 3.43, 4.51 to 4.52, 5.70 to 5.71, 6.27 to 6.28 and 8.37 to 8.38).

| 1.13. | The Court concludes that overall payments were materially affected by error and that the examined supervisory and control systems for payments were, in general, partially effective (see
  Table 1.2
  ). |
| --- | --- |

1.13.

The Court concludes that overall payments were materially affected by error and that the examined supervisory and control systems for payments were, in general, partially effective (see
  Table 1.2
  ).

| 1.12-1.13. | In relation to agriculture: Market and Direct Support, the Commission considers the most likely error determined by the Court for the financial year 2011 represents a slight increase compared to last year but is still within the normal range of statistical variation from one year to another and does not point to a deterioration of the overall quality in the management and control of expenditure by Member States. The Commission considers that the error rates determined by the Court over the last years taken together provide reliable evidence that the most likely error rate for EAGF is relatively close to the 2 % materiality threshold. In relation to Rural development, the Commission’s own appreciation of the level of undue payments, on the basis of the control statistics provided by Member States in 2011, shows a deterioration of the situation. This led the Director-General for DG AGRI to issue a reservation in his Annual Activity Report 2011. A number of corrective actions are being identified in order to address the situation. Regarding the supervisory and control systems in place in agriculture, the Commission is of the opinion that IACS which accounted for 91 % of total EAGF expenditure, is generally an effective control system for limiting the risk of error or irregular expenditure, and wishes to recall that the remaining risk for the EU budget is adequately covered by the conformity clearance procedure. See replies to paragraphs 3.10, 3.14-3.15, 3.42, 4.10, 4.43, 4.51 and 4.52.

  The combined most likely error for Regional Policy, Transport, Energy and Employment and Social Affairs, as shown in Table 1.3, decreases considerably compared to 2010, from 7,7 % to 5,1 %. Also, for the third consecutive year, the level of error for each part of the former policy group Cohesion, Energy and Transport (MLE 6,0 % for Regional Policy, Energy and Transport and, 2,2 % for Employment) remains well below those reported by the Court in the period 2006-2008. This positive development derives from the reinforced control provisions of the 2007-2013 programming period, from the Commission’s strict policy of interruptions/suspensions when deficiencies are identified, in line with its 2008 Action Plan and from the positive impact of the simplification measures provided in the regulations for the current programming period. The Commission will continue to focus its actions on the most risky programmes and/or Member States.


  Regarding research and other internal policies, the Commission considers that seen from a management perspective — i.e. when balancing the objectives in terms of legality and regularity with considerations on risk-proportionality and cost-effectiveness of controls — its management and control systems provide reasonable assurance subject to the reservations issued by the Authorising Officers by Delegation.


  Finally, with particular reference to the provisions of the Financial Regulation applicable to the EU Budget (Article 22a(2)(f) of the Regulation laying down detailed rules for the implementation of the Financial Regulation and Article 28(2b)(g) of the new Financial Regulation), and in view of the proposed reduction of its available resources and of the current measures taken by the Member States, the Commission will consider the cost and benefits of the Court’s recommendations before taking and/or proposing appropriate action. |
| --- | --- |

1.12-1.13.

The combined most likely error for Regional Policy, Transport, Energy and Employment and Social Affairs, as shown in Table 1.3, decreases considerably compared to 2010, from 7,7 % to 5,1 %. Also, for the third consecutive year, the level of error for each part of the former policy group Cohesion, Energy and Transport (MLE 6,0 % for Regional Policy, Energy and Transport and, 2,2 % for Employment) remains well below those reported by the Court in the period 2006-2008. This positive development derives from the reinforced control provisions of the 2007-2013 programming period, from the Commission’s strict policy of interruptions/suspensions when deficiencies are identified, in line with its 2008 Action Plan and from the positive impact of the simplification measures provided in the regulations for the current programming period. The Commission will continue to focus its actions on the most risky programmes and/or Member States.

Regarding research and other internal policies, the Commission considers that seen from a management perspective — i.e. when balancing the objectives in terms of legality and regularity with considerations on risk-proportionality and cost-effectiveness of controls — its management and control systems provide reasonable assurance subject to the reservations issued by the Authorising Officers by Delegation.

Finally, with particular reference to the provisions of the Financial Regulation applicable to the EU Budget (Article 22a(2)(f) of the Regulation laying down detailed rules for the implementation of the Financial Regulation and Article 28(2b)(g) of the new Financial Regulation), and in view of the proposed reduction of its available resources and of the current measures taken by the Member States, the Commission will consider the cost and benefits of the Court’s recommendations before taking and/or proposing appropriate action.

Table 1.2 —   2011 Summary of findings on regularity of transactions

| Policy group | Payments


  (million euro) | Assessment of examined supervisory control systems
   (39) | Most likely error


  (MLE)


  (%) | Confidence interval


  (%) | Frequency of errors
   (40)


  (%) | Audit conclusions |
| --- | --- | --- | --- | --- | --- | --- |
| Lower error limit


  (LEL) | Upper error limit


  (UEL) |
| Agriculture: market and direct support (38) | 43 801 (41) | Partially effective | 2,9
   (46) | 1,1 | 4,7 | 39 | Affected by material error |
| Rural development, environment, fisheries and health (38) | 13 310 (42) | Partially effective | 7,7
   (47) | 4,5 | 10,9 | 57 | Affected by material error |
| Regional policy, energy and transport (38) | 33 373 (43) | Partially effective | 6,0 | 3,0 | 9,0 | 59 | Affected by material error |
| Employment and social affairs (38) | 10 171 (44) | Partially effective | 2,2 | 0,9 | 3,4 | 40 | Affected by material error |
| External relations, aid and enlargement | 6 201 | Partially effective | 1,1 | 0,0 | 2,4 | 33 | Free from material error |
| Research and other internal policies | 10 591 | Partially effective | 3,0 | 1,1 | 4,9 | 49 | Affected by material error |
| Administrative and other expenditure | 9 777 | Effective | 0,1 | 0,0 | 0,3 | 7 | Free from material error |
| Overall audited population | 127 224 (45) | Partially effective | 3,9
   (48) | 3,0 | 4,8 | 44 | Affected by material error |
| Revenue | 130 000 (49) | Effective | 0,8 | 0,0 | 2,4 | 2 | Free from material error |

Policy group

Payments

(million euro)

Assessment of examined supervisory control systems
   (39)

Most likely error

(MLE)

(%)

Confidence interval

(%)

Frequency of errors
   (40)

(%)

Audit conclusions

Lower error limit

(LEL)

Upper error limit

(UEL)

Agriculture: market and direct support (38)

43 801 (41)

Partially effective

2,9
   (46)

1,1

4,7

39

Affected by material error

Rural development, environment, fisheries and health (38)

13 310 (42)

Partially effective

7,7
   (47)

4,5

10,9

57

Affected by material error

Regional policy, energy and transport (38)

33 373 (43)

Partially effective

6,0

3,0

9,0

59

Affected by material error

Employment and social affairs (38)

10 171 (44)

Partially effective

2,2

0,9

3,4

40

Affected by material error

External relations, aid and enlargement

6 201

Partially effective

1,1

0,0

2,4

33

Free from material error

Research and other internal policies

10 591

Partially effective

3,0

1,1

4,9

49

Affected by material error

Administrative and other expenditure

9 777

Effective

0,1

0,0

0,3

7

Free from material error

Overall audited population

127 224 (45)

Partially effective

3,9
   (48)

3,0

4,8

44

Affected by material error

Revenue

130 000 (49)

Effective

0,8

0,0

2,4

2

Free from material error

Comparison with previous years’ results

| 1.14. | The Court’s estimate of the most likely error concerning payments for 2011 is higher than in 2010 in: |
| --- | --- |

1.14.

The Court’s estimate of the most likely error concerning payments for 2011 is higher than in 2010 in:

1.14.

| — | Agriculture: market and direct support; and rural development, environment, fisheries and health (as compared with the former policy group agriculture and natural resources); |
| --- | --- |

—

Agriculture: market and direct support; and rural development, environment, fisheries and health (as compared with the former policy group agriculture and natural resources);

| — | For Agriculture: Market and direct support, the Commission considers that the slight increase compared to last year is still within the normal range of statistical variation from one year to another and does not point to a deterioration of the overall quality in the management and control of expenditure by the Member States.

  As regards rural development, the Commission agrees that there is a deterioration of the situation, albeit of a more limited magnitude than the one reported by the Court.


  The Commission notes that the Court’s conclusion is on the policy group as a whole, not on subgroups.


  The Commission considers that seen from a management perspective — i.e. when balancing the objectives in terms of legality and regularity with considerations on risk-proportionality and cost-effectiveness of controls — its management and control systems applicable to the research and other Internal Policies programmes provide reasonable assurance, subject to the reservations issued by the Authorising Officers by Delegation. |
| --- | --- |

—

As regards rural development, the Commission agrees that there is a deterioration of the situation, albeit of a more limited magnitude than the one reported by the Court.

The Commission notes that the Court’s conclusion is on the policy group as a whole, not on subgroups.

The Commission considers that seen from a management perspective — i.e. when balancing the objectives in terms of legality and regularity with considerations on risk-proportionality and cost-effectiveness of controls — its management and control systems applicable to the research and other Internal Policies programmes provide reasonable assurance, subject to the reservations issued by the Authorising Officers by Delegation.

| — | Research and other internal policies. |
| --- | --- |

—

Research and other internal policies.

In the policy groups regional policy, energy and transport; and employment and social affairs (as compared with the former policy group cohesion, energy and transport) the Court’s estimate of the most likely error rate decreased.

The Commission notes that for the third consecutive year, the level of error remains well below those reported by the Court in the period 2006-2008. This positive development derives from the reinforced control provisions of the 2007-2013 programming period and its strict policy of interruptions/suspensions when deficiencies are identified, in line with its 2008 Action Plan. As shown in Table 1.3, the combined most likely error for regional policy, transport, energy and employment and social affairs also decreased considerably compared to 2010, from 7,7 % to 5,1 %.

In the other policy groups (external relations, aid and enlargement; and administrative and other expenditure) the Court’s estimate of the most likely error remained stable (see
  Table 1.3
  ).

| 1.15. | Taken together the most likely error estimated by the Court for payments as a whole remained stable as compared to 2010 (3,9 % in 2011 and 3,7 % in 2010, see also
  Table 1.3
  and
  Graph 1.1
  ) (9). The Court found around two fifths of the transactions tested to be affected by error (2010: around one third of the transactions). The frequency of errors detected by the Court increased for all policy groups, except the former policy group cohesion, energy and transport and administrative and other expenditure for which it remained stable (see
  Table 1.3
  ). |
| --- | --- |

1.15.

Taken together the most likely error estimated by the Court for payments as a whole remained stable as compared to 2010 (3,9 % in 2011 and 3,7 % in 2010, see also
  Table 1.3
  and
  Graph 1.1
  ) (9). The Court found around two fifths of the transactions tested to be affected by error (2010: around one third of the transactions). The frequency of errors detected by the Court increased for all policy groups, except the former policy group cohesion, energy and transport and administrative and other expenditure for which it remained stable (see
  Table 1.3
  ).

| 1.15. | After taking into account the new valuation of cross-compliance errors in agriculture, the Commission notes the most likely error estimated by the Court is very close to that of 2010 despite a number of adverse technical and structural factors (EU multiannual programmes entering a critical phase with increasing complex payments necessarily more prone to errors). |
| --- | --- |

1.15.

Table 1.3 —   Comparison of audit results for 2010 and 2011

| Policy group | Most likely error


  (MLE)


  (%) | Confidence interval


  (%) | Frequency of errors


  (%) | Audit conclusions |
| --- | --- | --- | --- | --- |
| Lower error limit


  (LEL) | Upper error limit


  (UEL) |
| 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 |
| Agriculture: market and direct support | 2,3 | 4,0 (50) | 2,9 | 0,8 | 2,5 | 1,1 | 3,8 | 5,6 | 4,7 | 37 | 48 | 39 | Affected by material error | Affected by material error |
| Rural development, environment, fisheries and health | 7,7 | 4,5 | 10,9 | 57 | Affected by material error |
| Regional policy, energy and transport | 7,7 | 5,1 (50) | 6,0 | 4,7 | 3,2 | 3,0 | 10,7 | 7,1 | 9,0 | 49 | 50 | 59 | Affected by material error | Affected by material error |
| Employment and social affairs | 2,2 | 0,9 | 3,4 | 40 | Affected by material error |
| External relations, aid and enlargement | 1,7 | 1,1 | 0,1 | 0,0 | 3,3 | 2,4 | 23 | 33 | Free from material error | Free from material error |
| Research and other internal policies | 1,4 | 3,0 | 0,6 | 1,1 | 2,1 | 4,9 | 39 | 49 | Free from material error | Affected by material error |
| Administrative and other expenditure | 0,4 | 0,1 | 0,0 | 0,0 | 1,1 | 0,3 | 7 | 7 | Free from material error | Free from material error |
| Overall audited population | 3,7 | 3,9
   (51) | 2,6 | 3,0 | 4,8 | 4,8 | 36 | 44 | Affected by material error | Affected by material error |
| Revenue | 0,0 | 0,8 | N/A | 0,0 | N/A | 2,4 | N/A | 2 | Free from material error | Free from material error |

Policy group

Most likely error

(MLE)

(%)

Confidence interval

(%)

Frequency of errors

(%)

Audit conclusions

Lower error limit

(LEL)

Upper error limit

(UEL)

2010

2011

2010

2011

2010

2011

2010

2011

2010

2011

Agriculture: market and direct support

2,3

4,0 (50)

2,9

0,8

2,5

1,1

3,8

5,6

4,7

37

48

39

Affected by material error

Affected by material error

Rural development, environment, fisheries and health

7,7

4,5

10,9

57

Affected by material error

Regional policy, energy and transport

7,7

5,1 (50)

6,0

4,7

3,2

3,0

10,7

7,1

9,0

49

50

59

Affected by material error

Affected by material error

Employment and social affairs

2,2

0,9

3,4

40

Affected by material error

External relations, aid and enlargement

1,7

1,1

0,1

0,0

3,3

2,4

23

33

Free from material error

Free from material error

Research and other internal policies

1,4

3,0

0,6

1,1

2,1

4,9

39

49

Free from material error

Affected by material error

Administrative and other expenditure

0,4

0,1

0,0

0,0

1,1

0,3

7

7

Free from material error

Free from material error

Overall audited population

3,7

3,9
   (51)

2,6

3,0

4,8

4,8

36

44

Affected by material error

Affected by material error

Revenue

0,0

0,8

N/A

0,0

N/A

2,4

N/A

2

Free from material error

Free from material error

Image

Reliability of Commission management representations

Introduction

| 1.16. | In accordance with Article 317 of the TFEU, the Commission is ultimately responsible for the implementation of the EU budget. A keystone of the Commission’s present system for managing EU funds (which was revised thoroughly on the basis of a reform launched in April 2000 (10) in response to a resolution adopted by the European Parliament (11)) is the responsibility of the directors-general. The latter must put in place effective supervisory and control systems which meet pre-defined standards (12). |
| --- | --- |

1.16.

In accordance with Article 317 of the TFEU, the Commission is ultimately responsible for the implementation of the EU budget. A keystone of the Commission’s present system for managing EU funds (which was revised thoroughly on the basis of a reform launched in April 2000 (10) in response to a resolution adopted by the European Parliament (11)) is the responsibility of the directors-general. The latter must put in place effective supervisory and control systems which meet pre-defined standards (12).

| 1.17. | The Commission’s directors-general report annually on the performance of their duties in activity reports (13). These are accompanied by declarations inter alia on the extent to which resources have been used for their intended purpose, and control procedures ensure the legality and regularity of transactions. When they identify significant problems in these respects directors-general may include reservations in their declarations. |
| --- | --- |

1.17.

The Commission’s directors-general report annually on the performance of their duties in activity reports (13). These are accompanied by declarations inter alia on the extent to which resources have been used for their intended purpose, and control procedures ensure the legality and regularity of transactions. When they identify significant problems in these respects directors-general may include reservations in their declarations.

| 1.18. | The Commission assumes political responsibility for management by its directors-general through the synthesis report. This report draws on representations provided by directors-general in their annual activity reports, as well as on other sources, such as the overall opinion of the internal auditor. The report also describes the measures taken by the Commission to address management and control deficiencies. |
| --- | --- |

1.18.

The Commission assumes political responsibility for management by its directors-general through the synthesis report. This report draws on representations provided by directors-general in their annual activity reports, as well as on other sources, such as the overall opinion of the internal auditor. The report also describes the measures taken by the Commission to address management and control deficiencies.

Annual activity reports and declarations by directors-general
   (14)

Increased amount of payments under reservation

| 1.19. | Although all directors-general declared that the control procedures put in place give the necessary guarantees concerning the regularity of transactions, the number of directorates-general or services which have issued one or more reservations increased to 16 in 2011 (2010: 13). The total number of reservations increased to 27 in 2011 (2010: 17), the majority of which, as in previous years, refer to weaknesses concerning the regularity of transactions. The estimated total financial impact of reservations increased to 1 959 million euro or 1,5 % of the payments made in 2011 (2010: 423 million euro or 0,3 %) (see
  Table 1.4
  and Chapters 2 to 9). |
| --- | --- |

1.19.

Although all directors-general declared that the control procedures put in place give the necessary guarantees concerning the regularity of transactions, the number of directorates-general or services which have issued one or more reservations increased to 16 in 2011 (2010: 13). The total number of reservations increased to 27 in 2011 (2010: 17), the majority of which, as in previous years, refer to weaknesses concerning the regularity of transactions. The estimated total financial impact of reservations increased to 1 959 million euro or 1,5 % of the payments made in 2011 (2010: 423 million euro or 0,3 %) (see
  Table 1.4
  and Chapters 2 to 9).

Table 1.4 —   Reservations issued by Commission's directorates-general for 2011

| (million euro) |
| --- |
| DG/Service
   (52) | Reservations | Total payments for relevant ABB activities
   (53) | Financial impact of reservations
   (54) |
| AGRI | 1 — | Serious deficiencies in the IACS in BG and PT |

(million euro)

DG/Service
   (52)

Reservations

Total payments for relevant ABB activities
   (53)

Financial impact of reservations
   (54)

AGRI

1 —

Serious deficiencies in the IACS in BG and PT

Reputational risk

| 2 — | Rural development expenditure |
| --- | --- |

2 —

Rural development expenditure

12 292,02

278,00

| 3 — | Deficiencies in the supervision and control of certified organic products |
| --- | --- |

3 —

Deficiencies in the supervision and control of certified organic products

Reputational risk

BUDG

| 1 — | Reliability doubts on the Belgian clearance and accounting procedures and system and on the correctness of the TOR amounts transferred to the EU budget |
| --- | --- |

1 —

Reliability doubts on the Belgian clearance and accounting procedures and system and on the correctness of the TOR amounts transferred to the EU budget

Not estimated

CLIMA

| 1 — | Significant security weakness identified in the national registries of the EU Emissions Trading System (ETS) following cyber-attacks in several Member States in 2010 and 2011 |
| --- | --- |

1 —

Significant security weakness identified in the national registries of the EU Emissions Trading System (ETS) following cyber-attacks in several Member States in 2010 and 2011

Reputational risk

COMM

| 1 — | Potential non-compliance with applicable legislation on intellectual property rights |
| --- | --- |

1 —

Potential non-compliance with applicable legislation on intellectual property rights

Not estimated

EACEA

Materiality of the 2011 value at risk resulting from the error rates in grant payments of the 2011 programme budget for the LLP programme (2007-2013)

1 189,68

4,26

EMPL

| 1 — | Deficiencies in the management and control systems (2007-2013 period) for identified ESF OPs in BE, CZ, DE, ES, IT, LV, LT, RO, SK and UK and for the former Yugoslav Republic of Macedonia IPA Component IV programme |
| --- | --- |

1 —

Deficiencies in the management and control systems (2007-2013 period) for identified ESF OPs in BE, CZ, DE, ES, IT, LV, LT, RO, SK and UK and for the former Yugoslav Republic of Macedonia IPA Component IV programme

9 557,19

58,70

| 2 — | Deficiencies in the management and control systems (2000-2006 period) for identified ESF OPs in DE, FR, IT, and ES which have not been subject to sufficient control and corrective measures by the national authorities |
| --- | --- |

2 —

Deficiencies in the management and control systems (2000-2006 period) for identified ESF OPs in DE, FR, IT, and ES which have not been subject to sufficient control and corrective measures by the national authorities

437,04

0,00

ENER

| 1 — | Residual error rate with regard to the accuracy of cost claims in FP6 contracts |
| --- | --- |

1 —

Residual error rate with regard to the accuracy of cost claims in FP6 contracts

25,79

1,15

| 2 — | Residual error rate with regard to the accuracy of cost claims in FP7 contracts |
| --- | --- |

2 —

Residual error rate with regard to the accuracy of cost claims in FP7 contracts

133,43

5,26

ENTR

| 1 — | Accuracy of cost claims in FP6 |
| --- | --- |

1 —

Accuracy of cost claims in FP6

4,17

0,16

| 2 — | Accuracy of cost claims in FP7 |
| --- | --- |

2 —

Accuracy of cost claims in FP7

419,65

0,93

| 3 — | Reliability of the financial reporting by ESA about the joint implementation of the space component of GMES and the implementation of EGNOS and Galileo programmes |
| --- | --- |

3 —

Reliability of the financial reporting by ESA about the joint implementation of the space component of GMES and the implementation of EGNOS and Galileo programmes

Not estimated

HOME

| 1 — | Residual error rate in the non-audited population of grants in the programmes under ABB activity security and safeguarding liberties |
| --- | --- |

1 —

Residual error rate in the non-audited population of grants in the programmes under ABB activity security and safeguarding liberties

132,90

3,09

| 2 — | Continued risk of delay of the SIS II project |
| --- | --- |

2 —

Continued risk of delay of the SIS II project

Reputational risk

INFSO

| 1 — | Accuracy of cost claims in the FP7 grant agreements |
| --- | --- |

1 —

Accuracy of cost claims in the FP7 grant agreements

1 217,06

22,60

MARE

| 1 — | Management and control systems for the FIFG OPS in DE (Objective 1) |
| --- | --- |

1 —

Management and control systems for the FIFG OPS in DE (Objective 1)

Reputational risk

| 2a — | Management and control systems for EFF programmes in CZ, ES, IT, NL, RO, SK, FI and SE |
| --- | --- |

2a —

Management and control systems for EFF programmes in CZ, ES, IT, NL, RO, SK, FI and SE

444,42

9,11

| 2b — | Eligibility of expenditure for investments on board |
| --- | --- |

2b —

Eligibility of expenditure for investments on board

10,71

MOVE

| 1 — | Accuracy of cost claims in FP6 contracts |
| --- | --- |

1 —

Accuracy of cost claims in FP6 contracts

19,29

0,86

| 2 — | Accuracy of cost claims in FP7 contracts |
| --- | --- |

2 —

Accuracy of cost claims in FP7 contracts

39,68

1,23

REA

Accuracy of cost claims impacting on granted EU funding for research for space and security themes of the cooperation specific programme under FP7

432,82

3,63

REGIO

| 1 — | ERDF/Cohesion Fund/IPA management and control systems (2007-2013 period) in BG, CZ, DE, EE, ES, FR, IT, LV, LT, NL, AT, PL, SI, SK, UK and territorial cooperation prorammes |
| --- | --- |

1 —

ERDF/Cohesion Fund/IPA management and control systems (2007-2013 period) in BG, CZ, DE, EE, ES, FR, IT, LV, LT, NL, AT, PL, SI, SK, UK and territorial cooperation prorammes

30 044,46

1 427,00

| 2 — | ERDF/Cohesion Fund/IPA management and control systems (2000-2006 period) in DE, IE, ES, IT, HU and cross-boarder programmes |
| --- | --- |

2 —

ERDF/Cohesion Fund/IPA management and control systems (2000-2006 period) in DE, IE, ES, IT, HU and cross-boarder programmes

Reputational risk

RTD

| 1 — | Accuracy of cost claims in FP6 grants |
| --- | --- |

1 —

Accuracy of cost claims in FP6 grants

517,11

20,56

| 2 — | Accuracy of cost claims in FP7 grants |
| --- | --- |

2 —

Accuracy of cost claims in FP7 grants

3 765,16

100,80

SANCO

| 1 — | Accuracy of MS' cost claims under the animal disease eradication and monitoring programmes in the food and feed policy area |
| --- | --- |

1 —

Accuracy of MS' cost claims under the animal disease eradication and monitoring programmes in the food and feed policy area

256,23

10,70

Total

60 919,10

1 958,75

| 1.20. | The increases in the number of reservations, directorates-general concerned and financial impact estimated reflect the recognition, by the directors-general, of a high risk of error in some areas, such as rural development, cohesion or the 7th Framework Programme (FP7). This also corroborates the Court’s audit results for 2011 (see paragraphs 1.10 to 1.15). |
| --- | --- |

1.20.

The increases in the number of reservations, directorates-general concerned and financial impact estimated reflect the recognition, by the directors-general, of a high risk of error in some areas, such as rural development, cohesion or the 7th Framework Programme (FP7). This also corroborates the Court’s audit results for 2011 (see paragraphs 1.10 to 1.15).

| 1.20. | The Commission has reported its analysis of the various reasons behind this increase in the Synthesis report for 2011. These are outlined in paragraph 1.27 below. For regional policy, the increase in the number of reservations is mainly due to the application of a stricter methodology in particular by assessing the cumulative residual risk, to address observations made by the Court in its former Annual Reports. For the first year, programmes are put under reservation when the cumulative residual risk is above 2 %. |
| --- | --- |

1.20.

Commission estimates of a ‘residual error rate’

| 1.21. | Each directorate-general is required to assess the extent to which transactions remain affected by error after the operation of supervisory and control systems. This can be done by calculating a residual error rate (RER). In the simplest terms the RER is the error rate obtained from an examination of a representative sample of transactions less any corrections resulting from the supervisory and control systems. If the RER exceeds 2 %, the director-general must include a reservation in the declaration which is included in the annual activity report. |
| --- | --- |

1.21.

Each directorate-general is required to assess the extent to which transactions remain affected by error after the operation of supervisory and control systems. This can be done by calculating a residual error rate (RER). In the simplest terms the RER is the error rate obtained from an examination of a representative sample of transactions less any corrections resulting from the supervisory and control systems. If the RER exceeds 2 %, the director-general must include a reservation in the declaration which is included in the annual activity report.

| 1.21. | The examination of a representative sample of transactions typically requires an audit effort which is beyond the means of directorate-generals and services outside the four main expending areas (agriculture, Structural Funds, external aid and research). The AAR standing instructions provide extensive guidance on how to provide assurance when the available control indicators are not statistically representative of the transaction population. For cohesion policy the regulations provide that Member States audit representative samples of transactions for programmes or groups of programmes each year. The resulting error rates are then reviewed and confirmed by the Commission services and used for their assurance process. |
| --- | --- |

1.21.

| 1.22. | The Commission for the first time provided directorates-general with guidance on how to calculate the RER in the instructions for preparing the 2011 annual activity reports. This led to an improvement in some declarations, in particular for the cohesion directorates-general (see paragraphs 5.66 and 6.25) and the Directorates-General for Research and Innovation and for the Information Society and Media (see paragraphs 8.35 to 8.36). However, the Court found weaknesses in these instructions and their implementation. Some directorates-general provided unclear information and/or underestimated RERs, which meant that they failed to make reservations or understated their seriousness (15). For example: |
| --- | --- |

1.22.

The Commission for the first time provided directorates-general with guidance on how to calculate the RER in the instructions for preparing the 2011 annual activity reports. This led to an improvement in some declarations, in particular for the cohesion directorates-general (see paragraphs 5.66 and 6.25) and the Directorates-General for Research and Innovation and for the Information Society and Media (see paragraphs 8.35 to 8.36). However, the Court found weaknesses in these instructions and their implementation. Some directorates-general provided unclear information and/or underestimated RERs, which meant that they failed to make reservations or understated their seriousness (15). For example:

| 1.22. | The Commission welcomes the acknowledgement of its improved guidance as a response to the Court’s recommendations made in its 2010 Annual Report.

  It considers that the DGs referred to by the Court followed the instructions and made appropriate reservations. |
| --- | --- |

1.22.

It considers that the DGs referred to by the Court followed the instructions and made appropriate reservations.

| — | the guidance did not sufficiently explain what to do when it was not possible to calculate a reliable RER; |
| --- | --- |

—

the guidance did not sufficiently explain what to do when it was not possible to calculate a reliable RER;

| — | The AAR instructions include specific, step-by-step guidance on how to proceed in case this information is not available. |
| --- | --- |

—

| — | amounts were included in the calculation although, due to long delays, they had not been received or otherwise recovered; |
| --- | --- |

—

amounts were included in the calculation although, due to long delays, they had not been received or otherwise recovered;

| — | In line with the Commission’s instructions, only financial corrections that were officially agreed by national authorities and recorded by the Certifying Authority in their books were taken into consideration when calculating the residual error rate. Provided that these requirements are met, the Commission ensures that all agreed financial corrections are deducted from the next payment claim submitted by the relevant authorities. |
| --- | --- |

—

| — | different types of corrective actions (financial corrections/withdrawals and recoveries) were included in the calculation of the RER despite their inherent differences (16). Furthermore, the instructions also foresaw suspensions to be included. |
| --- | --- |

—

different types of corrective actions (financial corrections/withdrawals and recoveries) were included in the calculation of the RER despite their inherent differences (16). Furthermore, the instructions also foresaw suspensions to be included.

| — | The Commission agrees that suspensions should not be included in the residual error rate calculation and no directorate-general has done so. |
| --- | --- |

—

| 1.23. | The Court concludes that the RER is not yet a reliable indicator of the extent to which transactions remain affected by error. |
| --- | --- |

1.23.

The Court concludes that the RER is not yet a reliable indicator of the extent to which transactions remain affected by error.

| 1.23. | The Commission acknowledges that wider and more consistent use of the RER indicator is desirable. Yet, it recalls that it is not intended to be either solely or universally used. Most DGs and services will continue to rely on other indicators to assess the amount at risk. Medium-size directorates-general would in particular be facing unfavourable ratios for cost-efficiency of controls. |
| --- | --- |

1.23.

Synthesis report of the Commission

| 1.24. | In the introduction to the synthesis report (17), the Commission takes overall political responsibility for management of the EU budget primarily based on the assurances and reservations in the AARs from directors-general and heads of service. |
| --- | --- |

1.24.

In the introduction to the synthesis report (17), the Commission takes overall political responsibility for management of the EU budget primarily based on the assurances and reservations in the AARs from directors-general and heads of service.

| 1.25. | The principal sources for the synthesis report are the AARs. The Commission notes that they all give reasonable assurance concerning the regularity of the underlying transactions. The Court has noticed improvements in some AARs recognising a high risk of error and providing quantitative indicators for measuring regularity of transactions (see paragraphs 1.20 and 1.22). However, the Court emphasises that issues previously identified remain unresolved (see paragraph 1.22 and
  Annex 1.2
  , paragraph 2). |
| --- | --- |

1.25.

The principal sources for the synthesis report are the AARs. The Commission notes that they all give reasonable assurance concerning the regularity of the underlying transactions. The Court has noticed improvements in some AARs recognising a high risk of error and providing quantitative indicators for measuring regularity of transactions (see paragraphs 1.20 and 1.22). However, the Court emphasises that issues previously identified remain unresolved (see paragraph 1.22 and
  Annex 1.2
  , paragraph 2).

| 1.25. | See Commission reply to paragraph 1.22 and Annex 1.2, paragraph 2. |
| --- | --- |

1.25.

| 1.26. | The synthesis report also draws on the second overall opinion issued by the Commission’s Internal Auditor. The overall opinion is based on the work carried out from 2009 to 2011 by the IAS and the Internal Audit Capabilities as well as the assurance given in the AARs for 2011 by senior management. Compared to last year, the overall opinion has improved by providing more detail on the matters raised. The opinion remains positive, building in most cases on the same reservations as contained in the AARs. The Court considers that the issues identified by the Internal Auditor as requiring further attention — such as the weaknesses in the external aid area (18) — should be appropriately addressed by the directorates-general concerned. |
| --- | --- |

1.26.

The synthesis report also draws on the second overall opinion issued by the Commission’s Internal Auditor. The overall opinion is based on the work carried out from 2009 to 2011 by the IAS and the Internal Audit Capabilities as well as the assurance given in the AARs for 2011 by senior management. Compared to last year, the overall opinion has improved by providing more detail on the matters raised. The opinion remains positive, building in most cases on the same reservations as contained in the AARs. The Court considers that the issues identified by the Internal Auditor as requiring further attention — such as the weaknesses in the external aid area (18) — should be appropriately addressed by the directorates-general concerned.

| 1.26. | The Internal Auditor ensures coherence between the qualifications to his overall opinion and the reservations of the directors-general and heads of service through a dialogue lasting from the conclusion of his audits until the statements of assurance are signed. The opinion is built on the audit work undertaken over three years on all material areas.

  All risks brought to the attention of Authorising officers by delegation by the Internal Auditor are appropriately addressed by the directorates-general concerned through the drawing up and implementation of action plans which are rigorously monitored by directors-general and by the Audit Progress Committee of the Commission. |
| --- | --- |

1.26.

All risks brought to the attention of Authorising officers by delegation by the Internal Auditor are appropriately addressed by the directorates-general concerned through the drawing up and implementation of action plans which are rigorously monitored by directors-general and by the Audit Progress Committee of the Commission.

| 1.27. | The Commission recognises the high risk of error by increasing the amount of payments under reservation (see paragraph 1.20). It states that this effect can be attributed to a series of factors of which some are:






  — | the multiannual implementation cycle is up to full speed for most 2007-2013 programmes; |
| --- | --- | --- |

1.27.

The Commission recognises the high risk of error by increasing the amount of payments under reservation (see paragraph 1.20). It states that this effect can be attributed to a series of factors of which some are:

—

the multiannual implementation cycle is up to full speed for most 2007-2013 programmes;

| — | for many spending areas, more reliable indicators for the quality of financial management are now available; and |
| --- | --- |

—

for many spending areas, more reliable indicators for the quality of financial management are now available; and

| — | new guidance for these indicators has prevented pre-financing from averaging down the error rates detected in interim and final payments. |
| --- | --- |

—

new guidance for these indicators has prevented pre-financing from averaging down the error rates detected in interim and final payments.

| 1.27. | See Commission reply to paragraph 1.20. |
| --- | --- |

1.27.

| 1.28. | In relation to this, the Commission also acknowledges that further improvement is required to present transparent information on the quality of financial management and proposes action to address these concerns, such as: |
| --- | --- |

1.28.

In relation to this, the Commission also acknowledges that further improvement is required to present transparent information on the quality of financial management and proposes action to address these concerns, such as:

1.28.

| — | reporting in the relevant AARs on implementation, results and audits of financial instrument activities; |
| --- | --- |

—

reporting in the relevant AARs on implementation, results and audits of financial instrument activities;

| — | The amendment of Council Regulation (EC) No. 1083/2006 of 13 December 2011, initiated by the Commission in July 2011, introduced formal requirement for the Managing Authorities to report on financial instruments (FIs) in the annual and final reports on implementation of operational programmes. The Commission will provide a summary of this data in the AAR, on the progress made in financing and implementing financial instruments. The Commission’s summary report will be produced by 1 October 2012.

  In addition, further to the Court’s observations concerning financial instrument activities in its 2010 Annual Report, the Commission has conducted specific audit work in 2011 focusing on this area and reported its results in the AARs of DG REGIO (page 73) and DG EMPL (pages 45-46). The Commission intends to pursue with its audit work in this area in 2012 and subsequent years. |
| --- | --- |

—

In addition, further to the Court’s observations concerning financial instrument activities in its 2010 Annual Report, the Commission has conducted specific audit work in 2011 focusing on this area and reported its results in the AARs of DG REGIO (page 73) and DG EMPL (pages 45-46). The Commission intends to pursue with its audit work in this area in 2012 and subsequent years.

| — | disclosing, for the AARs concerned, indicators that are relevant to multiannual control strategies as is done for cohesion and further harmonising the materiality criteria in the AARs between cohesion directorates-general and other directorates-general responsible for funds under shared management; and |
| --- | --- |

—

disclosing, for the AARs concerned, indicators that are relevant to multiannual control strategies as is done for cohesion and further harmonising the materiality criteria in the AARs between cohesion directorates-general and other directorates-general responsible for funds under shared management; and

| — | AARs indicators such as the cumulative residual risk relevant to multiannual strategies will be further harmonised, to the extent possible, with other structural actions directorates-general. |
| --- | --- |

—

| — | the modifications which it has proposed to the Financial Regulation and the sectoral regulations for the 2014 to 2020 period (which are currently being discussed by the European Parliament and the Council) with a view to improving the design of funding schemes, addressing the risk of error, limiting the administrative burden for beneficiaries and other stakeholders, reducing the operating costs of controls and obtaining annual management declarations of assurance for all programmes under shared management. |
| --- | --- |

—

the modifications which it has proposed to the Financial Regulation and the sectoral regulations for the 2014 to 2020 period (which are currently being discussed by the European Parliament and the Council) with a view to improving the design of funding schemes, addressing the risk of error, limiting the administrative burden for beneficiaries and other stakeholders, reducing the operating costs of controls and obtaining annual management declarations of assurance for all programmes under shared management.

| — | The aim of the Commission is to improve the arrangements put in place for 2007-2013 whilst ensuring sufficient continuity and avoiding an overhaul of systems. Reinforced result orientation is one of the overarching aims of the Commission. Planning, implementation, monitoring, evaluation as well as control and audit arrangements have been adjusted or redesigned to encourage and facilitate achievement as well as the measurement of results. |
| --- | --- |

—

| 1.29. | The Court considers that the initiatives of the Commission to strengthen accountability and improve transparency of information on the quality of financial management are steps in the right direction. However, the Court has recently pointed out that although these proposals might contribute to increasing assurance that expenditure is legal and regular, the Commission has not shown how it intends to use this information to arrive at the situation that transactions are free from material error (19). |
| --- | --- |

1.29.

The Court considers that the initiatives of the Commission to strengthen accountability and improve transparency of information on the quality of financial management are steps in the right direction. However, the Court has recently pointed out that although these proposals might contribute to increasing assurance that expenditure is legal and regular, the Commission has not shown how it intends to use this information to arrive at the situation that transactions are free from material error (19).

| 1.29. | The Commission proposal of a single logical assurance chain supporting the Commission services’ own management declarations — if adopted by the legislative Authority — is seen as a major step forward as this will provide for assurance from all levels of management of all EU funds.

  The relevant Commission managers will take full account of the underlying assurance declarations in framing their own management declarations thus providing a solid basis for assurance and action to address weaknesses in the management and control systems where necessary. |
| --- | --- |

1.29.

The relevant Commission managers will take full account of the underlying assurance declarations in framing their own management declarations thus providing a solid basis for assurance and action to address weaknesses in the management and control systems where necessary.

| 1.30. | Interruption and suspension of payments may be a useful tool to prevent deficiencies resulting in irregular expenditure, but these instruments need to be complemented by actions correcting the errors (i.e. financial corrections and recoveries). The Court considers that when presenting figures concerning financial correction and recoveries the Commission needs to put these into an appropriate context — the related data from Member States is still incomplete or not fully audited and/or validated and the inherent difference and impact of the two corrective instruments is still not adequately taken into account. |
| --- | --- |

1.30.

Interruption and suspension of payments may be a useful tool to prevent deficiencies resulting in irregular expenditure, but these instruments need to be complemented by actions correcting the errors (i.e. financial corrections and recoveries). The Court considers that when presenting figures concerning financial correction and recoveries the Commission needs to put these into an appropriate context — the related data from Member States is still incomplete or not fully audited and/or validated and the inherent difference and impact of the two corrective instruments is still not adequately taken into account.

| 1.30. | The Commission agrees that a strict interruptions and suspensions policy is an effective tool to prevent deficiencies resulting in irregular expenditure, as demonstrated in the Staff Working Document (SEC(2011) 1179). The Commission complements these preventive mechanisms with strict financial corrections when necessary. The Commission has reported on the first results of its risk-based audit of the Member States’ corrective capacity in the concerned AARs, and has provided detailed guidance to Member States to improve the reporting of figures. The results of the ongoing audits on Member States’ figures will be used to further improve guidance if necessary and good practices will be shared with Member States. |
| --- | --- |

1.30.

BUDGETARY MANAGEMENT

| 1.31. | This section analyses some key 2011 budgetary management data, notably the implementation of budgetary appropriations for commitments and payments, the utilisation of payment appropriations at year end and the level of outstanding budgetary commitments (RAL). |
| --- | --- |

1.31.

This section analyses some key 2011 budgetary management data, notably the implementation of budgetary appropriations for commitments and payments, the utilisation of payment appropriations at year end and the level of outstanding budgetary commitments (RAL).

Budgetary appropriations for commitments and payments

| 1.32. | The EU budget in 2011 included budgetary appropriations for commitment (20) of 142,5 billion euro (21), and appropriations for payment (22) of 128,3 billion euro (23). The implementing institutions arrived at high implementation rates: 99,3 % of appropriations for commitment (the same as in 2010) and 98,6 % of appropriations for payment (2010: 96,6 %) (24). Appropriations, excluding carryovers, were below the financial framework ceilings in commitments by 0,1 billion euro and in payments by 7,0 billion euro, all reserves included. |
| --- | --- |

1.32.

The EU budget in 2011 included budgetary appropriations for commitment (20) of 142,5 billion euro (21), and appropriations for payment (22) of 128,3 billion euro (23). The implementing institutions arrived at high implementation rates: 99,3 % of appropriations for commitment (the same as in 2010) and 98,6 % of appropriations for payment (2010: 96,6 %) (24). Appropriations, excluding carryovers, were below the financial framework ceilings in commitments by 0,1 billion euro and in payments by 7,0 billion euro, all reserves included.

| 1.33. | Implementation of the budget overall resulted in a budgetary surplus (25) at the end of 2011 of 1,5 billion euro (2010: 4,5 billion euro). This will offset, in principle, the own resources to be collected from Member States in the following year(s). |
| --- | --- |

1.33.

Implementation of the budget overall resulted in a budgetary surplus (25) at the end of 2011 of 1,5 billion euro (2010: 4,5 billion euro). This will offset, in principle, the own resources to be collected from Member States in the following year(s).

| 1.34. | However, in the three main funds of the heading 1b of the multiannual financial framework ‘Cohesion for growth and employment’ (European Social Fund (ESF), European Regional Development Fund (ERDF) and Cohesion fund (CF)) there was an acceleration of payment requests by Member States towards the end of the year. In fact, payments could have been up to 5 billion euro higher had the increased need for funds been correctly anticipated and had the required payment appropriations been made available, e.g. by transfers of unused amounts in other areas (26). |
| --- | --- |

1.34.

However, in the three main funds of the heading 1b of the multiannual financial framework ‘Cohesion for growth and employment’ (European Social Fund (ESF), European Regional Development Fund (ERDF) and Cohesion fund (CF)) there was an acceleration of payment requests by Member States towards the end of the year. In fact, payments could have been up to 5 billion euro higher had the increased need for funds been correctly anticipated and had the required payment appropriations been made available, e.g. by transfers of unused amounts in other areas (26).

| 1.34. | As a general rule, the legal base foresees that payment applications are submitted three times a year with a last submission until end October. However, this provision is not binding and Member States may send their claims until year end to avoid automatic decommitments, which explains the high number of claims transmitted at the end of the year.

  Moreover, interruptions and suspensions decisions are elements which can hardly be taken into account when forecasting appropriations needed. Interruptions may last up to six months according to the regulation. Upon correction of the deficiency by the Member States and application of financial corrections if necessary, the Commission lifts the interruption and as a consequence, payments may resume.


  The Commission wrote to Member States in the beginning of 2012 to emphasise the need to transmit most of the claims by 31 October. It would allow the Commission, in addition to the global transfer exercise, to request an amending budget to the budgetary Authority to increase the payment appropriations to honour the claims received, based on payment claims actually received instead of on the basis of forecasts. |
| --- | --- |

1.34.

Moreover, interruptions and suspensions decisions are elements which can hardly be taken into account when forecasting appropriations needed. Interruptions may last up to six months according to the regulation. Upon correction of the deficiency by the Member States and application of financial corrections if necessary, the Commission lifts the interruption and as a consequence, payments may resume.

The Commission wrote to Member States in the beginning of 2012 to emphasise the need to transmit most of the claims by 31 October. It would allow the Commission, in addition to the global transfer exercise, to request an amending budget to the budgetary Authority to increase the payment appropriations to honour the claims received, based on payment claims actually received instead of on the basis of forecasts.

Utilisation of payment appropriations at year end

| 1.35. | The Court notes that under some budget titles a disproportionately high amount of payments was made in the month of December compared to the total payments in the rest of the year (27). Such a concentration of a significant proportion of payments in a limited period may adversely affect the effectiveness of supervisory and control systems and increase the risk of error. |
| --- | --- |

1.35.

The Court notes that under some budget titles a disproportionately high amount of payments was made in the month of December compared to the total payments in the rest of the year (27). Such a concentration of a significant proportion of payments in a limited period may adversely affect the effectiveness of supervisory and control systems and increase the risk of error.

| 1.35. | Concentration of payments depends on the rhythm by which cost claims from Member States and other beneficiaries are sent to the Commission. The Commission is also of the view that not all budget titles mentioned in the footnote present a high percentage of payments at year end. |
| --- | --- |

1.35.

Outstanding budgetary commitments (RAL)

| 1.36. | Outstanding budgetary commitments (RAL) (28) for which payment and/or decommitment have not yet been made (29) increased by 13 billion euro (6,7 %) to 207 billion euro, mostly in policy areas financed through differentiated appropriations (30), and represent the equivalent of 2,3 years worth of differentiated commitments or 2,7 years of differentiated payments at the 2011 spending rate. |
| --- | --- |

1.36.

Outstanding budgetary commitments (RAL) (28) for which payment and/or decommitment have not yet been made (29) increased by 13 billion euro (6,7 %) to 207 billion euro, mostly in policy areas financed through differentiated appropriations (30), and represent the equivalent of 2,3 years worth of differentiated commitments or 2,7 years of differentiated payments at the 2011 spending rate.

| 1.37. | Most outstanding commitments concern cohesion (31) (see
  Graph 1.2
  ). In this field, outstanding commitments amounted to 136 billion euro (32) (65,5 % of the total amount), representing 2,7 years worth of commitments or 3,2 years worth of payments in that area at the 2011 spending rate. The vast majority of these outstanding commitments (124,6 billion euro or 92 % of the total amount) concerns the current period 2007-2013 (33). |
| --- | --- |

1.37.

Most outstanding commitments concern cohesion (31) (see
  Graph 1.2
  ). In this field, outstanding commitments amounted to 136 billion euro (32) (65,5 % of the total amount), representing 2,7 years worth of commitments or 3,2 years worth of payments in that area at the 2011 spending rate. The vast majority of these outstanding commitments (124,6 billion euro or 92 % of the total amount) concerns the current period 2007-2013 (33).

| 1.36-1.37 | Outstanding commitments derive from the normal management of multiannual programmes and from the growth in the overall level of new commitments. As far as Structural Funds are concerned, the size of the RAL is controlled by the N+2/N+3 rule defined by the corresponding regulations. Following this rule, the expected level of the RAL must be equivalent to two or three years of commitments. Consequently, the RAL situation is normal, as shown in Graph 1.2 comparing the situation of the RAL for the 2000-2006 period and the first years of implementation of the 2007-2013 period.

  The validity of the indicator ‘2011 spending rate’ is relative for payments, because of the lack of available appropriations at year end (see item 1.34 last sentence). |
| --- | --- |

1.36-1.37

The validity of the indicator ‘2011 spending rate’ is relative for payments, because of the lack of available appropriations at year end (see item 1.34 last sentence).

| 1.38. | The substantially higher level of accumulated outstanding commitments shown for the programming period 2007-2013 can be explained to a large extent by the late implementation of programmes (34). Payments could only be made once Member States' management and control systems were approved by the Commission, as required by the relevant regulations for Structural Funds. According to the interinstitutional agreement on budgetary discipline and sound financial management (35), it must be ensured that sufficient payment appropriations are made available in future years to cover the widening gap between outstanding commitments and appropriations for payments (see also paragraph 1.34). |
| --- | --- |

1.38.

The substantially higher level of accumulated outstanding commitments shown for the programming period 2007-2013 can be explained to a large extent by the late implementation of programmes (34). Payments could only be made once Member States' management and control systems were approved by the Commission, as required by the relevant regulations for Structural Funds. According to the interinstitutional agreement on budgetary discipline and sound financial management (35), it must be ensured that sufficient payment appropriations are made available in future years to cover the widening gap between outstanding commitments and appropriations for payments (see also paragraph 1.34).

| 1.38. | The mechanism of prior approval of Member States’ management and control systems before any interim payment is made, introduced for the first time for the 2007-2013 period, is a major improvement in securing the EU payments for cohesion. During the programming period, the requirements for presenting the payment request were modified for 2007 commitments and more flexibility was introduced for major projects. These measures slowed down the spending levels.

  Full execution of the available credits by the Structural Funds in both 2010 and 2011 show that the growth in the RAL can also result from a lack of budget credits available at year end (see also point 1.34).


  Graph 1.2 gives evidence of the likely absorption of outstanding commitments accumulated during the financial framework programming period.


  Finally, the Commission agrees that sufficient payment appropriations need to be made available in future years. The Commission is firmly committed to present draft budgets covering the widening gap between outstanding commitments and appropriations for payments. |
| --- | --- |

1.38.

Full execution of the available credits by the Structural Funds in both 2010 and 2011 show that the growth in the RAL can also result from a lack of budget credits available at year end (see also point 1.34).

Graph 1.2 gives evidence of the likely absorption of outstanding commitments accumulated during the financial framework programming period.

Finally, the Commission agrees that sufficient payment appropriations need to be made available in future years. The Commission is firmly committed to present draft budgets covering the widening gap between outstanding commitments and appropriations for payments.

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(1)  The consolidated financial statements comprise the balance sheet, the economic outturn account, the cash flow table, the statement of changes in net assets and a summary of significant accounting policies and other explanatory notes (including segment reporting).

(2)  The consolidated reports on implementation of the budget comprise the consolidated reports on implementation of the budget and a summary of budgetary principles and other explanatory notes.

(3)  The accounting rules adopted by the Commission's accounting officer are derived from International Public Sector Accounting Standards (IPSAS) issued by the International Federation of Accountants or, in their absence, International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board. In accordance with the Financial Regulation, the consolidated financial statements for the 2011 financial year were prepared (as they have been since the 2005 financial year) on the basis of these accounting rules adopted by the Commission's accounting officer, which adapt accruals based accounting principles to the specific environment of the European Union, while the consolidated reports on implementation of the budget continue to be primarily based on cash movements.

(4)  From French: ‘Déclaration d’assurance’.

(5)  See article 287 of the Treaty on the Functioning of the European Union.

(6)  Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities (OJ L 248, 16.9.2002, p. 1), last amended by Regulation (EU, Euratom) No 1081/2010 of the European Parliament and of the Council (OJ L 311, 26.11.2010, p. 9), requires that the final consolidated accounts shall be sent before 31 July of the following financial year (see Article 129).

(7)  For the scope of the audit of revenue, see paragraphs 2.9 and 2.13.

(8)  Interim and final payments based on declarations of expenditure incurred at the level of final recipients (see paragraphs 3.9, 4.9, 5.27 and 6.12).

(9)  In contrast to previous years, failure to meet cross-compliance obligations by recipients of payments under the CAP has been included in the calculation of the most likely error. The errors found represent around 0,1 percentage point of the most likely error estimated by the Court for payments as a whole (see paragraph 3.9, second indent, paragraph 3.13, paragraph 4.9, second indent, and paragraphs 4.16 to 4.18).

(10)  White Paper ‘Reforming the Commission’, COM(2000) 200 final of 5.4.2000.

(11)  European Parliament resolution of 19 January 2000 on action to be taken on the second report of the Committee of Independent Experts on reform of the Commission (OJ C 304, 24.10.2000, p. 135).

(12)  The Commission’s internal control standards are largely inspired by the COSO principles. COSO is a voluntary private-sector organisation dedicated to improving the quality of financial management and reporting through business ethics, effective internal controls and corporate governance.

(13)  The term ‘director-general’ is used in the broad sense of persons responsible. In fact, the 48 declarations have been signed by 1 secretary-general, 36 directors-general, 7 directors and 4 heads of service.

(14)  Performance aspects of the annual activity reports are treated in Chapter 10.

(15)  See paragraphs 3.40 to 3.41, 4.48 to 4.50, 5.67 to 5.69, 6.24 to 6.26 and 7.25.

(16)  See paragraphs 1.32 to 1.50 of the Court’s 2009 Annual Report.

(17)  Communication from the Commission to the European Parliament, the Council and the Court of Auditors — Synthesis of the Commission’s management achievements in 2011, COM(2012) 281 final of 6.6.2012.

(18)  Information about the overall quality of financial management is absent in the external aid DGs, but no reservation has been provided for this (see paragraph 7.25 and paragraphs 52 to 53 in the 2011 EDF Annual Report).

(19)  See Opinion No 6/2010 on a proposal for a regulation of the European Parliament and of the Council on the Financial Regulation applicable to the general budget of the European Union of the European Court of Auditors (OJ C 334, 10.12.2010, p. 1).

(20)  Amounts available for commitments in this and future years.

(21)  Includes appropriations for commitment carried over from 2010 amounting to 259 million euro and an overall 284 million euro increase in appropriations for commitment arising from the seven amending budgets approved during 2011. It excludes assigned revenue which in 2011 amounts to 6,2 billion euro for commitments and 6,7 billion euro for payments. Assigned revenues are used to finance specific items of expenditure (see Article 18 of the Financial Regulation — Regulation (EC, Euratom) No 1605/2002). They cover inter alia refunds arising from recovery of amounts paid in error, which are re-allocated to their budget line of origin, contributions from EFTA members increasing budget lines, and revenue from third parties where agreements have been concluded involving a financial contribution to EU activities.

(22)  Amounts available for payments in the year.

(23)  Includes appropriations for payment carried over from 2010 amounting to 1 582 million euro and an overall 200 million euro increase in appropriations for payment arising from the seven amending budgets approved during 2011.

(24)  In 2011 appropriations for commitment were higher than in 2010 by 0,6 billion euro (0,4 %), and appropriations for payment were higher by 3,6 billion euro (2,9 %).

(25)  The budgetary surplus (budget outturn) is the result of the implementation of the budget. However, it is not a reserve and it cannot be accumulated and used in future years to finance expenditure.

(26)  In the case of the ESF an underutilisation in 2010 (see the Court’s 2010 Annual Report, paragraph 1.41) led to additional payments in 2011. This, together with accelerated payment requests towards the end of the year, increased the actual payments to 114 % of the original budget. The additional payment requests for the ESF were mainly covered by transfers from ERDF and CF. However, unforeseen inflow of payment requests for ERDF and CF towards the end of the year overturned predictions and increased actual payments to such a level that additional payments could have been made from these funds, if appropriations had been available — see also ‘Report on budgetary and financial management accompanying the Community accounts — Financial year 2011’, pp. 42-45.

(27)  High percentages of payments in December compared to the actual payments made in the year: Title 06 — Mobility and transport 26 % (295 million), Title 17 — Health and consumer protection 44 % (266 million), Title 19 — External relations 31 % (1 016 million), Title 21 — Development and relations with African, Caribbean and Pacific States 27 % (403 million), Title 22 — Enlargement 28 % (264 million) and Title 32 — Energy 23 % (219 million).

(28)  From French: ‘Reste à liquider’.

(29)  Outstanding budgetary commitments arise as a direct consequence of differentiated appropriations (see footnote 30), where expenditure programmes take a number of years to be completed and commitments made in earlier years remain outstanding until the corresponding payments are made.

(30)  The budget distinguishes between two types of appropriation: non-differentiated appropriations and differentiated appropriations. Non-differentiated appropriations are used to finance operations of an annual nature, e.g. administrative expenditure. Differentiated appropriations were introduced to manage multiannual operations; the related payments can be made during the year of the commitment and during the following years. Differentiated appropriations are used mainly for the Structural Funds and the Cohesion Fund.

(31)  For cohesion, the following total commitments were foreseen in the Financial Framework 2000-2006: 261 billion euro (see 2006 accounts) and the Financial Framework 2007-2013: 348 billion euro (see 2011 accounts), i.e. an increase of 33 %.

(32)  For cohesion see ‘Report on budgetary and financial management accompanying the Community accounts — Financial year 2011’, pp. 28, 42-45.

(33)  The automatic decommitment rule (n + 2 rule/n + 3 rule) helps to clear outstanding commitments. This rule requires automatic decommitment of all funds not spent or not covered by a payment request by the end of the second/third year following the year of allocation. As part of the ‘third simplification’ package, the n + 2/n + 3 rule was last amended for the 2007 commitments in cohesion (see Council Regulation (EC) No 1083/2006 (OJ L 210, 31.7.2006, p. 26), amended by Regulation (EU) No 539/2010 of the European Parliament and of the Council (OJ L 158, 24.6.2010, p. 1).

(34)  See the Court’s 2008 Annual Report, paragraphs 6.8 and 6.26 to 6.28. More details are available in the Commission Report on budgetary and financial management accompanying the Community accounts — Financial year 2008, p. 42, and in the Commission Analysis of the budgetary implementation of the Structural and Cohesion Funds in 2008, p. 5 and pp. 13-17.

(35)  OJ C 139, 14.6.2006, p. 1. See also Article 3 of Council Decision 2007/436/EC, Euratom of 7 June 2007 on the system of the European Communities Own Resources (OJ L 163, 23.6.2007, p. 17).

(36)  The budgetary Titles 14 and 24 to 31 of Section III of the general budget concerning primarily administrative expenditure are reported in the European Commission Section of Chapter 9.

(37)  Administrative expenditure is deducted from policy groups and shown separately under its own heading; this leads to differences in comparison with Chapters 3 to 9.

(38)  In the 2010 Annual Report, the policy groups agriculture: market and direct support and rural development, environment, fisheries and health as well as the policy groups regional policy, energy and transport and employment and social affairs were single policy groups. The aggregated results for 2011, based on the previous structure, are presented in
  Table 1.3
  .

(39)  Systems are classified as ‘partially effective’ where some control arrangements have been judged to work adequately whilst others have not. Consequently, taken as a whole, they might not succeed in restricting errors in the underlying transactions to an acceptable level. For details see the section ‘Audit scope and approach’ in Chapters 2 to 9.

(40)  The frequency of errors represents the proportion of the sample affected by quantifiable and non-quantifiable errors. Percentages are rounded.

(41)  Reimbursed expenditure (see paragraph 3.9).

(42)  Reimbursed expenditure (see paragraph 4.9).

(43)  Reimbursed expenditure (see paragraph 5.27).

(44)  Reimbursed expenditure (see paragraph 6.12).

(45)  The difference between the payments in 2011 (129 395 million euro — see
  Table 1.1
  ) and the total amount of the overall audited population in the context of the regularity of transactions corresponds to advances paid for the policy groups agriculture: market and direct support (8 million euro), rural development, environment, fisheries and health (565 million euro), regional policy, energy and transport (1 469 million euro), and employment and social affairs (128 million euro) (see paragraphs 3.9, 4.9, 5.27 and 6.12).

(46)  In contrast to previous years, failure to meet cross-compliance obligations has been included in the calculation of the most likely error. The errors found represent around 0,2 percentage points of the total most likely error (see paragraph 3.9, second indent and paragraph 3.13).

(47)  In contrast to previous years, failure to meet cross-compliance obligations has been included in the calculation of the most likely error. The errors found represent around 0,2 percentage points of the total most likely error (see paragraph 4.9, second indent and paragraphs 4.16 to 4.18).

(48)  In contrast to previous years, failure to meet cross-compliance obligations by recipients of payments under the CAP has been included in the calculation of the most likely error. The errors found represent around 0,1 percentage point of the most likely error estimated by the Court for payments as a whole (see also footnotes 9 and 10).

(49)  The audit involved examination at the Commission's level of a sample of recovery orders covering all types of revenue (see paragraphs 2.8, 2.9 and 2.13).

(50)  In contrast to previous years, failure to meet cross-compliance obligations has been included in the calculation of the most likely error (see paragraphs 3.9, 3.13, 4.9 and 4.16 to 4.18). The errors found represent around 0,2 percentage points of the total most likely error.

(51)  In contrast to previous years, failure to meet cross-compliance obligations by recipients of payments under the CAP has been included in the calculation of the most likely error. The errors found represent around 0,1 percentage point of the most likely error estimated by the Court for payments as a whole (see also footnote 1).

(52)  For the full list of Commission's DGs/services please see http://publications.europa.eu/code/en/en-390600.htm

(53)  Source: 2011 consolidated accounts.

(54)  Source: 2011 annual activity reports. REGIO and REA have indicated minimum and maximum amounts. Only the latter have been taken into account.

ANNEX 1.1

AUDIT APPROACH AND METHODOLOGY

PART 1
  —   
  Audit approach and methodology for the reliability of accounts (financial audit)

| 1. | In order to assess whether the consolidated accounts, consisting of the consolidated financial statements and the consolidated reports on the implementation of the budget (1), present fairly, in all material respects, the financial position of the European Union, and the results of operations and cash flows at the year end, the main assessment criteria are:
  (a)   legality and regularity: the accounts are drawn up in accordance with the rules, and budgetary appropriations are available;
  (b)   completeness: all revenue and expenditure transactions and all assets and liabilities (including off-balance sheet items) proper to the period are entered in the accounts;
  (c)   reality of the transactions and existence of the assets and liabilities: each revenue and expenditure transaction is justified by an event which pertains to the entity and is proper to the period; the asset or liability exists at the balance sheet date and is proper to the reporting entity;
  (d)   measurement and valuation: the revenue and expenditure transaction and the asset or liability is entered in the accounts at an appropriate value, bearing in mind the principle of prudence;
  (e)   presentation of information: the revenue and expenditure transaction, asset or liability is disclosed and described in accordance with the applicable accounting rules and conventions and the principle of transparency. |
| --- | --- |

1.

In order to assess whether the consolidated accounts, consisting of the consolidated financial statements and the consolidated reports on the implementation of the budget (1), present fairly, in all material respects, the financial position of the European Union, and the results of operations and cash flows at the year end, the main assessment criteria are:

(a)   legality and regularity: the accounts are drawn up in accordance with the rules, and budgetary appropriations are available;

(b)   completeness: all revenue and expenditure transactions and all assets and liabilities (including off-balance sheet items) proper to the period are entered in the accounts;

(c)   reality of the transactions and existence of the assets and liabilities: each revenue and expenditure transaction is justified by an event which pertains to the entity and is proper to the period; the asset or liability exists at the balance sheet date and is proper to the reporting entity;

(d)   measurement and valuation: the revenue and expenditure transaction and the asset or liability is entered in the accounts at an appropriate value, bearing in mind the principle of prudence;

(e)   presentation of information: the revenue and expenditure transaction, asset or liability is disclosed and described in accordance with the applicable accounting rules and conventions and the principle of transparency.

| 2. | The audit consists of the following basic elements:






  (a) | an update of the evaluation of the accounting control environment; |
| --- | --- | --- |

2.

The audit consists of the following basic elements:

(a)

an update of the evaluation of the accounting control environment;

| (b) | checking of the functioning of key accounting procedures and the year-end closure process; |
| --- | --- |

(b)

checking of the functioning of key accounting procedures and the year-end closure process;

| (c) | analytical checks (consistency and reasonableness) on the main accounting data; |
| --- | --- |

(c)

analytical checks (consistency and reasonableness) on the main accounting data;

| (d) | analyses and reconciliations of accounts and/or balances; and |
| --- | --- |

(d)

analyses and reconciliations of accounts and/or balances; and

| (e) | substantive tests of commitments, payments and specific balance sheet items based on representative samples. |
| --- | --- |

(e)

substantive tests of commitments, payments and specific balance sheet items based on representative samples.

PART 2
  —   
  Audit approach and methodology for the regularity of transactions (compliance audit)

| 3. | The approach taken by the Court to audit the regularity of the transactions underlying the accounts comprises:






  — | direct testing of transactions in revenue and in each spending area (see
  Table 1.1
  ) in order to ascertain how far they are regular; and |
| --- | --- | --- |

3.

The approach taken by the Court to audit the regularity of the transactions underlying the accounts comprises:

—

direct testing of transactions in revenue and in each spending area (see
  Table 1.1
  ) in order to ascertain how far they are regular; and

| — | an assessment of the effectiveness of supervisory and control systems ensuring the regularity of transactions. |
| --- | --- |

—

an assessment of the effectiveness of supervisory and control systems ensuring the regularity of transactions.

| 4. | This is supplemented by evidence provided by the work of other auditors (where relevant) and an analysis of Commission management representations. |
| --- | --- |

4.

This is supplemented by evidence provided by the work of other auditors (where relevant) and an analysis of Commission management representations.

How the Court tests transactions

| 5. | The direct testing of transactions within each specific assessment (Chapters 2 to 9) is based on a representative sample of the recovery orders (in the case of revenue) and payments contained within the policy group concerned (2). This testing provides a statistical estimation of the extent to which the transactions in the population concerned are irregular. |
| --- | --- |

5.

The direct testing of transactions within each specific assessment (Chapters 2 to 9) is based on a representative sample of the recovery orders (in the case of revenue) and payments contained within the policy group concerned (2). This testing provides a statistical estimation of the extent to which the transactions in the population concerned are irregular.

| 6. | In order to determine the sample sizes necessary to produce a reliable result, the Court uses an audit assurance model. This involves an assessment of the risk of errors occurring in transactions (inherent risk) and the risk that the systems do not prevent or detect and correct such errors (control risk). |
| --- | --- |

6.

In order to determine the sample sizes necessary to produce a reliable result, the Court uses an audit assurance model. This involves an assessment of the risk of errors occurring in transactions (inherent risk) and the risk that the systems do not prevent or detect and correct such errors (control risk).

| 7. | Transaction testing involves a detailed check of each transaction selected by the samples, including determination of whether or not the claim or payment was correctly calculated and in compliance with the relevant rules and regulations. The Court samples the transactions recorded in the budgetary accounts and traces the payment down to the level of the final recipient (e.g. farmer, organiser of training course, or development aid project promoter) and tests compliance at each level. When the transaction (at any level) is incorrectly calculated or does not meet a regulatory requirement or contractual provision, it is considered to contain an error. |
| --- | --- |

7.

Transaction testing involves a detailed check of each transaction selected by the samples, including determination of whether or not the claim or payment was correctly calculated and in compliance with the relevant rules and regulations. The Court samples the transactions recorded in the budgetary accounts and traces the payment down to the level of the final recipient (e.g. farmer, organiser of training course, or development aid project promoter) and tests compliance at each level. When the transaction (at any level) is incorrectly calculated or does not meet a regulatory requirement or contractual provision, it is considered to contain an error.

How the Court evaluates and presents the results of transaction testing

| 8. | Errors in transactions occur for a variety of reasons and take a number of different forms depending on the nature of the breach and specific rule or contractual requirement not followed. Errors in individual transactions do not always affect the total amount paid. |
| --- | --- |

8.

Errors in transactions occur for a variety of reasons and take a number of different forms depending on the nature of the breach and specific rule or contractual requirement not followed. Errors in individual transactions do not always affect the total amount paid.

| 9. | The Court classifies errors as follows:






  — | whether they are quantifiable or non-quantifiable, depending on whether it is possible to measure how much of the amount paid or received from the EU budget was affected by error; and |
| --- | --- | --- |

9.

The Court classifies errors as follows:

—

whether they are quantifiable or non-quantifiable, depending on whether it is possible to measure how much of the amount paid or received from the EU budget was affected by error; and

| — | in terms of their nature, in particular eligibility (payment does not meet the eligibility rules), occurrence (reimbursement of a cost which is not proven to have been incurred) or accuracy (payment incorrectly calculated). |
| --- | --- |

—

in terms of their nature, in particular eligibility (payment does not meet the eligibility rules), occurrence (reimbursement of a cost which is not proven to have been incurred) or accuracy (payment incorrectly calculated).

| 10. | Public procurement is one area where the Court often finds significant errors. EU and national public procurement law consists essentially of a series of procedural requirements. To ensure the basic principle of competition foreseen in the Treaty the contracts have to be advertised; bids must be evaluated according to specified criteria; contracts may not be artificially split to get below thresholds, etc. |
| --- | --- |

10.

Public procurement is one area where the Court often finds significant errors. EU and national public procurement law consists essentially of a series of procedural requirements. To ensure the basic principle of competition foreseen in the Treaty the contracts have to be advertised; bids must be evaluated according to specified criteria; contracts may not be artificially split to get below thresholds, etc.

| 11. | For its audit purposes the Court puts a value on failure to observe a procedural requirement. The Court:






  (a) | regards as ‘serious’ those errors which frustrate the objectives of the public procurement rules: fair competition and award of the contract to the best qualified bidder (3); |
| --- | --- | --- |

11.

For its audit purposes the Court puts a value on failure to observe a procedural requirement. The Court:

(a)

regards as ‘serious’ those errors which frustrate the objectives of the public procurement rules: fair competition and award of the contract to the best qualified bidder (3);

| (b) | quantifies the impact of ‘serious’ infringements of the public procurement rules as affecting the entire value of the payment related to the contract — a 100 % quantifiable error (4); |
| --- | --- |

(b)

quantifies the impact of ‘serious’ infringements of the public procurement rules as affecting the entire value of the payment related to the contract — a 100 % quantifiable error (4);

| (c) | treats less serious errors which do not affect the outcome of the tendering procedure as non-quantifiable errors (5). |
| --- | --- |

(c)

treats less serious errors which do not affect the outcome of the tendering procedure as non-quantifiable errors (5).

The quantification by the Court may differ from that used by the Commission or Member States when deciding how to respond to misapplication of the public procurement rules.

| 12. | The Court expresses the frequency by which errors occur by presenting the proportion of the sample affected by quantifiable and non-quantifiable errors. This indicates how widespread errors are likely to be within the policy group as a whole. This information is given in Annexes X.1 of Chapters 2 to 9 when material error is present. |
| --- | --- |

12.

The Court expresses the frequency by which errors occur by presenting the proportion of the sample affected by quantifiable and non-quantifiable errors. This indicates how widespread errors are likely to be within the policy group as a whole. This information is given in Annexes X.1 of Chapters 2 to 9 when material error is present.

| 13. | On the basis of the errors which it has quantified, the Court, using standard statistical techniques, estimates the most likely rate of error (MLE) in each specific assessment and for spending from the budget as whole. The MLE is the weighted average of the percentage error rates found in the sample (6). The Court also estimates, again using standard statistical techniques, the range within which it is 95 % confident that the rate of error for the population lies in each specific assessment (and for spending as whole). This is the range between the lower error limit (LEL) and the upper error limit (UEL) (7) (see illustration). |
| --- | --- |

13.

On the basis of the errors which it has quantified, the Court, using standard statistical techniques, estimates the most likely rate of error (MLE) in each specific assessment and for spending from the budget as whole. The MLE is the weighted average of the percentage error rates found in the sample (6). The Court also estimates, again using standard statistical techniques, the range within which it is 95 % confident that the rate of error for the population lies in each specific assessment (and for spending as whole). This is the range between the lower error limit (LEL) and the upper error limit (UEL) (7) (see illustration).

Image

| 14. | The percentage of the shaded area below the curve indicates the probability that the true error rate of the population is between the LEL and the UEL. |
| --- | --- |

14.

The percentage of the shaded area below the curve indicates the probability that the true error rate of the population is between the LEL and the UEL.

| 15. | In planning its audit work, the Court seeks to undertake procedures allowing it to compare the estimated rate of error in the population with a planning materiality of 2 %. In assessing audit results, the Court is guided by this level of materiality and takes account of the nature, amount and context of errors when forming its audit opinion. |
| --- | --- |

15.

In planning its audit work, the Court seeks to undertake procedures allowing it to compare the estimated rate of error in the population with a planning materiality of 2 %. In assessing audit results, the Court is guided by this level of materiality and takes account of the nature, amount and context of errors when forming its audit opinion.

How the Court assesses systems and reports the results

| 16. | Supervisory and control systems are established by the Commission and Member and beneficiary States in the case of shared or decentralised management, to manage the risks to the budget, including the regularity of transactions. Assessing the effectiveness of systems in ensuring regularity is therefore a key audit procedure, and particularly useful for identifying recommendations for improvement. |
| --- | --- |

16.

Supervisory and control systems are established by the Commission and Member and beneficiary States in the case of shared or decentralised management, to manage the risks to the budget, including the regularity of transactions. Assessing the effectiveness of systems in ensuring regularity is therefore a key audit procedure, and particularly useful for identifying recommendations for improvement.

| 17. | Each policy group is subject to a multitude of individual systems, likewise revenue. The Court therefore normally selects a sample of systems to assess each year. The results of the systems assessments are presented in the form of a table called ‘Results of examination of systems’ given in Annexes X.2 of Chapters 2 to 9. Systems are classified as being effective in mitigating the risk of error in transactions, partially effective (when there are some weaknesses affecting operational effectiveness) or not effective (when weaknesses are pervasive and thereby completely undermine operating effectiveness). |
| --- | --- |

17.

Each policy group is subject to a multitude of individual systems, likewise revenue. The Court therefore normally selects a sample of systems to assess each year. The results of the systems assessments are presented in the form of a table called ‘Results of examination of systems’ given in Annexes X.2 of Chapters 2 to 9. Systems are classified as being effective in mitigating the risk of error in transactions, partially effective (when there are some weaknesses affecting operational effectiveness) or not effective (when weaknesses are pervasive and thereby completely undermine operating effectiveness).

| 18. | In addition and when supported by evidence, the Court provides an overall assessment of systems for the policy group (also provided in Annexes X.2 of Chapters 2 to 9), which takes into account both the assessment of selected systems, as well as the results of transaction testing. |
| --- | --- |

18.

In addition and when supported by evidence, the Court provides an overall assessment of systems for the policy group (also provided in Annexes X.2 of Chapters 2 to 9), which takes into account both the assessment of selected systems, as well as the results of transaction testing.

How the Court assesses Commission management representations and reports the results

| 19. | As required by International Standards on Auditing, the Court obtains a letter of representation from the Commission, confirming that the Commission has fulfilled its responsibilities, and disclosed all information that could be relevant to the auditor. This includes confirmation that the Commission has disclosed all information in respect of the assessment of the risk of fraud, all information in respect of fraud or suspected fraud of which the Commission is aware, and all material instances of non-compliance with laws and regulation. |
| --- | --- |

19.

As required by International Standards on Auditing, the Court obtains a letter of representation from the Commission, confirming that the Commission has fulfilled its responsibilities, and disclosed all information that could be relevant to the auditor. This includes confirmation that the Commission has disclosed all information in respect of the assessment of the risk of fraud, all information in respect of fraud or suspected fraud of which the Commission is aware, and all material instances of non-compliance with laws and regulation.

| 20. | In addition, Chapters 2 to 9 consider the annual activity reports of relevant directorates-general. These report on the achievement of policy objectives and the supervisory and control systems in place to ensure the regularity of transactions and sound use of resources. Each annual activity report is accompanied by a declaration of the director-general on inter alia the extent to which resources have been used for their intended purpose, and control procedures ensure the regularity of transactions (8). |
| --- | --- |

20.

In addition, Chapters 2 to 9 consider the annual activity reports of relevant directorates-general. These report on the achievement of policy objectives and the supervisory and control systems in place to ensure the regularity of transactions and sound use of resources. Each annual activity report is accompanied by a declaration of the director-general on inter alia the extent to which resources have been used for their intended purpose, and control procedures ensure the regularity of transactions (8).

| 21. | The Court assesses the annual activity reports and accompanying declarations in order to determine how far they provide a fair reflection of financial management in relation to regularity of transactions and identify the necessary measures to address any serious control deficiencies. The Court reports on the results of this assessment in the section ‘Effectiveness of systems’ in Chapters 2 to 9 (9). |
| --- | --- |

21.

The Court assesses the annual activity reports and accompanying declarations in order to determine how far they provide a fair reflection of financial management in relation to regularity of transactions and identify the necessary measures to address any serious control deficiencies. The Court reports on the results of this assessment in the section ‘Effectiveness of systems’ in Chapters 2 to 9 (9).

How the Court arrives at its opinions in the statement of assurance

| 22. | The Court arrives at its opinion on the regularity of transactions underlying the European Union's accounts, set out in the statement of assurance, on the basis of all its audit work as reported in Chapters 2 to 9 of this report and including an assessment of the pervasiveness of error. A key element is the consideration of the results of testing of spending transactions. Taken together, the Court’s best estimate of the rate of error for overall spending in 2011 is 3,9 %. The Court has 95 % confidence that the rate of error for the population is between 3,0 % and 4,8 %. The error rate estimated for different policy areas varies as described in Chapters 3 to 9. The Court assessed error as pervasive — extending across the majority of spending areas. The Court gives an overall opinion on the regularity of commitments based on an additional horizontal sample. |
| --- | --- |

22.

The Court arrives at its opinion on the regularity of transactions underlying the European Union's accounts, set out in the statement of assurance, on the basis of all its audit work as reported in Chapters 2 to 9 of this report and including an assessment of the pervasiveness of error. A key element is the consideration of the results of testing of spending transactions. Taken together, the Court’s best estimate of the rate of error for overall spending in 2011 is 3,9 %. The Court has 95 % confidence that the rate of error for the population is between 3,0 % and 4,8 %. The error rate estimated for different policy areas varies as described in Chapters 3 to 9. The Court assessed error as pervasive — extending across the majority of spending areas. The Court gives an overall opinion on the regularity of commitments based on an additional horizontal sample.

Irregularity or fraud

| 23. | The overwhelming majority of errors arise from misapplication or misunderstanding of the often complex rules of EU expenditure schemes. If the Court has reason to suspect that fraudulent activity has taken place, it reports this to OLAF, the Union’s anti-fraud office, which is responsible for carrying out any resulting investigations. In fact, the Court reports around four cases per year to OLAF, based on its audit work. |
| --- | --- |

23.

The overwhelming majority of errors arise from misapplication or misunderstanding of the often complex rules of EU expenditure schemes. If the Court has reason to suspect that fraudulent activity has taken place, it reports this to OLAF, the Union’s anti-fraud office, which is responsible for carrying out any resulting investigations. In fact, the Court reports around four cases per year to OLAF, based on its audit work.

---

(1)  Including the explanatory notes.

(2)  Additionally to this, a horizontal representative sample of commitments is drawn and tested for compliance with the relevant rules and regulations.

(3)  There are essentially two award systems: the lowest offer or the most advantageous offer.

(4)  Examples of a quantifiable error: no or restricted competition (except where this is explicitly allowed by the legal framework) for the main or a supplementary contract; inappropriate assessment of bids with an impact on the outcome of the tender; substantial change of the contract scope; splitting of the contracts for different construction sites, which fulfil the same economical function.

The Court applies in general a different approach to misapplication of the public procurement rules by the EU institutions, on the grounds that the contracts concerned generally still remain valid. Such errors are not quantified in the DAS.

(5)  Examples of a non-quantifiable error: inappropriate assessment of bids without impact on the outcome of the tender, formal weaknesses of tender procedure or tender specification, formal aspects of the transparency requirements not respected.

(6)  Formula, where ASI is the average sampling interval and i is the numbering of transactions in the sample.

(7)  Formula and Formula , where t is the t-distribution factor, n is the sample size and s is the standard deviation of the percentage errors.

(8)  Further information on these processes, as well as links to the most recent reports can be found at

http://ec.europa.eu/atwork/synthesis/index_en.htm

(9)  In previous years, the results of this assessment were represented in a specific section ‘Reliability of Commission management representations’.

ANNEX 1.2

FOLLOW-UP OF OBSERVATIONS OF PRIOR YEARS CONCERNING THE RELIABILITY OF ACCOUNTS

| Observations raised in prior years | Court’s analysis of the progress made | Commission reply |
| --- | --- | --- |
| 1. | Pre-financing, accounts payable and cut-off procedures |

Observations raised in prior years

Court’s analysis of the progress made

Commission reply

1.

| 1. | Pre-financing, accounts payable and cut-off procedures |
| --- | --- |

1.

| 1. | Pre-financing, accounts payable and cut-off procedures |
| --- | --- |

1.

For pre-financings, accounts payable and related cut-off, since the financial year 2007 the Court has identified accounting errors with an immaterial financial impact overall but a high frequency. This underlines the need for further improvement in the basic accounting data at the level of certain directorates-general.

The Commission continued to work on improving the accuracy of its accounting data through ongoing actions such as the accounting quality project and the validation of local systems.

The Court’s audit of representative samples of pre-financing and of invoices/cost claims again identified errors with an immaterial financial impact overall but a high frequency. Therefore, the Commission should continue to make further efforts to improve the basic accounting data at the level of certain directorates-general.

The Commission will continue its efforts to further improve the quality of the accounting data and local systems are updated continuously to meet the accounting requirements.

As regards accounting for amounts pre-financed, the Court also identified:

| — | that the clearing of outstanding pre-financings is not always carried out correctly. A number of clearings were either not carried out at all or for incorrect amounts; |
| --- | --- |

—

that the clearing of outstanding pre-financings is not always carried out correctly. A number of clearings were either not carried out at all or for incorrect amounts;

| — | that some directorates-general do not process the available information on progress made and related costs incurred and do not clear the corresponding pre-financing according to this progress, but use approximations when determining the cut-off; |
| --- | --- |

—

that some directorates-general do not process the available information on progress made and related costs incurred and do not clear the corresponding pre-financing according to this progress, but use approximations when determining the cut-off;

| — | for the first time in its 2010 Annual Report that in a growing number of cases the Commission has failed to properly record payments giving rise to an asset, in particular for financial engineering instruments and advances for other aid schemes. |
| --- | --- |

—

for the first time in its 2010 Annual Report that in a growing number of cases the Commission has failed to properly record payments giving rise to an asset, in particular for financial engineering instruments and advances for other aid schemes.

Despite the efforts of the accounting officer’s services to improve the situation, the Court found that several directorates-general continue to record estimates in the accounts even when they have an adequate basis for clearing the corresponding pre-financings.

The issue of the financial engineering instruments was already addressed in the 2010 accounts on receipt of information provided by Member States on a voluntary basis. The Commission also proposed to amend the current legal framework and made appropriate proposals for the post 2013 period in order to make the transmission of the necessary information compulsory.

For the advances paid to Member States for other aid schemes and for contributions to the European Globalisation Adjustment Fund, a corresponding asset of 2 512 million euro has been recognised for the first time in the 2011 consolidated accounts.

Prior to 2011, Member States did not provide data to the Commission which would have allowed a reliable estimate to be made. Information now available indicates that these amounts would not have been material.

Except for the advances for the aid schemes related to the European Agricultural Fund for Rural Development, the unused amounts recognised for the aforementioned financial engineering instruments and other aid schemes have been established on the basis of the amounts contributed by the Commission, taking into consideration an estimate of the unused amounts on a straight line basis. The lack of information on the amounts actually used reduces significantly the usefulness of this information for management purposes.

The Accounting Services have prepared a set of guidelines on the clearing of pre-financing which will be distributed once the review of the Financial Regulation will be completed.

The legal basis for the financial engineering instruments as well as for the State aid prepaid amounts, including an annex to the declaration of expenditure has been implemented (amendment to the Council Regulation (EC) No 1083/2006 on 13 December 2011). Following this amendment, the European Commission has a legal basis to request the required information from the Member States.

The above information will be used for the accounting purposes at the closure of the 2012 accounts. The unpaid amounts to the final beneficiaries are based on pro-rata temporis estimation.

Since DG REGIO is currently at the sixth out of a seven year-programming period, it is not advisable to modify the methodology. Nevertheless, this approach is foreseen to be modified for the next programming period, providing it is accepted by the Member States with the new Financial Regulation.

Once the legal basis for the new programming period of Structural Funds enters into force the Commission will be entitled to receive information on the amounts actually used, which will be used for the preparation of the annual accounts. These new requirements should also improve management information.

The method used by the Commission for the 2011 accounts is the most cost-effective and has already been used in the 2010 accounts.

Furthermore, as already mentioned in the Court’s 2009 Annual Report, some directorates-general did not comply with the requirement to register the invoices and cost statements within five working days of receipt.

Despite improvements noted in the time taken to register new cost claims, some directorates-general still do not fully comply with the requirement to register their invoices and cost claims promptly.

The Commission's services will continue their efforts in this direction. To this end local systems are updated constantly, for example cost claims received by DG AGRI and DG REGIO are treated within the delay.

The Court noted in its 2010 Annual Report that the increased use of pre-financing in the EU budget and of new types of financial instruments makes it a matter of urgency for the Commission to revisit the relevant accounting rule in order to provide adequate guidance on the recognition and clearing of pre-financing.

The relevant accounting rule was updated in 2012 in order to take into consideration the need to recognise the unused amounts of contributions to financial engineering instruments and advances paid for other aid schemes as an asset.

The services are implementing the rule in the light of the Financial Instruments and State aid related payments (see reply above).

| 2. | Disclosures concerning recoveries and financial corrections |
| --- | --- |

2.

| 2. | Disclosures concerning recoveries and financial corrections |
| --- | --- |

2.

| 2. | Disclosures concerning recoveries and financial corrections |
| --- | --- |

2.

In its 2007 Annual Report, the Court already stated that although the Commission had taken steps to increase and improve the information it provided on the corrective mechanisms applied to the EU budget, the information was not yet completely reliable because the Commission did not always receive reliable information from Member States.

Despite the weaknesses still affecting the reliability and completeness of the data presented by the Member States, in particular in the area of cohesion, certain improvements were noted over the years. At the beginning of 2011, the Commission launched an audit of the Member States' systems for recoveries in the area of cohesion. The Commission's on-the-spot controls showed that the systems for recording and reporting data are not yet completely reliable in all Member States visited. Therefore, data from Member States in the area of cohesion are not disclosed in the notes to the 2011 financial statements.

For agriculture, the Commission has booked the outstanding debts at Member State level and the corresponding value reduction, as well as the amounts recovered by the Member States in the 2011 accounts.

For cohesion, the reliability of data on recoveries received from Member States has improved in comparison to the last period, but the Commission agrees it should be further improved. To this effect the Commission has launched beginning of 2011 a risk-based audit of the Member States' systems for recoveries, based on the reporting made each year as at 31 March with the objective to improve reporting of national financial corrections to the Commission, and ensure completeness, accuracy and timeliness of reporting. The first results have been reported in the 2011 annual activity reports of structural actions' directorates-general.

Furthermore, the need to refine the financial reporting guidelines pertaining to what information is to be included and how it should be treated should be examined.

The accounting officer's instructions provide the authorising officers by delegation guidance on the data to be supplied. The Court's audit found improvements in the application of this guidance. However, additional efforts are needed to improve the quality of the data presented.

The Commission will continue its efforts to further improve the quality of the data presented.

For the first time in its 2009 Annual Report, the Court criticised that for some areas of expenditure, the Commission does not systematically provide information reconciling the year in which the payment concerned is made, the year in which the related error is detected and the year in which the resulting financial correction is disclosed in the notes to the accounts.

Information reconciling payments, errors, recoveries and financial corrections is not yet presented. The Court maintains its position that, wherever it is possible, such a reconciliation should be provided. Furthermore, a clear link should be established between amounts included in annual activity reports, in particular for establishing the residual error rate, and information on recoveries/financial corrections presented in the accounts.

The Commission takes note of the requests of the Court and points out that this is seldom possible.

In shared management financial corrections are not meant to recover irregular spending (which remains under the responsibility of the Member States) but rather to protect the EU budget from such irregularities. It is therefore not correct to link error rates of a given year to financial corrections and recoveries disclosed in the annual accounts of that same year.

In addition, the differences in the timing of financial corrections and actual recoveries on one side, and error rates on the other also prevent this reconciliation. This later comment is not only relevant for shared management, but also for direct management, where recovery orders are either issued after the end of the (multiannual) grant period, or not issued, as a corrected cost statement is submitted by the beneficiary.

The Commission repeats its comment that expenditure is controlled several years after the actual year of a given payment, primarily at programme closure. Furthermore, the financial correction may be the result of the detection of weaknesses in the control systems of Member States, in which case no direct link exists with payments. As a consequence it is neither possible nor relevant to reconcile the year of the payment concerned with the year that the financial correction is disclosed in the notes to the accounts. Additionally, Member States are primarily responsible for the prevention, detection and correction of errors and irregularities in the area of shared management.

For agriculture, all amounts in the different tables in note 6 can be reconciled either with data available at Commission level or with the Member State declarations.

As regards regional policy, the link between amounts used for the residual error rate in the annual activity report and information in the provisional accounts is possible for previous year's reporting and for information provided by Member States in advance of the regulatory deadline of 31 March, which is also the deadline for establishing the provisional accounts. The Commission encouraged Member States to report corrections as early as possible before 31 March to avoid this timing issue.

At year end 2010, for cohesion, a total amount of 2,5 billion euro still remained to be implemented (i.e. ‘cashed’ through the receipt of a repayment by the Commission or payment by the Commission on the basis of a claim from which the Member State has deducted ineligible expenditure). The low implementation rate of 71 % was explained by the ongoing closure process for the programming period 2000-2006. Payment claims received end-2010 were not yet authorised, which meant that the related financial corrections could not be taken into account in the 2010 implementation figures.

At the end of 2011, an amount of 2,5 billion euro remained to be implemented (implementation rate of 72 %). The amount as well as the implementation rate stayed at a similar level to last year because payment claims received end-2010 could still not be authorised.

The closure of programmes is a complex procedure where numerous documents submitted by the Member State are checked, and where further information can be requested by the Commission so as to get evidence that the Member State did indeed deduct the financial corrections decided, especially for complex operational programmes, thus putting off further the calculation of the final balance to pay. In addition, the Commission only recognises the implementation of a financial correction when the final payment is duly authorised by the authorising officer, a step which is completed at the very end of the verification chain.

For cohesion, the amount of corrections accepted by Member States but still to be implemented relates to 2000-2006 programmes and is reflected in final payment claims received by the Commission but not yet authorised due to the closure process where the Commission has to assess all information provided as coherent and complete. The Court recommended the Commission to take this prudent approach not to report such corrections as implemented, until final payments are authorised.

The explanatory notes to the consolidated accounts contain information that some payments are likely to be corrected at a later date by the Commission's services or the Member States. However, despite repeated requests by the Court since 2005, the amounts and areas of expenditure which may be subject to further verification and clearance of accounts procedures are still not identified in the notes.

Amounts subject to further verification and clearing are not yet disclosed in the notes to the consolidated accounts (contrary to quantifiable amounts of potential recoveries).

The Financial Regulation allows the Commission to make ex-post checks on all expenditure for several years after the actual year of expenditure. The accounts should not imply that, because of verifications in future years, all the expenditure concerned remains to be accepted. Otherwise, all budgetary expenditure would be considered provisional until an ex-post check is made or the said limitation period has lapsed. Where the amounts of potential recoveries are quantifiable, they are disclosed in note 6 to the consolidated accounts.

In agriculture, a financial clearance decision is taken around six months after the end of the financial year in question, through which the Commission establishes the amount of expenditure recognised as chargeable to the EU budget for that year. This role of the financial clearance decision is not called into question by the fact that subsequently financial corrections may be imposed on Member States through conformity decisions. The amount of expenditure which is likely to be excluded from EU financing by such future conformity decisions is disclosed in a note to the financial statements.

| 3. | Transfer of assets of Galileo |
| --- | --- |

3.

| 3. | Transfer of assets of Galileo |
| --- | --- |

3.

| 3. | Transfer of assets of Galileo |
| --- | --- |

3.

The agreements for the transfer to the Union of the ownership of all assets created, developed or acquired for the Galileo programme have not yet been fully implemented. As all expenditure incurred since 2003 was treated as research expenses there was no impact on the balance sheet at 31 December 2010. However, the Commission should ensure that all information is available at the time when the transfer takes place in order to safeguard assets effectively.

The Commission is working with the European Space Agency to ensure that at the time of the transfer all the necessary accounting and technical information will be available to guarantee a smooth handover. This transfer is planned for the end of the in orbit validation phase (end of 2012 at the earliest). In the meantime, the Commission recognised in 2011 an amount of 219 million euro as assets under construction relating to the Galileo project. This amount reflects the costs incurred by the Commission since 22 October 2011, the date on which the first two satellites of the system were successfully launched. Prior to this date the Commission considered the project still to be in a research phase and all costs incurred were expenses.

However, the Court’s review revealed immaterial weaknesses in the cut-off procedure establishing the amount of assets under construction.

The Commission considers the amounts recognised on the balance sheet as reasonably accurate and reliable.

The accounting methodology and procedures for the valuation of the Galileo assets are in full compliance with the EU accounting rules and the IPSAS standards.

The valuation of the assets was determined with the support of independent external accounting experts based on data provided by ESA. The Commission has performed necessary checks to reasonably ensure the reliability of the outcome.

In its 2010 Annual Report, the Court drew attention to the reservation made by the responsible director-general in his 2010 annual activity report concerning the reliability of the European Space Agency’s financial reporting.

The responsible director-general maintained the reservation in his 2011 annual activity report and widened its scope.

The Commission will continue auditing the financial reports provided by ESA and will encourage and support ESA in implementing its actions towards further improving the quality of financial reporting to the Commission. An external review of the control systems of the European Space Agency was finalised in 2012, disclosing satisfactory results. Given the actions currently under way, the Commission expects the issues to be corrected soon which will enable reducing and finally lifting this reservation.

ANNEX 1.3

EXTRACTS FROM THE 2011 CONSOLIDATED ACCOUNTS
   (1)

Table 1 —   Balance sheet
   (2)

| (million euro) |
| --- |
| | 31.12.2011 | 31.12.2010 |
| Non-current assets: |
| Intangible assets | 149 | 108 |
| Property, plant and equipment | 5 071 | 4 813 |
| Long-term investments: |
| Investments accounted for using the equity method | 374 | 492 |
| Financial assets: Available for sale assets | 2 272 | 2 063 |
| Financial assets: Long-term loans | 41 400 | 11 640 |
| Long-term receivables and recoverables | 289 | 40 |
| Long-term pre-financing | 44 723 | 44 118 |
| | 94 278 | 63 274 |
| Current assets: |
| Inventories | 94 | 91 |
| Short-term investments: |
| Financial assets: Available for sale assets | 3 619 | 2 331 |
| Short-term receivables and recoverables: |
| Financial assets: Short-term loans | 102 | 2 170 |
| Other receivables and recoverables | 9 477 | 11 331 |
| Short-term pre-financing | 11 007 | 10 078 |
| Cash and cash equivalents | 18 935 | 22 063 |
| | 43 234 | 48 064 |
| Total assets | 137 512 | 111 338 |
| Non-current liabilities: |
| Pension and other employee benefits | (34 835) | (37 172) |
| Long-term provisions | (1 495) | (1 317) |
| Long-term financial liabilities | (41 179) | (11 445) |
| Other long-term liabilities | (2 059) | (2 104) |
| | (79 568) | (52 038) |
| Current liabilities: |
| Short-term provisions | (270) | (214) |
| Short-term financial liabilities | (51) | (2 004) |
| Payables | (91 473) | (84 529) |
| | (91 794) | (86 747) |
| Total liabilities | (171 362) | (138 785) |
| Net assets | (33 850) | (27 447) |
| Reserves | 3 608 | 3 484 |
| Amounts to be called from Member States | (37 458) | (30 931) |
| Net assets | (33 850) | (27 447) |

(million euro)

31.12.2011

31.12.2010

Non-current assets:

Intangible assets

149

108

Property, plant and equipment

5 071

4 813

Long-term investments:

Investments accounted for using the equity method

374

492

Financial assets: Available for sale assets

2 272

2 063

Financial assets: Long-term loans

41 400

11 640

Long-term receivables and recoverables

289

40

Long-term pre-financing

44 723

44 118

94 278

63 274

Current assets:

Inventories

94

91

Short-term investments:

Financial assets: Available for sale assets

3 619

2 331

Short-term receivables and recoverables:

Financial assets: Short-term loans

102

2 170

Other receivables and recoverables

9 477

11 331

Short-term pre-financing

11 007

10 078

Cash and cash equivalents

18 935

22 063

43 234

48 064

Total assets

137 512

111 338

Non-current liabilities:

Pension and other employee benefits

(34 835)

(37 172)

Long-term provisions

(1 495)

(1 317)

Long-term financial liabilities

(41 179)

(11 445)

Other long-term liabilities

(2 059)

(2 104)

(79 568)

(52 038)

Current liabilities:

Short-term provisions

(270)

(214)

Short-term financial liabilities

(51)

(2 004)

Payables

(91 473)

(84 529)

(91 794)

(86 747)

Total liabilities

(171 362)

(138 785)

Net assets

(33 850)

(27 447)

Reserves

3 608

3 484

Amounts to be called from Member States

(37 458)

(30 931)

Net assets

(33 850)

(27 447)

Table 2 —   Economic outturn account
   (3)

| (million euro) |
| --- |
| | 2011 | 2010 |
| Operating revenue |
| Own resource and contributions revenue | 124 677 | 122 328 |
| Other operating revenue | 5 376 | 8 188 |
| | 130 053 | 130 516 |
| Operating expenses |
| Administrative expenses | (8 976) | (8 614) |
| Operating expenses | (123 778) | (103 764) |
| | (132 754) | (112 378) |
| (Deficit)/Surplus from operating activities | (2 701) | 18 138 |
| Financial revenue | 1 491 | 1 178 |
| Financial expenses | (1 355) | (661) |
| Movement in pension and other employee benefits liability | 1 212 | (1 003) |
| Share of net deficit of joint ventures and associates | (436) | (420) |
| Economic outturn for the year | (1 789) | 17 232 |

(million euro)

2011

2010

Operating revenue

Own resource and contributions revenue

124 677

122 328

Other operating revenue

5 376

8 188

130 053

130 516

Operating expenses

Administrative expenses

(8 976)

(8 614)

Operating expenses

(123 778)

(103 764)

(132 754)

(112 378)

(Deficit)/Surplus from operating activities

(2 701)

18 138

Financial revenue

1 491

1 178

Financial expenses

(1 355)

(661)

Movement in pension and other employee benefits liability

1 212

(1 003)

Share of net deficit of joint ventures and associates

(436)

(420)

Economic outturn for the year

(1 789)

17 232

Table 3 —   Cashflow table
   (4)

| (million euro) |
| --- |
| | 2011 | 2010 |
| Economic outturn for the year | (1 789) | 17 232 |
| Operating activities |
| Amortisation | 33 | 28 |
| Depreciation | 361 | 358 |
| (Increase)/decrease in long-term loans | (29 760) | (876) |
| (Increase)/decrease in long-term pre-financing | (605) | (2 574) |
| (Increase)/decrease in long-term receivables and recoverables | (249) | 15 |
| (Increase)/decrease in inventories | (3) | (14) |
| (Increase)/decrease in short-term pre-financing | (929) | (642) |
| (Increase)/decrease in short-term receivables and recoverables | 3 922 | (4 543) |
| Increase/(decrease) in long-term provisions | 178 | (152) |
| Increase/(decrease) in long-term financial liabilities | 29 734 | 886 |
| Increase/(decrease) in other long-term liabilities | (45) | (74) |
| Increase/(decrease) in short-term provisions | 56 | 1 |
| Increase/(decrease) in short-term financial liabilities | (1 953) | 1 964 |
| Increase/(decrease) in payables | 6 944 | (9 355) |
| Prior year budgetary surplus taken as non-cash revenue | (4 539) | (2 254) |
| Other non-cash movements | (75) | (149) |
| Increase/(decrease) in pension and employee benefits liability | (2 337) | (70) |
| Investing activities |
| (Increase)/decrease in intangible assets and property, plant and equipment | (693) | (374) |
| (Increase)/decrease in long-term investments | (91) | (176) |
| (Increase)/decrease in short-term investments | (1 288) | (540) |
| Net cashflow | (3 128) | (1 309) |
| Net increase/(decrease) in cash and cash equivalents | (3 128) | (1 309) |
| Cash and cash equivalents at the beginning of the year | 22 063 | 23 372 |
| Cash and cash equivalents at year end | 18 935 | 22 063 |

(million euro)

2011

2010

Economic outturn for the year

(1 789)

17 232

Operating activities

Amortisation

33

28

Depreciation

361

358

(Increase)/decrease in long-term loans

(29 760)

(876)

(Increase)/decrease in long-term pre-financing

(605)

(2 574)

(Increase)/decrease in long-term receivables and recoverables

(249)

15

(Increase)/decrease in inventories

(3)

(14)

(Increase)/decrease in short-term pre-financing

(929)

(642)

(Increase)/decrease in short-term receivables and recoverables

3 922

(4 543)

Increase/(decrease) in long-term provisions

178

(152)

Increase/(decrease) in long-term financial liabilities

29 734

886

Increase/(decrease) in other long-term liabilities

(45)

(74)

Increase/(decrease) in short-term provisions

56

1

Increase/(decrease) in short-term financial liabilities

(1 953)

1 964

Increase/(decrease) in payables

6 944

(9 355)

Prior year budgetary surplus taken as non-cash revenue

(4 539)

(2 254)

Other non-cash movements

(75)

(149)

Increase/(decrease) in pension and employee benefits liability

(2 337)

(70)

Investing activities

(Increase)/decrease in intangible assets and property, plant and equipment

(693)

(374)

(Increase)/decrease in long-term investments

(91)

(176)

(Increase)/decrease in short-term investments

(1 288)

(540)

Net cashflow

(3 128)

(1 309)

Net increase/(decrease) in cash and cash equivalents

(3 128)

(1 309)

Cash and cash equivalents at the beginning of the year

22 063

23 372

Cash and cash equivalents at year end

18 935

22 063

Table 4 —   Statement of changes in net assets
   (5)

| (million euro) |
| --- |
| | Reserves (A) | Amounts to be called from Member States (B) | Net assets = (A) + (B) |
| Fair value reserve | Other reserves | Accumulated surplus/(deficit) | Economic outturn for the year |
| Balance as at 31 December 2009 | 69 | 3 254 | (52 488) | 6 887 | (42 278) |
| Movement in Guarantee Fund reserve | | 273 | (273) | | 0 |
| Fair value movements | (130) | | | | (130) |
| Other | | 4 | (21) | | (17) |
| Allocation of the economic outturn 2009 | | 14 | 6 873 | (6 887) | 0 |
| Budget result 2009 credited to Member States | | | (2 254) | | (2 254) |
| Economic outturn for the year | | | | 17 232 | 17 232 |
| Balance as at 31 December 2010 | (61) | 3 545 | (48 163) | 17 232 | (27 447) |
| Movement in Guarantee Fund reserve | | 165 | (165) | | 0 |
| Fair value movements | (47) | | | | (47) |
| Other | | 2 | (30) | | (28) |
| Allocation of the economic outturn 2010 | | 4 | 17 228 | (17 232) | 0 |
| Budget result 2010 credited to Member States | | | (4 539) | | (4 539) |
| Economic outturn for the year | | | | (1 789) | (1 789) |
| Balance as at 31 December 2011 | (108) | 3 716 | (35 669) | (1 789) | (33 850) |

(million euro)

Reserves (A)

Amounts to be called from Member States (B)

Net assets = (A) + (B)

Fair value reserve

Other reserves

Accumulated surplus/(deficit)

Economic outturn for the year

Balance as at 31 December 2009

69

3 254

(52 488)

6 887

(42 278)

Movement in Guarantee Fund reserve

273

(273)

0

Fair value movements

(130)

(130)

Other

4

(21)

(17)

Allocation of the economic outturn 2009

14

6 873

(6 887)

0

Budget result 2009 credited to Member States

(2 254)

(2 254)

Economic outturn for the year

17 232

17 232

Balance as at 31 December 2010

(61)

3 545

(48 163)

17 232

(27 447)

Movement in Guarantee Fund reserve

165

(165)

0

Fair value movements

(47)

(47)

Other

2

(30)

(28)

Allocation of the economic outturn 2010

4

17 228

(17 232)

0

Budget result 2010 credited to Member States

(4 539)

(4 539)

Economic outturn for the year

(1 789)

(1 789)

Balance as at 31 December 2011

(108)

3 716

(35 669)

(1 789)

(33 850)

Table 5 —   EU budget outturn
   (6)

| (million euro) |
| --- |
| European Union | 2011 | 2010 |
| Revenue for the financial year | 130 000 | 127 795 |
| Payments against current year appropriations | (128 043) | (121 213) |
| Payment appropriations carried over to year N+1 | (1 019) | (2 797) |
| Cancellation of unused payment appropriations carried over from year N-1 | 457 | 741 |
| Exchange differences for the year | 97 | 23 |
| Budget outturn
   (7) | 1 492 | 4 549 |

(million euro)

European Union

2011

2010

Revenue for the financial year

130 000

127 795

Payments against current year appropriations

(128 043)

(121 213)

Payment appropriations carried over to year N+1

(1 019)

(2 797)

Cancellation of unused payment appropriations carried over from year N-1

457

741

Exchange differences for the year

97

23

Budget outturn
   (7)

1 492

4 549

---

(1)  The reader is advised to consult the full text of the consolidated accounts of the European Union for the financial year 2011 including both the consolidated financial statements and explanatory notes and the consolidated reports on implementation of the budget and explanatory notes.

(2)  The balance sheet is presented using the layout as in the consolidated accounts of the European Union.

(3)  The economic outturn account is presented using the layout as in the consolidated accounts of the European Union.

(4)  The cashflow table is presented using the layout as in the consolidated accounts of the European Union.

(5)  The statement of changes in net assets is presented using the layout as in the consolidated accounts of the European Union.

(6)  The EU budget outturn table is presented using the layout as in the consolidated accounts of the European Union.

(7)  Of which EFTA amounts total (5) million euro in 2011 and 9 million euro in 2010.

---

CHAPTER 2

Revenue

TABLE OF CONTENTS

Introduction

Specific characteristics of revenue

Audit scope and approach

Traditional own resources

VAT- and GNI-based own resources

Regularity of transactions

Traditional own resources

VAT- and GNI-based own resources

Other revenue

Effectiveness of systems

Traditional own resources

VAT-based own resources

GNI-based own resources

General and specific reservations

Verification of GNI inventories

Other revenue: Fines and penalties

Enforced recovery

Minimum credit ratings of financial institutions that issue guarantees

Conclusions and recommendations

Conclusions

Recommendations

| THE COURT’S OBSERVATIONS | THE COMMISSION’S REPLIES |
| --- | --- |
| INTRODUCTION |
| 2.1. | This Chapter presents the Court's specific assessment of revenue, which comprises own resources and other revenue. Key information on revenue in 2011 is provided in
  Table 2.1
  . Own resources constitute by far the main source of financing of budgetary expenditure (91 %). |

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

2.1.

This Chapter presents the Court's specific assessment of revenue, which comprises own resources and other revenue. Key information on revenue in 2011 is provided in
  Table 2.1
  . Own resources constitute by far the main source of financing of budgetary expenditure (91 %).

Table 2.1 —   Revenue — Key information 2011

| Budget Title | Type of revenue | Description | Revenue 2011 |
| --- | --- | --- | --- |
| million euro | % |
| 1 | Traditional own resources (TOR) | Sugar levies | 132 | 0,1 |
| Customs duties | 16 646 | 12,8 |
| VAT-based own resources | VAT (value added tax)-based resources from the current financial year | 14 077 | 10,8 |
| GNI-based own resources | GNI (gross national income)-based resources from the current financial year | 87 258 | 67,1 |
| Correction of budgetary imbalances | UK correction | 52 | 0,0 |
| Reduction of GNI-based contribution | Granted to the Netherlands and Sweden | –1 | 0,0 |
| | TOTAL OWN RESOURCES | 118 164 | 90,9 |
| 3 | | Surpluses, balances and adjustments | 6 370 | 4,9 |
| 4 | | Revenue accruing from persons working with the institutions and other Union bodies | 1 207 | 0,9 |
| 5 | | Revenue accruing from the administrative operation of the institutions | 587 | 0,5 |
| 6 | | Contributions and refunds in connection with Union/Community agreements and programmes | 2 454 | 1,9 |
| 7 | | Interest on late payments and fines | 1 183 | 0,9 |
| 8 | | Borrowing and lending operations | 1 | 0,0 |
| 9 | | Miscellaneous revenue | 34 | 0,0 |
| | | TOTAL OTHER REVENUE | 11 836 | 9,1 |
| TOTAL REVENUE FOR THE YEAR | 130 000 | 100,0 |

Budget Title

Type of revenue

Description

Revenue 2011

million euro

%

1

Traditional own resources (TOR)

Sugar levies

132

0,1

Customs duties

16 646

12,8

VAT-based own resources

VAT (value added tax)-based resources from the current financial year

14 077

10,8

GNI-based own resources

GNI (gross national income)-based resources from the current financial year

87 258

67,1

Correction of budgetary imbalances

UK correction

52

0,0

Reduction of GNI-based contribution

Granted to the Netherlands and Sweden

–1

0,0

TOTAL OWN RESOURCES

118 164

90,9

3

Surpluses, balances and adjustments

6 370

4,9

4

Revenue accruing from persons working with the institutions and other Union bodies

1 207

0,9

5

Revenue accruing from the administrative operation of the institutions

587

0,5

6

Contributions and refunds in connection with Union/Community agreements and programmes

2 454

1,9

7

Interest on late payments and fines

1 183

0,9

8

Borrowing and lending operations

1

0,0

9

Miscellaneous revenue

34

0,0

TOTAL OTHER REVENUE

11 836

9,1

TOTAL REVENUE FOR THE YEAR

130 000

100,0

Source: 2011 annual accounts of the European Union.

Specific characteristics of revenue

| 2.2. | There are three categories of own resources (1): traditional own resources (TOR) (customs duties collected on imports and sugar production charge), own resources calculated on the basis of value added tax (VAT) collected by Member States, and own resources derived from Member States' gross national income (GNI). |
| --- | --- |

2.2.

There are three categories of own resources (1): traditional own resources (TOR) (customs duties collected on imports and sugar production charge), own resources calculated on the basis of value added tax (VAT) collected by Member States, and own resources derived from Member States' gross national income (GNI).

| 2.3. | TOR are established and collected by the Member States. Three quarters of these amounts are paid to the Union budget (16 778 million euro, 12,9 % of revenue), the remaining quarter being retained to cover collection costs. Each Member State sends the Commission a monthly statement of established duties (the ‘A accounts’) and a quarterly statement of those established duties which are not included therein (the ‘B accounts’) (2). The principal risks regarding TOR are the completeness, accuracy and timeliness of the duties made available to the Union. |
| --- | --- |

2.3.

TOR are established and collected by the Member States. Three quarters of these amounts are paid to the Union budget (16 778 million euro, 12,9 % of revenue), the remaining quarter being retained to cover collection costs. Each Member State sends the Commission a monthly statement of established duties (the ‘A accounts’) and a quarterly statement of those established duties which are not included therein (the ‘B accounts’) (2). The principal risks regarding TOR are the completeness, accuracy and timeliness of the duties made available to the Union.

| 2.4. | The VAT-based own resources are contributions resulting from the application of a uniform rate to Member States' notionally harmonised VAT assessment bases (14 077 million euro, 10,8 % of revenue). The GNI-based own resources result from the application of a uniform rate to the Member States' GNI (87 258 million euro, 67,1 % of revenue). The principal risk to regularity in respect of these own resources is that the underlying statistics either are not compiled in compliance with Union rules or are not processed according to these rules and that, as a result, an incorrect amount of VAT- and/or GNI-based own resources is paid by all Member States. |
| --- | --- |

2.4.

The VAT-based own resources are contributions resulting from the application of a uniform rate to Member States' notionally harmonised VAT assessment bases (14 077 million euro, 10,8 % of revenue). The GNI-based own resources result from the application of a uniform rate to the Member States' GNI (87 258 million euro, 67,1 % of revenue). The principal risk to regularity in respect of these own resources is that the underlying statistics either are not compiled in compliance with Union rules or are not processed according to these rules and that, as a result, an incorrect amount of VAT- and/or GNI-based own resources is paid by all Member States.

| 2.5. | The United Kingdom is granted a correction in respect of budgetary imbalances (‘the UK correction’) which involves a reduction in its payments of GNI-based own resources (3). In addition, Germany, the Netherlands, Austria and Sweden benefit from a reduced call rate for VAT, and the Netherlands and Sweden have a gross reduction in their annual GNI contribution for the period 2007-2013 (4). The principal risk is that the Commission makes an error in these calculations, notably in respect of the complex UK correction calculations. |
| --- | --- |

2.5.

The United Kingdom is granted a correction in respect of budgetary imbalances (‘the UK correction’) which involves a reduction in its payments of GNI-based own resources (3). In addition, Germany, the Netherlands, Austria and Sweden benefit from a reduced call rate for VAT, and the Netherlands and Sweden have a gross reduction in their annual GNI contribution for the period 2007-2013 (4). The principal risk is that the Commission makes an error in these calculations, notably in respect of the complex UK correction calculations.

| 2.6. | After taking into account the total of TOR, VAT-based own resources and other revenue, the GNI-based own resources are used to balance the budget. Any understatement (or overstatement) of GNI for particular Member States — while not affecting the overall GNI-based own resources — has the effect of increasing (or decreasing) the contributions from the other Member States, until the problem is corrected. |
| --- | --- |

2.6.

After taking into account the total of TOR, VAT-based own resources and other revenue, the GNI-based own resources are used to balance the budget. Any understatement (or overstatement) of GNI for particular Member States — while not affecting the overall GNI-based own resources — has the effect of increasing (or decreasing) the contributions from the other Member States, until the problem is corrected.

| 2.7. | The principal risks in other revenue include the Commission’s management of fines and the determination of the financial corrections the Commission imposes on agricultural and cohesion expenditure. |
| --- | --- |

2.7.

The principal risks in other revenue include the Commission’s management of fines and the determination of the financial corrections the Commission imposes on agricultural and cohesion expenditure.

Audit scope and approach

| 2.8. | Annex 1.1, Part 2
  , of Chapter 1 describes the Court's overall audit approach and methodology. For the audit of revenue, the following specific issues should be noted:






  (a) | The audit involved examination at the Commission level of a sample of 55 recovery orders (5) covering all types of revenue (see
  Annex 2.1
  ). |
| --- | --- | --- |

2.8.

Annex 1.1, Part 2
  , of Chapter 1 describes the Court's overall audit approach and methodology. For the audit of revenue, the following specific issues should be noted:

(a)

The audit involved examination at the Commission level of a sample of 55 recovery orders (5) covering all types of revenue (see
  Annex 2.1
  ).

| (b) | The assessment of systems covered:






  (i) | the systems for TOR, VAT-based and GNI-based own resources; |
| --- | --- | --- |

(b)

The assessment of systems covered:

(i)

the systems for TOR, VAT-based and GNI-based own resources;

| (ii) | the Commission systems underlying the calculation of the UK correction (including an examination of the calculation of the definitive amount in respect of 2007) (6); |
| --- | --- |

(ii)

the Commission systems underlying the calculation of the UK correction (including an examination of the calculation of the definitive amount in respect of 2007) (6);

| (iii) | the Commission's management of fines and penalties; |
| --- | --- |

(iii)

the Commission's management of fines and penalties;

| (iv) | the Commission's management representations, in particular the Annual Activity Report of Directorate-General for Budget (DG BUDG). |
| --- | --- |

(iv)

the Commission's management representations, in particular the Annual Activity Report of Directorate-General for Budget (DG BUDG).

Traditional own resources

| 2.9. | The Court's audit of transactions underlying the accounts cannot cover undeclared imports or those that have escaped customs surveillance. |
| --- | --- |

2.9.

The Court's audit of transactions underlying the accounts cannot cover undeclared imports or those that have escaped customs surveillance.

| 2.10. | The Court carried out an assessment of supervisory and control systems in Germany, Spain and France, which together contribute more than one third of the total of TOR. It reviewed their accounting systems and examined the flow of TOR from establishment until declaration to the Commission in order to obtain reasonable assurance that the amounts recorded were accurate and complete. The audit included testing key controls relating to the application of preferential duty rates in France, Local Clearance Procedures (LCP) in Germany and Spain, and warehousing and the treatment of freight and insurance costs in Germany, Spain and France. |
| --- | --- |

2.10.

The Court carried out an assessment of supervisory and control systems in Germany, Spain and France, which together contribute more than one third of the total of TOR. It reviewed their accounting systems and examined the flow of TOR from establishment until declaration to the Commission in order to obtain reasonable assurance that the amounts recorded were accurate and complete. The audit included testing key controls relating to the application of preferential duty rates in France, Local Clearance Procedures (LCP) in Germany and Spain, and warehousing and the treatment of freight and insurance costs in Germany, Spain and France.

| 2.11. | In addition, the Court reconciled the seven TOR recovery orders included in the sample referred to in paragraph 2.8(a) with the corresponding monthly statement from the Member States concerned (7). |
| --- | --- |

2.11.

In addition, the Court reconciled the seven TOR recovery orders included in the sample referred to in paragraph 2.8(a) with the corresponding monthly statement from the Member States concerned (7).

| 2.12. | Lastly, the Court assessed the supervisory and control systems at the Commission, including its inspections in Member States, the procedure for writing off irrecoverable amounts and the procedure for following up both its and the Court's previous findings. |
| --- | --- |

2.12.

Lastly, the Court assessed the supervisory and control systems at the Commission, including its inspections in Member States, the procedure for writing off irrecoverable amounts and the procedure for following up both its and the Court's previous findings.

VAT- and GNI-based own resources

| 2.13. | VAT- and GNI-based own resources are based on statistical data for which the underlying transactions cannot be audited directly. For this reason, the audit took as its starting point the Commission's receipt of the macroeconomic aggregates prepared by the Member States, and then assessed the Commission's systems for processing the data in order to determine the amounts to be included in the final budgetary accounts. The Court thus examined the drawing-up of the EU budget and the correctness of the contributions by Member States. |
| --- | --- |

2.13.

VAT- and GNI-based own resources are based on statistical data for which the underlying transactions cannot be audited directly. For this reason, the audit took as its starting point the Commission's receipt of the macroeconomic aggregates prepared by the Member States, and then assessed the Commission's systems for processing the data in order to determine the amounts to be included in the final budgetary accounts. The Court thus examined the drawing-up of the EU budget and the correctness of the contributions by Member States.

| 2.14. | The Court assessed the Commission's supervisory and control systems, which are intended to provide reasonable assurance that these resources are correctly calculated and collected. The audit also covered the Commission's management of VAT and GNI reservations and its verification of GNI inventories in the Member States. The Court's audit cannot provide a judgement on the quality of VAT and GNI data received by the Commission from Member States. |
| --- | --- |

2.14.

The Court assessed the Commission's supervisory and control systems, which are intended to provide reasonable assurance that these resources are correctly calculated and collected. The audit also covered the Commission's management of VAT and GNI reservations and its verification of GNI inventories in the Member States. The Court's audit cannot provide a judgement on the quality of VAT and GNI data received by the Commission from Member States.

REGULARITY OF TRANSACTIONS

| 2.15. | Annex 2.1
  contains a summary of the results of transaction testing. The Court's testing of its sample of transactions found 1,8 % to be affected by error. The most likely error estimated by the Court is 0,8 % (8). |
| --- | --- |

2.15.

Annex 2.1
  contains a summary of the results of transaction testing. The Court's testing of its sample of transactions found 1,8 % to be affected by error. The most likely error estimated by the Court is 0,8 % (8).

| 2.15. | See reply to point 2.18. |
| --- | --- |

2.15.

Traditional own resources

| 2.16. | The Court found that, overall, the recovery orders raised by the Commission reflect the A accounts' statements sent by the Member States. |
| --- | --- |

2.16.

The Court found that, overall, the recovery orders raised by the Commission reflect the A accounts' statements sent by the Member States.

VAT- and GNI-based own resources

| 2.17. | The Court's audit did not find any error in the calculation of Member States' contributions and their payment. |
| --- | --- |

2.17.

The Court's audit did not find any error in the calculation of Member States' contributions and their payment.

Other revenue

| 2.18. | The Court found that one of the six transactions tested in respect of other revenue contained an error. The Court reviewed the calculation of a financial correction imposed by the Commission on a Member State in the field of agricultural expenditure (Title 6 in
  Table 2.1
  ). While the Court does not call into question the methodology used by the Commission, it found an error in its application with the result that the Commission underestimated the loss to the EU budget. The financial correction should have been 30 million euro instead of the 21 million euro calculated (9). |
| --- | --- |

2.18.

The Court found that one of the six transactions tested in respect of other revenue contained an error. The Court reviewed the calculation of a financial correction imposed by the Commission on a Member State in the field of agricultural expenditure (Title 6 in
  Table 2.1
  ). While the Court does not call into question the methodology used by the Commission, it found an error in its application with the result that the Commission underestimated the loss to the EU budget. The financial correction should have been 30 million euro instead of the 21 million euro calculated (9).

| 2.18. | The Commission welcomes that the Court does not call into question its methodology for assessing the loss to the EU budget. This was done in line with the Court’s recommendation to calculate the loss rather than to use a flat-rate correction.

  With regard to the case mentioned by the Court, the calculation of the error rate was made by the Member State on the basis of a methodology accepted by the Commission and using the best information available at that time. The Member State later provided additional and more precise information on the population at risk and the Commission considered it justified to take that information into account without, at that very late stage, re-opening the whole conformity clearance procedure in order to recalculate the error rate. |
| --- | --- |

2.18.

With regard to the case mentioned by the Court, the calculation of the error rate was made by the Member State on the basis of a methodology accepted by the Commission and using the best information available at that time. The Member State later provided additional and more precise information on the population at risk and the Commission considered it justified to take that information into account without, at that very late stage, re-opening the whole conformity clearance procedure in order to recalculate the error rate.

EFFECTIVENESS OF SYSTEMS

| 2.19. | Annex 2.2
  contains a summary of the results of the Court’s examination of supervisory and control systems. Some deficiencies in the systems were found, as reported below. |
| --- | --- |

2.19.

Annex 2.2
  contains a summary of the results of the Court’s examination of supervisory and control systems. Some deficiencies in the systems were found, as reported below.

Traditional own resources

| 2.20. | In the Member States visited, the Court's audit (see paragraph 2.10) revealed deficiencies in national customs supervision in: |
| --- | --- |

2.20.

In the Member States visited, the Court's audit (see paragraph 2.10) revealed deficiencies in national customs supervision in:

| 2.20. | The Commission will follow up the Court's findings exhaustively, taking into account that Member States’ customs controls should be risk-based. |
| --- | --- |

2.20.

| (a) | the application of preferential duty rates (10); |
| --- | --- |

(a)

the application of preferential duty rates (10);

| (a) | In the case of two import declarations out of 50 the Court did not find in the files examined any document evidencing direct transport of the goods to the EU.

  The two cases where evidence of direct transport is missing will be followed up by the Commission in order to determine whether there are any financial consequences. |
| --- | --- |

(a)

The two cases where evidence of direct transport is missing will be followed up by the Commission in order to determine whether there are any financial consequences.

| (b) | the control and ex-post audit of Local Clearance Procedures (LCP) (11); |
| --- | --- |

(b)

the control and ex-post audit of Local Clearance Procedures (LCP) (11);

| (b) | The risk analysis carried out by the Member States should take due account of the prescription period and in some cases it may not require that an audit of the Local Clearance Procedure is carried out every three years. |
| --- | --- |

(b)

| (c) | the ex-post audit of customs warehousing (12); |
| --- | --- |

(c)

the ex-post audit of customs warehousing (12);

| (c) | The risk analysis carried out by the Member States should take due account of the prescription period and in some cases it may not require that an audit of warehousing is carried out every three years. |
| --- | --- |

(c)

| (d) | the risk analysis applied at import stage (13); |
| --- | --- |

(d)

the risk analysis applied at import stage (13);

| (d) | The Commission will follow up this finding with the Member States concerned. |
| --- | --- |

(d)

| (e) | the treatment of freight and insurance costs (14). |
| --- | --- |

(e)

the treatment of freight and insurance costs (14).

| (e) | The Commission will follow up the individual cases with the Member States concerned in order to determine whether there are financial consequences. |
| --- | --- |

(e)

Partially effective national customs supervision increases the risk that incorrect amounts of TOR are collected.

| 2.21. | In its 2010 Annual Report the Court reported that, for one A statement relating to a Member State (15), it was not possible to reconcile the amount of TOR declared with the underlying accounting documents. In DG BUDG's Annual Activity Report for 2011 there is now a reservation on the reliability of the accounting data of this Member State. |
| --- | --- |

2.21.

In its 2010 Annual Report the Court reported that, for one A statement relating to a Member State (15), it was not possible to reconcile the amount of TOR declared with the underlying accounting documents. In DG BUDG's Annual Activity Report for 2011 there is now a reservation on the reliability of the accounting data of this Member State.

| 2.21. | DG Budget has made the reservation on the reliability of this Member State's clearance and accounting procedures and systems for TOR on the basis of three consecutive Commission inspections and on the findings of the Court.

  Remedial action is underway. The Member State submitted a plan of action at the end of November 2011 setting out the corrective measures that will be taken. The plan contains short-term (2012), medium-term (2012-2013) and long-term objectives (2013-2014 and subsequent years). The Commission is monitoring the implementation of the plan. The first stage consists in carrying out an external audit of the accounting system. |
| --- | --- |

2.21.

Remedial action is underway. The Member State submitted a plan of action at the end of November 2011 setting out the corrective measures that will be taken. The plan contains short-term (2012), medium-term (2012-2013) and long-term objectives (2013-2014 and subsequent years). The Commission is monitoring the implementation of the plan. The first stage consists in carrying out an external audit of the accounting system.

| 2.22. | The Court found that several findings reported by it or by the Commission in previous years continue to be reported by these two institutions without remedial action being taken by the relevant Member States (for example the findings raised in the Court’s Special Report No 1/2010: ‘Are simplified customs procedures for imports effectively controlled?’ (16)). |
| --- | --- |

2.22.

The Court found that several findings reported by it or by the Commission in previous years continue to be reported by these two institutions without remedial action being taken by the relevant Member States (for example the findings raised in the Court’s Special Report No 1/2010: ‘Are simplified customs procedures for imports effectively controlled?’ (16)).

| 2.22. | Court and Commission findings are exhaustively followed up. It can take time for Member States to improve their systems, particularly where disagreements arise or systemic and structured changes are required. The Commission services use all the means at their disposal to ensure Member States satisfactorily address findings and, where relevant, require the Member States to recover any traditional own resources underpaid. This may include taking infringement proceedings where there is a clear ongoing transgression of EU customs legislation. In recent years the Commission has carried out inspections of simplified procedures, custom control strategy and local clearance. A thematic report on custom control strategy was provided to the Advisory Committee on own resources in 2011 and the thematic report on local clearance will be presented in 2012. |
| --- | --- |

2.22.

VAT-based own resources

| 2.23. | A reservation is a means by which a doubtful element in a VAT statement submitted by a Member State can be kept open for correction after the statutory time limit of four years. The use of reservations is thus part of the internal control process. However, the Commission and Member States should endeavour to resolve doubtful elements as soon as possible. |
| --- | --- |

2.23.

A reservation is a means by which a doubtful element in a VAT statement submitted by a Member State can be kept open for correction after the statutory time limit of four years. The use of reservations is thus part of the internal control process. However, the Commission and Member States should endeavour to resolve doubtful elements as soon as possible.

| 2.24. | In 2011, the Commission placed 46 reservations and lifted 42. According to the Commission, the net effect was to decrease VAT-based own resources by approximately 88 million euro (17). At the end of the year, a total of 156 reservations were in place (see
  Table 2.2
  ). Of the reservations put in place by the Commission, 51 relate to infringements of VAT legislation. These can only be lifted after the infringement procedure has been closed and the effect on the VAT base for the years concerned has been determined. |
| --- | --- |

2.24.

In 2011, the Commission placed 46 reservations and lifted 42. According to the Commission, the net effect was to decrease VAT-based own resources by approximately 88 million euro (17). At the end of the year, a total of 156 reservations were in place (see
  Table 2.2
  ). Of the reservations put in place by the Commission, 51 relate to infringements of VAT legislation. These can only be lifted after the infringement procedure has been closed and the effect on the VAT base for the years concerned has been determined.

| 2.24. | The figures used in this report slightly differ from those the Commission provides in the relevant annex to its annual accounts. This is because the Court and the Commission use slightly different methods for counting the stock of reservations. The Court uses the date of notification and the Commission the date the associated internal administrative procedures are completed. |
| --- | --- |

2.24.

| 2.25. | The Commission is continuing its efforts to lift long-outstanding VAT reservations. The Court defines such reservations as relating to a year at least 10 years previously, that is reservations still in place at the end of 2011 concerning 2002 and earlier years. There were 15 such reservations at the year end, some dating back to 1995, compared to 16 at the end of 2010 (paragraph 2.23 of the 2010 Annual Report). |
| --- | --- |

2.25.

The Commission is continuing its efforts to lift long-outstanding VAT reservations. The Court defines such reservations as relating to a year at least 10 years previously, that is reservations still in place at the end of 2011 concerning 2002 and earlier years. There were 15 such reservations at the year end, some dating back to 1995, compared to 16 at the end of 2010 (paragraph 2.23 of the 2010 Annual Report).

| 2.25. | There has been an ongoing improvement in the frequency of consultations with Member States plus enhancement of the levels of cooperation between the Commission and Member States which will continue. The proportion of reservations that the Court defines as long-outstanding is continuing to decrease — being now less than 10 % of the total. Even with enhanced cooperation, there will always be some long-outstanding reservations as some have many ramifications to explore, including issues of principle, and may entail more than one attempt to reach a solution. The definition of long-outstanding, adopted by the Court, risks over-accentuating the time apparently taken to resolve reservations. Of the new reservations set by the Commission in 2011, 75 % covered 2007 so were according to the Court’s methodology already almost halfway to being long-outstanding. |
| --- | --- |

2.25.

Table 2.2 —   VAT reservations as at 31 December 2011

| Member State | Reservations outstanding at 31.12.2010 | Reservations placed in 2011 | Reservations lifted in 2011 | Reservations outstanding at 31.12.2011 | Earliest year to which reservations apply |
| --- | --- | --- | --- | --- | --- |
| Belgium | 0 | 1 | 0 | 1 | 2007 |
| Bulgaria | 2 | 5 | 1 | 6 | 2007 |
| Czech Republic | 8 | 9 | 4 | 13 | 2004 |
| Denmark | 9 | 2 | 3 | 8 | 2005 |
| Germany | 1 | 5 | 0 | 6 | 2003 |
| Estonia | 9 | 1 | 0 | 10 | 2004 |
| Ireland | 10 | 2 | 7 | 5 | 1998 |
| Greece | 7 | 0 | 0 | 7 | 1999 |
| Spain | 1 | 2 | 0 | 3 | 2003 |
| France | 6 | 1 | 0 | 7 | 2001 |
| Italy | 8 | 2 | 3 | 7 | 1995 |
| Cyprus | 6 | 0 | 2 | 4 | 2004 |
| Latvia | 6 | 0 | 1 | 5 | 2004 |
| Lithuania | 2 | 0 | 0 | 2 | 2005 |
| Luxembourg | 2 | 0 | 2 | 0 | |
| Hungary | 4 | 0 | 0 | 4 | 2004 |
| Malta | 10 | 0 | 0 | 10 | 2004 |
| Netherlands | 8 | 6 | 5 | 9 | 2004 |
| Austria | 6 | 0 | 0 | 6 | 2002 |
| Poland | 6 | 0 | 1 | 5 | 2004 |
| Portugal | 14 | 0 | 9 | 5 | 2003 |
| Romania | 0 | 5 | 1 | 4 | 2007 |
| Slovenia | 0 | 0 | 0 | 0 | |
| Slovakia | 0 | 0 | 0 | 0 | |
| Finland | 8 | 3 | 1 | 10 | 1995 |
| Sweden | 10 | 2 | 1 | 11 | 1995 |
| United Kingdom | 9 | 0 | 1 | 8 | 1998 |
| TOTAL | 152 | 46 | 42 | 156 | |

Member State

Reservations outstanding at 31.12.2010

Reservations placed in 2011

Reservations lifted in 2011

Reservations outstanding at 31.12.2011

Earliest year to which reservations apply

Belgium

0

1

0

1

2007

Bulgaria

2

5

1

6

2007

Czech Republic

8

9

4

13

2004

Denmark

9

2

3

8

2005

Germany

1

5

0

6

2003

Estonia

9

1

0

10

2004

Ireland

10

2

7

5

1998

Greece

7

0

0

7

1999

Spain

1

2

0

3

2003

France

6

1

0

7

2001

Italy

8

2

3

7

1995

Cyprus

6

0

2

4

2004

Latvia

6

0

1

5

2004

Lithuania

2

0

0

2

2005

Luxembourg

2

0

2

0

Hungary

4

0

0

4

2004

Malta

10

0

0

10

2004

Netherlands

8

6

5

9

2004

Austria

6

0

0

6

2002

Poland

6

0

1

5

2004

Portugal

14

0

9

5

2003

Romania

0

5

1

4

2007

Slovenia

0

0

0

0

Slovakia

0

0

0

0

Finland

8

3

1

10

1995

Sweden

10

2

1

11

1995

United Kingdom

9

0

1

8

1998

TOTAL

152

46

42

156

Source: European Court of Auditors.

GNI-based own resources

General and specific reservations

| 2.26. | General reservations (18) existed at the end of 2011 on the GNI data of EU-15 Member States for the period 2002 to 2007, EU-10 Member States for 2004-2007, and Bulgaria and Romania for 2007. |
| --- | --- |

2.26.

General reservations (18) existed at the end of 2011 on the GNI data of EU-15 Member States for the period 2002 to 2007, EU-10 Member States for 2004-2007, and Bulgaria and Romania for 2007.

| 2.26. | As the Court acknowledges in paragraph 2.28 the situation had changed markedly by January 2012 when general reservations remained in place only for Bulgaria and Romania. |
| --- | --- |

2.26.

| 2.27. | At the beginning of 2011, there were four open specific GNP reservations (19) relating to the period 1995 to 2001. The Commission subsequently lifted two reservations concerning the United Kingdom, leaving a balance of two (20) at the end of 2011. |
| --- | --- |

2.27.

At the beginning of 2011, there were four open specific GNP reservations (19) relating to the period 1995 to 2001. The Commission subsequently lifted two reservations concerning the United Kingdom, leaving a balance of two (20) at the end of 2011.

| 2.27. | The Commission is making progress via its cooperation with the two countries that still have GNP reservations for the period 1995-2001 (one for Greece and one for the United Kingdom at end 2011) so that these reservations can be lifted. |
| --- | --- |

2.27.

Verification of GNI inventories

| 2.28. | Based on Eurostat verification of GNI inventories the GNI Committee adopted the assessment reports on the EU-25 Member States, in July and October 2011. No general reservations were lifted or specific reservations put in place in respect of GNI data for the period 2002 onwards until the end of January 2012 (see paragraphs 2.29 and 2.41, fourth indent, of the 2010 Annual Report). |
| --- | --- |

2.28.

Based on Eurostat verification of GNI inventories the GNI Committee adopted the assessment reports on the EU-25 Member States, in July and October 2011. No general reservations were lifted or specific reservations put in place in respect of GNI data for the period 2002 onwards until the end of January 2012 (see paragraphs 2.29 and 2.41, fourth indent, of the 2010 Annual Report).

| 2.28. | As a result of conclusions drawn at the two GNI Committee meetings in the second half of 2011 work continued until the end of the year identifying and precisely framing the specific reservations needed to replace the existing general reservations. The administrative processes necessary to provide each of the 25 Member States simultaneously with confirmatory official notification of the lifting of the general reservations and the specific reservations set concerning them were completed in early 2012. |
| --- | --- |

2.28.

Other revenue: Fines and penalties

Enforced recovery

| 2.29. | The Financial Regulation’s implementing rules (21) set out that the Commission should enforce the recovery of amounts receivable by any available means where neither provisional payments have been made nor guarantees lodged by debtors to cover the full amount by the due date. At the end of 2011 around 2 % (22) of fines pending were not covered either by a provisional payment or by a guarantee after the due date. |
| --- | --- |

2.29.

The Financial Regulation’s implementing rules (21) set out that the Commission should enforce the recovery of amounts receivable by any available means where neither provisional payments have been made nor guarantees lodged by debtors to cover the full amount by the due date. At the end of 2011 around 2 % (22) of fines pending were not covered either by a provisional payment or by a guarantee after the due date.

| 2.29. | Enforcing recovery at any price could have irreparable consequences and destroy or make bankrupt companies that are subject to fines. The Commission seeks to obtain coverage of its fines by negotiating with the companies in order to safeguard the fine either through regular down payments or guarantees.

  It is thanks to such negotiations that a part of the uncovered fines (including default interest) imposed on undertakings in a weak financial situation can be collected or covered by a guarantee and a payment plan covered by a financial guarantee can be agreed under the current rules (see paragraph 2.32). Some fines cannot however be collected because they are imposed on undertakings in bankruptcy, in a precarious financial situation or established outside the Union. |
| --- | --- |

2.29.

It is thanks to such negotiations that a part of the uncovered fines (including default interest) imposed on undertakings in a weak financial situation can be collected or covered by a guarantee and a payment plan covered by a financial guarantee can be agreed under the current rules (see paragraph 2.32). Some fines cannot however be collected because they are imposed on undertakings in bankruptcy, in a precarious financial situation or established outside the Union.

| 2.30. | The Court examined a sample of 14 of such fines and found that in eight cases the Commission had not used all available means to enforce the recovery. |
| --- | --- |

2.30.

The Court examined a sample of 14 of such fines and found that in eight cases the Commission had not used all available means to enforce the recovery.

| 2.30. | As regards the eight cases mentioned by the Court, the Commission is of the opinion that the fines concern either cases where interim measures or ITP (inability to pay under paragraph 35 of the 2006 fining guidelines) requests were pending, and/or cases where enforcement would have caused the immediate insolvency of the company concerned, with the consequence that the Commission would have lost the fine because it is not a preferential creditor.

  These examples show that the Commission always seeks, with regard to debtors in a precarious financial situation, to obtain coverage of fines by negotiating with the companies in order to safeguard collection of the fine. |
| --- | --- |

2.30.

These examples show that the Commission always seeks, with regard to debtors in a precarious financial situation, to obtain coverage of fines by negotiating with the companies in order to safeguard collection of the fine.

| 2.31. | All of these cases concerned debtors which, the Commission claims, were in a precarious financial condition. DG BUDG states in its 2011 Annual Activity Report that it will not seek to enforce recovery if it assesses that the Union's financial interest is best protected by negotiating a payment plan. The Commission is proposing to modify the Financial Regulation’s implementing rules to allow this course of action ‘in exceptional circumstances’. |
| --- | --- |

2.31.

All of these cases concerned debtors which, the Commission claims, were in a precarious financial condition. DG BUDG states in its 2011 Annual Activity Report that it will not seek to enforce recovery if it assesses that the Union's financial interest is best protected by negotiating a payment plan. The Commission is proposing to modify the Financial Regulation’s implementing rules to allow this course of action ‘in exceptional circumstances’.

Minimum credit ratings of financial institutions that issue guarantees

| 2.32. | Under Article 28a of the Financial Regulation (23), the safeguarding of assets is a management objective of the Commission. In order to ensure that the guarantees covering fines are safeguarded, the Commission sets minimum credit rating requirements for the financial institutions providing the guarantees. The Court found cases where these requirements were not respected. |
| --- | --- |

2.32.

Under Article 28a of the Financial Regulation (23), the safeguarding of assets is a management objective of the Commission. In order to ensure that the guarantees covering fines are safeguarded, the Commission sets minimum credit rating requirements for the financial institutions providing the guarantees. The Court found cases where these requirements were not respected.

| 2.33. | On 13 May 2011 the Commission made the conditions for such guarantees less stringent to reflect the deteriorating market conditions. The Court found examples where even these updated conditions were not respected. |
| --- | --- |

2.33.

On 13 May 2011 the Commission made the conditions for such guarantees less stringent to reflect the deteriorating market conditions. The Court found examples where even these updated conditions were not respected.

| 2.34. | In view of the current state of the banking sector, the Commission states in DG BUDG's Annual Activity Report that it is reviewing its risk management policy. |
| --- | --- |

2.34.

In view of the current state of the banking sector, the Commission states in DG BUDG's Annual Activity Report that it is reviewing its risk management policy.

| 2.32-2.35. | The Commission considers that in a very limited number of cases it was impossible to obtain guarantees respecting the set requirements taking into account the deteriorating financial environment. |
| --- | --- |

2.32-2.35.

| 2.33-2.34. | In view of the current state of the European financial sector, it is inevitable that the Commission reviews on a regular basis its risk management policy concerning the guarantees covering outstanding fines. Indeed, most major banks have now lost their acceptable rating from all three major rating agencies and in a large majority of Member States it is impossible to find a bank with an acceptable rating, which makes it very difficult for a small or medium-sized company, for instance, to obtain such a guarantee. Due to market conditions the Commission was obliged to review requirements for the guarantees on 13 May 2011.

  In the examples referred to by Court, guarantees concerned respected the risk policy in force, when accepted by Commission. Guarantors were later downgraded, which in view of the reduced number of banks fulfilling the criteria still on the market, led Commission again to reconsider its risk policy for bank guarantees in June 2012. While taking into account the evolution of the financial markets, the new decision also ensures a sufficient degree of diversification in the Commission's overall exposure vis-à-vis individual guarantors. |
| --- | --- |

2.33-2.34.

In the examples referred to by Court, guarantees concerned respected the risk policy in force, when accepted by Commission. Guarantors were later downgraded, which in view of the reduced number of banks fulfilling the criteria still on the market, led Commission again to reconsider its risk policy for bank guarantees in June 2012. While taking into account the evolution of the financial markets, the new decision also ensures a sufficient degree of diversification in the Commission's overall exposure vis-à-vis individual guarantors.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

| 2.35. | Based on its audit work (24), the Court concludes that, for the year ended 31 December 2011,






  (a) | Member States' declarations and payments of TOR; |
| --- | --- | --- |

2.35.

Based on its audit work (24), the Court concludes that, for the year ended 31 December 2011,

(a)

Member States' declarations and payments of TOR;

| (b) | the Commission's calculation of Member States' contributions on the basis of the VAT and GNI data received from Member States; |
| --- | --- |

(b)

the Commission's calculation of Member States' contributions on the basis of the VAT and GNI data received from Member States;

| (c) | the calculation of the UK correction; and |
| --- | --- |

(c)

the calculation of the UK correction; and

| (d) | other revenue; |
| --- | --- |

(d)

other revenue;

were free from material error.

| 2.36. | Based on its audit work, the Court found that the examined supervisory and control systems for revenue were effective. However, the Court draws attention to the matters set out below: |
| --- | --- |

2.36.

Based on its audit work, the Court found that the examined supervisory and control systems for revenue were effective. However, the Court draws attention to the matters set out below:

2.36.

| (a) | The Court's audits revealed weaknesses in national customs supervision (paragraph 2.20). The Court concludes that the supervisory and control systems of the Member States audited are only partially effective in ensuring that the TOR recorded are complete and correct. |
| --- | --- |

(a)

The Court's audits revealed weaknesses in national customs supervision (paragraph 2.20). The Court concludes that the supervisory and control systems of the Member States audited are only partially effective in ensuring that the TOR recorded are complete and correct.

| (a) | The Commission will follow up the Court's findings with the Member States concerned. |
| --- | --- |

(a)

| (b) | Long-outstanding reservations still exist in connection with VAT-based own resources (paragraph 2.25). |
| --- | --- |

(b)

Long-outstanding reservations still exist in connection with VAT-based own resources (paragraph 2.25).

| (b) | The number and proportion of reservations long-outstanding according to the Court's definition continues to decrease – it is now less than 10 % of the total. There will always be some long-outstanding reservations as there may be many ramifications for Member States to explore and to remedy.

  There has been an ongoing improvement in the frequency of consultations with Member States plus enhancement of the levels of cooperation between the Commission and Member States which will continue. |
| --- | --- |

(b)

There has been an ongoing improvement in the frequency of consultations with Member States plus enhancement of the levels of cooperation between the Commission and Member States which will continue.

| (c) | At the end of 2011 the Commission had still not lifted general reservations and placed specific GNI reservations in respect of the EU-25 Member States for the period 2002 onwards (paragraph 2.28). |
| --- | --- |

(c)

At the end of 2011 the Commission had still not lifted general reservations and placed specific GNI reservations in respect of the EU-25 Member States for the period 2002 onwards (paragraph 2.28).

| (c) | The administrative processes necessary to provide each of the 25 Member States simultaneously with confirmatory official notification of the lifting of the general reservations and the specific reservations set concerning them were completed in early 2012. |
| --- | --- |

(c)

| (d) | At the end of 2011 the Commission had not yet lifted the two remaining specific GNP reservations for the period 1995 to 2001 (paragraph 2.27). |
| --- | --- |

(d)

At the end of 2011 the Commission had not yet lifted the two remaining specific GNP reservations for the period 1995 to 2001 (paragraph 2.27).

| (d) | The Commission is making progress via its cooperation with the two countries that still have GNP reservations for the period 1995-2001 (one for Greece and one for the United Kingdom at end 2011) so that these reservations can be lifted. |
| --- | --- |

(d)

| (e) | The Court takes note of the reasons for not enforcing recovery in all cases (paragraph 2.31). The Commission is proposing to modify the Financial Regulation’s implementing rules to allow this course of action ‘in exceptional circumstances’. |
| --- | --- |

(e)

The Court takes note of the reasons for not enforcing recovery in all cases (paragraph 2.31). The Commission is proposing to modify the Financial Regulation’s implementing rules to allow this course of action ‘in exceptional circumstances’.

| (e) | The Commission always seeks to obtain the best coverage of an appealed fine (through a provisional payment or a guarantee) but in some cases where the fined undertaking is in a precarious financial situation, the negotiations of this coverage can be lengthy and involve other stakeholders (shareholders, parent companies or banks). A new rule allowing, in exceptional cases, a deferred payment without guarantee will make it possible to collect some part of a fine even if the undertaking cannot obtain a bank guarantee. |
| --- | --- |

(e)

| (f) | The Commission is also reviewing its risk management policy concerning the reliability of guarantees covering outstanding fines and penalties, in order to reflect the situation in the banking sector (paragraph 2.34). |
| --- | --- |

(f)

The Commission is also reviewing its risk management policy concerning the reliability of guarantees covering outstanding fines and penalties, in order to reflect the situation in the banking sector (paragraph 2.34).

| (f) | The risk management policy has been reviewed and adapted to take into account the current economic and financial environment, while also ensuring that the level of security of the financial assets remains at the highest possible level. Credit ratings provide an indication for the evaluation of risk but are not used uniquely, or without taking into account other criterion for risk management decisions. |
| --- | --- |

(f)

Recommendations

| 2.37. | Annex 2.3
  shows the result of the Court's review of progress in addressing recommendations made in previous annual reports (2008 and 2009). The following points should be noted: |
| --- | --- |

2.37.

Annex 2.3
  shows the result of the Court's review of progress in addressing recommendations made in previous annual reports (2008 and 2009). The following points should be noted:

2.37.

| (a) | In its previous annual reports (for example paragraph 4.14 of the 2008 Annual Report and paragraph 2.20 of the 2009 Annual Report), the Court stated that it continued to find problems with the use of the B accounts. In 2011 the Commission was still finding such problems in its inspections. |
| --- | --- |

(a)

In its previous annual reports (for example paragraph 4.14 of the 2008 Annual Report and paragraph 2.20 of the 2009 Annual Report), the Court stated that it continued to find problems with the use of the B accounts. In 2011 the Commission was still finding such problems in its inspections.

| (a) | The Commission examines the B accounts every year in the course of its inspections. The B account in which debts are entered that are not guaranteed and/or which are contested, of its nature, contains matters that may lead to problems and this is the reason why the Commission services examine this account each year. However, it should be noted that the B account is now computerised in most of the Member States and the number of amounts unduly entered in the B account is decreasing. Most of the findings made by the Commission relate to the financial responsibility of the Member State, for example, when an amount cannot be recovered (and is written off) or when a debt is cancelled because of an administrative error. In these cases the management of the B account, as such, is not at issue. |
| --- | --- |

(a)

| (b) | Concerning GNI-based own resources, the Court has recommended (in, for example, paragraph 2.38 of the 2009 Annual Report) that the Commission should (i) make clear the scope of the opinion it provides in its assessment reports on Member States' GNI data and (ii) take into account its evaluation of supervisory and control systems in the National Statistical Institutes (NSI) for the compilation of national accounts. These recommendations were not implemented by the Commission in its assessment of the GNI data of the EU-25 Member States (see paragraph 2.28). |
| --- | --- |

(b)

Concerning GNI-based own resources, the Court has recommended (in, for example, paragraph 2.38 of the 2009 Annual Report) that the Commission should (i) make clear the scope of the opinion it provides in its assessment reports on Member States' GNI data and (ii) take into account its evaluation of supervisory and control systems in the National Statistical Institutes (NSI) for the compilation of national accounts. These recommendations were not implemented by the Commission in its assessment of the GNI data of the EU-25 Member States (see paragraph 2.28).

| (b) | The Commission considers that the approach it applies (desk checks of the GNI Questionnaires, the verification of GNI Inventories using the GIAQ supplemented by a direct verification) is appropriate for a final assessment of the Member States' GNI. In this context, the supervisory and control systems (SCS) are of an organisational nature and give no specific indication of the reliability of the accounts, which depends primarily on the statistical sources and methods used, even though SCS may help mitigate the risks of errors in national accounts. The Commission will pursue its efforts to develop SCS guidelines for compilation of their national accounts by Member States, taking into account the observations made by the Court. |
| --- | --- |

(b)

| 2.38. | Following this review, and the findings and conclusions for 2011, the Court recommends that the Commission: |
| --- | --- |

2.38.

Following this review, and the findings and conclusions for 2011, the Court recommends that the Commission:

2.38.

| — | Recommendation 1: encourages Member States to strengthen customs supervision in order to maximise the amount of TOR collected. |
| --- | --- |

—

Recommendation 1: encourages Member States to strengthen customs supervision in order to maximise the amount of TOR collected.

The Commission will continue to verify that the Member States have put in place appropriate control frameworks to protect the financial interests of the EU in the area of traditional own resources.

| — | Recommendation 2: continues its efforts to ensure that B accounts are correctly used and that accounting systems allow the Member States' A accounts to be demonstrably complete and correct. |
| --- | --- |

—

Recommendation 2: continues its efforts to ensure that B accounts are correctly used and that accounting systems allow the Member States' A accounts to be demonstrably complete and correct.

The Commission will continue to verify that B accounts are correctly used and that accounting systems allow Member States' A accounts to be complete and correct.

---

(1)  Council Decision 2007/436/EC, Euratom of 7 June 2007 on the system of the European Communities' own resources (OJ L 163, 23.6.2007, p. 17) and Council Regulation (EC, Euratom) No 1150/2000 of 22 May 2000 implementing Decision 2007/436/EC, Euratom on the system of the European Communities' own resources (OJ L 130, 31.5.2000, p. 1), as last amended by Regulation (EC, Euratom) No 105/2009 (OJ L 36, 5.2.2009, p. 1).

(2)  When duties or levies remain unpaid and no security has been provided, or they are covered by securities but have been challenged, Member States may suspend making these resources available by entering them in these separate accounts.

(3)  Article 4 of Decision 2007/436/EC. This reduction was approximately 4 billion euro in 2011. The 52 million euro referred to in
  Table 2.1
  represents the effect of exchange rate differences.

(4)  Articles 2(4) and 2(5) of Decision 2007/436/EC. The 1 million euro reduction in the GNI-based contribution in
  Table 2.1
  is the effect of exchange rate differences.

(5)  A recovery order is the procedure by which the Authorising Officer (AO) registers an entitlement by the Commission in order to retrieve the amount which is due.

(6)  See paragraph 2.16 of the 2010 Annual Report.

(7)  Belgium, Germany, Spain and the Netherlands.

(8)  The Court calculates its estimate of error from a representative statistical sample. The figure quoted is the best estimate (known as the MLE). The Court has 95 % confidence that the rate of error in the population lies between LEL 0,0 % and UEL 2,4 % (the lower and upper error limits respectively).

(9)  In 2006 the Commission found that a Member State had been using out of date orthophotos. The Commission calculated an error rate of 1,34 % by wrongly including regions that were not affected by the problem of outdated orthophotos. According to the Court the correct error rate to be used should have been 1,91 %, resulting in a difference of 9 million euro.

(10)  France.

(11)  Germany and Spain. In addition the Commission's own inspections of LCP revealed system weaknesses in 11 of the 21 Member States it inspected in 2011.

(12)  Spain and France.

(13)  Germany and France.

(14)  Spain and France.

(15)  Paragraph 2.15: Belgium.

(16)  See ECA website: http://eca.europa.eu

(17)  The balance of an increase of 8 million euro and a decrease of 96 million euro.

(18)  Article 10(7) of Regulation (EC, Euratom) No 1150/2000, as amended, states that, after 30 September of the fourth year following a given financial year, any changes to GNP/GNI shall no longer be taken into account, except on points notified within this time limit by either the Commission or the Member State. These points are known as reservations. A general reservation covers all the data of a Member State.

(19)  A specific reservation covers discrete elements of GNI (GNP until 2001, GNI thereafter) such as gross value added of selected activities, total final consumption expenditure or gross operating surplus and mixed income.

(20)  These concerned Greece and the United Kingdom and related to methodological and compilation aspects.

(21)  Articles 84, 85 and 85a of Commission Regulation (EC, Euratom) No 2342/2002 of 23 December 2002 laying down detailed rules for the implementation of Council Regulation (EC, Euratom) No 1605/2002 on the Financial Regulation applicable to the general budget of the European Communities (OJ L 357, 31.12.2002, p. 1), as last amended by Regulation (EC, Euratom) No 478/2007 (OJ L 111, 28.4.2007, p. 13).

(22)  About 240 million out of 13 billion euro.

(23)  Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities (OJ L 248, 16.9.2002, p. 1), as last amended by Regulation (EU, Euratom) No 1081/2010 of the European Parliament and of the Council (OJ L 311, 26.11.2010, p. 9).

(24)  For reasons explained in paragraphs 2.13 and 2.14, this conclusion does not provide an assessment of the quality of VAT or GNI data that were received by the Commission from Member States.

ANNEX 2.1

RESULTS OF TRANSACTION TESTING FOR REVENUE

| | 2011 | 2010 | 2009 | 2008 |
| --- | --- | --- | --- | --- |
| TOR | VAT/GNI, corrections under budget Title 1 | Other revenue | Total |
| SIZE AND STRUCTURE OF THE SAMPLE |
| Total transactions (of which): | 7 | 42 | 6 | 55 | 55 | 62 | 60 |
| Recovery orders | 7 | 42 | 6 | 55 | 55 | 62 | 60 |
| RESULTS OF TESTING
   (1)
   (2) |
| Proportion (number) of transactions tested found to be: |
| Free of error | 100 % | (7) | 100 % | (42) | 83 % | (5) | 98 % | (54) | 100 % | 95 % | 100 % |
| Affected by one or more errors | 0 % | (0) | 0 % | (0) | 17 % | (1) | 2 % | (1) | 0 % | 5 % | 0 % |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| Most likely error rate | 0,8 % | | | |
| Upper Error Limit (UEL) | 2,4 % | | | |
| Lower Error Limit (LEL) | 0,0 % | | | |

2011

2010

2009

2008

TOR

VAT/GNI, corrections under budget Title 1

Other revenue

Total

SIZE AND STRUCTURE OF THE SAMPLE

Total transactions (of which):

7

42

6

55

55

62

60

Recovery orders

7

42

6

55

55

62

60

RESULTS OF TESTING
   (1)
   (2)

Proportion (number) of transactions tested found to be:

Free of error

100 %

(7)

100 %

(42)

83 %

(5)

98 %

(54)

100 %

95 %

100 %

Affected by one or more errors

0 %

(0)

0 %

(0)

17 %

(1)

2 %

(1)

0 %

5 %

0 %

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Most likely error rate

0,8 %

Upper Error Limit (UEL)

2,4 %

Lower Error Limit (LEL)

0,0 %

---

(1)  To improve insight into areas with different risk profiles within the policy group, the sample was split up into segments.

(2)  Numbers quoted in brackets represent the actual number of transactions.

ANNEX 2.2

RESULTS OF EXAMINATION OF SYSTEMS FOR REVENUE

Assessment of the systems examined

| System concerned | Commission checks in Member States | Commission calculation / desk checks and revenue management | Commission management of reservations | Key internal controls in Member States audited | Overall assessment |
| --- | --- | --- | --- | --- | --- |
| TOR | Effective | Effective | N/A | Partially effective | Effective |
| VAT/GNI | Effective | Effective | Effective | N/A | Effective |
| UK correction | N/A | Effective | N/A | N/A | Effective |
| Fines and penalties | N/A | Effective | N/A | N/A | Effective |

System concerned

Commission checks in Member States

Commission calculation / desk checks and revenue management

Commission management of reservations

Key internal controls in Member States audited

Overall assessment

TOR

Effective

Effective

N/A

Partially effective

Effective

VAT/GNI

Effective

Effective

Effective

N/A

Effective

UK correction

N/A

Effective

N/A

N/A

Effective

Fines and penalties

N/A

Effective

N/A

N/A

Effective

ANNEX 2.3

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR REVENUE

| Year | Court recommendation | Court's analysis of the progress made | Commission reply |
| --- | --- | --- | --- |
| 2009 | Concerning GNI-based own resources, the Court recommended (in paragraph 2.38 in respect of 2009) that the Commission should | | |
| (i) | make clear the scope of the opinion it provides in its assessment reports on Member States’ GNI data; and |

Year

Court recommendation

Court's analysis of the progress made

Commission reply

2009

Concerning GNI-based own resources, the Court recommended (in paragraph 2.38 in respect of 2009) that the Commission should

(i)

make clear the scope of the opinion it provides in its assessment reports on Member States’ GNI data; and

| (ii) | that it should take into account an evaluation of supervisory and control systems in the National Statistical Institutes (NSI) for the compilation of national accounts. |
| --- | --- |

(ii)

that it should take into account an evaluation of supervisory and control systems in the National Statistical Institutes (NSI) for the compilation of national accounts.

| (i) | in the reports on the EU-25 Member States, the Commission made an assessment on the quality of GNI data and on its conformity with ESA95, without clarifying the scope and objectives of the Eurostat verification work supporting the overall conclusion; |
| --- | --- |

(i)

in the reports on the EU-25 Member States, the Commission made an assessment on the quality of GNI data and on its conformity with ESA95, without clarifying the scope and objectives of the Eurostat verification work supporting the overall conclusion;

| (ii) | as Eurostat had still not adopted guidelines in 2011 setting out best practices on the functioning of supervisory and control systems for the compilation of national accounts, in the Court’s view their evaluation could not be carried out appropriately in the context of the final assessment made on GNI data of EU-25 Member States. |
| --- | --- |

(ii)

as Eurostat had still not adopted guidelines in 2011 setting out best practices on the functioning of supervisory and control systems for the compilation of national accounts, in the Court’s view their evaluation could not be carried out appropriately in the context of the final assessment made on GNI data of EU-25 Member States.

The Commission considers that the approach it applies (desk checks of the GNI Questionnaires, the verification of GNI Inventories using the GIAQ supplemented by a direct verification) is appropriate for a final assessment of the Member States’ GNI. In this context, the supervisory and control systems (SCS) are of an organisational nature and give no specific indication of the reliability of the accounts, which depends primarily on the statistical sources and methods used, even though SCS may help mitigate the risks of errors in national accounts. The Commission will pursue its efforts to develop SCS guidelines for compilation of their national accounts by Member States, taking into account the observations made by the Court.

2009 and 2008

The Court has frequently reported inappropriate use of B accounts (for example paragraph 2.20 of the 2009 Annual Report and paragraph 4.14 of the 2008 Annual Report).

The Commission examines B accounts every year and still finds such inappropriate use.

The Commission examines the B accounts each year in the course of its inspections. It will continue to do so.

---

CHAPTER 3

Agriculture: market and direct support

TABLE OF CONTENTS

Introduction

Specific characteristics of the policy group

Audit scope and approach

Regularity of transactions

Cross compliance

Effectiveness of systems

Member States' systems relating to regularity of transactions

Administrative and control procedures to ensure correct payment including quality of databases

Control systems based on physical on-the-spot checks

Procedures to ensure recovery of undue payments

The Commission's supervisory system and management representation

The Commission’s assessment of the proper functioning of management and control systems

DG AGRI’s management representation — the Annual Activity Report (AAR)

Conclusions and recommendations

Conclusions

Recommendations

| THE COURT’S OBSERVATIONS | THE COMMISSION’S REPLIES |
| --- | --- |
| INTRODUCTION |
| 3.1. | This Chapter presents the Court’s specific assessment of market and direct support for agriculture, which is part of policy area 05 — Agriculture and rural development. Key information on the activities covered and the spending in 2011 is provided in
  Table 3.1
  . |

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

3.1.

This Chapter presents the Court’s specific assessment of market and direct support for agriculture, which is part of policy area 05 — Agriculture and rural development. Key information on the activities covered and the spending in 2011 is provided in
  Table 3.1
  .

| 3.1. | The administrative expenditure referred to in Table 3.1 also covers non-EAGF activities. The EAGF finances 1 budget line (05 01 04 01) with payments made for 7,7 million euro in 2011 out of the total administrative expenditure of 133,7 million euro (chapter 05 01). |
| --- | --- |

3.1.

Table 3.1 —   Market and direct support for agriculture — Key information 2011

| (million euro) |
| --- |
| Budget Title | Policy area | Description | Payments | Management mode |
| 05 | Agriculture expenditure financed by the European Agricultural Guarantee Fund (EAGF) | Administrative expenditure (39) | 134 | Centralised direct |
| Interventions in agricultural markets | 3 533 | Shared (40) |
| Direct aids | 40 178 | Shared |
| Other | 98 | Centralised direct/Shared |
| | 43 943 | |
| Total administrative expenditure (41) | 134 | |
| Total operational expenditure | 43 809 | |
| Of which: | — | advances |

(million euro)

Budget Title

Policy area

Description

Payments

Management mode

05

Agriculture expenditure financed by the European Agricultural Guarantee Fund (EAGF)

Administrative expenditure (39)

134

Centralised direct

Interventions in agricultural markets

3 533

Shared (40)

Direct aids

40 178

Shared

Other

98

Centralised direct/Shared

43 943

Total administrative expenditure (41)

134

Total operational expenditure

43 809

Of which:

—

8

| — | interim/final payments |
| --- | --- |

—

43 801

Total payments for the year

43 943

Total commitments for the year

43 950

Source: 2011 annual accounts of the European Union.

Specific characteristics of the policy group

| 3.2. | The objectives (1) of the common agricultural policy (CAP) as set out in the Treaty are to increase agricultural productivity, thus to ensure a fair standard of living for the agricultural community, to stabilise markets, to assure the availability of supplies and to ensure that supplies reach consumers at reasonable prices. |
| --- | --- |

3.2.

The objectives (1) of the common agricultural policy (CAP) as set out in the Treaty are to increase agricultural productivity, thus to ensure a fair standard of living for the agricultural community, to stabilise markets, to assure the availability of supplies and to ensure that supplies reach consumers at reasonable prices.

| 3.3. | The EU budget finances CAP expenditure mainly through two funds (2): the European Agricultural Guarantee Fund (EAGF), which fully finances EU direct aid and market measures (3), and the European Agricultural Fund for Rural Development (EAFRD), which co-finances rural development programmes. This Chapter covers EAGF expenditure while rural development expenditure is presented in Chapter 4. |
| --- | --- |

3.3.

The EU budget finances CAP expenditure mainly through two funds (2): the European Agricultural Guarantee Fund (EAGF), which fully finances EU direct aid and market measures (3), and the European Agricultural Fund for Rural Development (EAFRD), which co-finances rural development programmes. This Chapter covers EAGF expenditure while rural development expenditure is presented in Chapter 4.

| 3.4. | The main measures financed by EAGF are:






  — | the direct aid ‘Single Payment Scheme’ (SPS). SPS payments are based on ‘entitlements’ (4) each of which is activated with one hectare of eligible land declared by the farmer. In 2011 SPS represented 31 082 million euro of expenditure (77 % of direct aids), |
| --- | --- | --- |

3.4.

The main measures financed by EAGF are:

—

the direct aid ‘Single Payment Scheme’ (SPS). SPS payments are based on ‘entitlements’ (4) each of which is activated with one hectare of eligible land declared by the farmer. In 2011 SPS represented 31 082 million euro of expenditure (77 % of direct aids),

| — | the direct aid ‘Single Area Payment Scheme’ (SAPS) provides for the payment of uniform amounts per eligible hectare of agricultural land and is currently applied in 10 of the Member States (5) that joined the EU in 2004 and 2007. In 2011 SAPS accounted for 5 084 million euro of expenditure (13 % of direct aids), |
| --- | --- |

—

the direct aid ‘Single Area Payment Scheme’ (SAPS) provides for the payment of uniform amounts per eligible hectare of agricultural land and is currently applied in 10 of the Member States (5) that joined the EU in 2004 and 2007. In 2011 SAPS accounted for 5 084 million euro of expenditure (13 % of direct aids),

| — | other direct aid schemes linked to specific types of agricultural production (such as suckler cows, cotton, etc.). In 2011 those schemes accounted for 4 012 million euro of expenditure (10 % of direct aids), |
| --- | --- |

—

other direct aid schemes linked to specific types of agricultural production (such as suckler cows, cotton, etc.). In 2011 those schemes accounted for 4 012 million euro of expenditure (10 % of direct aids),

| — | interventions in agricultural markets covering, e.g. intervention storage, export refunds, food programmes and specific support for the fruit/vegetable and the wine sectors (in total amounting to 3 533 million euro in 2011). |
| --- | --- |

—

interventions in agricultural markets covering, e.g. intervention storage, export refunds, food programmes and specific support for the fruit/vegetable and the wine sectors (in total amounting to 3 533 million euro in 2011).

| 3.5. | Under all EAGF direct aid schemes (6), beneficiaries of EU aid have a legal obligation to fulfil ‘cross compliance’ conditions relating to the protection of the environment, public health, animal and plant health, animal welfare (Statutory Management Requirements (SMRs)) and to the maintenance of agricultural land in good agricultural and environmental condition (GAEC) (7). If farmers do not comply with these obligations their aid is reduced (8). |
| --- | --- |

3.5.

Under all EAGF direct aid schemes (6), beneficiaries of EU aid have a legal obligation to fulfil ‘cross compliance’ conditions relating to the protection of the environment, public health, animal and plant health, animal welfare (Statutory Management Requirements (SMRs)) and to the maintenance of agricultural land in good agricultural and environmental condition (GAEC) (7). If farmers do not comply with these obligations their aid is reduced (8).

| 3.5. | EU legislation provides that where non-compliance with those conditions is noted, a penalty shall be applied on the overall amount of direct payments made in respect of the applications submitted by the farmer in the course of the calendar year of the finding, if the non-compliance is due to an act or omission directly attributable to the farmer and if it is not of a minor nature. |
| --- | --- |

3.5.

| 3.6. | CAP expenditure is subject to shared management by the Commission and the Member States. Expenditure is channelled through 81 national or regional paying agencies. These paying agencies are responsible for making payments to the beneficiaries and, prior to doing so, they must, either directly or through delegated bodies, check the eligibility of the aid applications. The Integrated Administration and Control System (IACS) is the main management and control system to ensure the regularity of EAGF direct aid transactions. The accounts and payment records of the paying agencies are examined by independent audit bodies (certification bodies) which report to the Commission through annual certificates and reports. |
| --- | --- |

3.6.

CAP expenditure is subject to shared management by the Commission and the Member States. Expenditure is channelled through 81 national or regional paying agencies. These paying agencies are responsible for making payments to the beneficiaries and, prior to doing so, they must, either directly or through delegated bodies, check the eligibility of the aid applications. The Integrated Administration and Control System (IACS) is the main management and control system to ensure the regularity of EAGF direct aid transactions. The accounts and payment records of the paying agencies are examined by independent audit bodies (certification bodies) which report to the Commission through annual certificates and reports.

| 3.6. | According to Article 5 of Commission Regulation (EC) No 885/2006, the certification bodies examine, on an annual basis, the internal control procedures of the paying agencies, in addition to their annual accounts. |
| --- | --- |

3.6.

| 3.7. | The Commission has to obtain assurance that the Member States have set up management and control systems which meet the requirements of the regulations, and that the systems function effectively. |
| --- | --- |

3.7.

The Commission has to obtain assurance that the Member States have set up management and control systems which meet the requirements of the regulations, and that the systems function effectively.

| 3.8. | As regards direct aids the main risks to regularity are that area aid is paid for ineligible land or to two or more beneficiaries for the same plot of land, or that animal premiums are paid for more animals than the applicant owns. As regards interventions in agricultural markets the main risks to regularity are that aid is granted for ineligible or overstated costs. |
| --- | --- |

3.8.

As regards direct aids the main risks to regularity are that area aid is paid for ineligible land or to two or more beneficiaries for the same plot of land, or that animal premiums are paid for more animals than the applicant owns. As regards interventions in agricultural markets the main risks to regularity are that aid is granted for ineligible or overstated costs.

Audit scope and approach

| 3.9. | Annex 1.1, Part 2
  , to Chapter 1 describes the Court’s overall audit approach and methodology. For the audit of market and direct support for agriculture the following specific issues should be noted: |
| --- | --- |

3.9.

Annex 1.1, Part 2
  , to Chapter 1 describes the Court’s overall audit approach and methodology. For the audit of market and direct support for agriculture the following specific issues should be noted:

3.9.

| — | the audit involved the examination of a sample of 180 interim and final payments, |
| --- | --- |

—

the audit involved the examination of a sample of 180 interim and final payments,

| — | as regards cross compliance, the Court focused its testing on selected GAEC obligations (9) and SMRs (10). Where cross-compliance obligations were not met, the Court treated such cases as errors (11). These errors were included in the calculation of the overall error rate provided that it can be established that the error already existed in the year in which the farmer applied for aid (12). This represents a change from previous years, when the failure to meet cross-compliance obligations was not included in the error rate calculation, |
| --- | --- |

—

as regards cross compliance, the Court focused its testing on selected GAEC obligations (9) and SMRs (10). Where cross-compliance obligations were not met, the Court treated such cases as errors (11). These errors were included in the calculation of the overall error rate provided that it can be established that the error already existed in the year in which the farmer applied for aid (12). This represents a change from previous years, when the failure to meet cross-compliance obligations was not included in the error rate calculation,

| — | Most of the cross-compliance requirements, i.e. the SMRs, are to be respected by all EU citizens, irrespectively of being a farmer benefiting from EU support under the CAP. The respect of cross compliance does not constitute an eligibility criterion and, therefore, the controls of these requirements do not pertain to the legality and regularity of the underlying transactions. Farmers not respecting the requirements are entitled to receive their payments, but are sanctioned on the basis of the severity, extent, permanence and repetition of the non-compliance found as well as negligence or intent of the farmer concerned. This is also shown by the fact that payments can be made before the cross-compliance controls have been completed and that penalties are not applied on the payments made in respect of the calendar year when the farmer failed to comply with the requirements, but rather on the payments made in respect of the calendar year of the findings by the national authorities. For all these reasons, the Commission does not itself take violations of cross-compliance obligations into account in the calculation of the level of error for its Annual Activity Report. |
| --- | --- |

—

| — | reductions and exclusions (applied in cases where beneficiaries of EU aid over-claim the actual area or number of animals (13) are not included in the Court’s error rate calculation, |
| --- | --- |

—

reductions and exclusions (applied in cases where beneficiaries of EU aid over-claim the actual area or number of animals (13) are not included in the Court’s error rate calculation,

| — | the assessment of systems covered IACS in five paying agencies in Member States applying the SPS — Austria, Denmark, Finland, Italy (Lombardia) and Spain (Galicia) — and in one paying agency in a Member State applying SAPS (Hungary), |
| --- | --- |

—

the assessment of systems covered IACS in five paying agencies in Member States applying the SPS — Austria, Denmark, Finland, Italy (Lombardia) and Spain (Galicia) — and in one paying agency in a Member State applying SAPS (Hungary),

| — | the Court examined the implementation (at national level) of cross-compliance standards and the control systems implemented by Member States. The results of this work are presented in Chapter 4 at paragraphs 4.30 to 4.32 but are also applicable to this Chapter, |
| --- | --- |

—

the Court examined the implementation (at national level) of cross-compliance standards and the control systems implemented by Member States. The results of this work are presented in Chapter 4 at paragraphs 4.30 to 4.32 but are also applicable to this Chapter,

| — | the Court reviewed the work carried out by the certification bodies of Romania and Bulgaria under the new reinforcement of assurance procedure (14), |
| --- | --- |

—

the Court reviewed the work carried out by the certification bodies of Romania and Bulgaria under the new reinforcement of assurance procedure (14),

| — | the review of the Commission’s management representations covered the annual activity report of DG AGRI concerning EAGF-related issues, |
| --- | --- |

—

the review of the Commission’s management representations covered the annual activity report of DG AGRI concerning EAGF-related issues,

| — | in the context of the Commission’s clearance of accounts procedure the Court reviewed 17 of the EAGF certification bodies’ certificates and reports relating to 17 paying agencies. The results are presented in Chapter 4 (see paragraph 4.36). |
| --- | --- |

—

in the context of the Commission’s clearance of accounts procedure the Court reviewed 17 of the EAGF certification bodies’ certificates and reports relating to 17 paying agencies. The results are presented in Chapter 4 (see paragraph 4.36).

REGULARITY OF TRANSACTIONS

| 3.10. | Annex 3.1
  contains a summary of the results of transaction testing. The Court’s testing of its sample of transactions found 39 % to be affected by error. The most likely error estimated by the Court is 2,9 % (15). |
| --- | --- |

3.10.

Annex 3.1
  contains a summary of the results of transaction testing. The Court’s testing of its sample of transactions found 39 % to be affected by error. The most likely error estimated by the Court is 2,9 % (15).

| 3.10. | The most likely error determined by the Court for the financial year 2011 represents a slight increase compared to last year but is still within the normal range of statistical variation from one year to another and does not point to a deterioration of the overall quality in the management and control of expenditure by Member States. This is confirmed by the fact that, in the Commission’s view, one of the cases which the Court considers to be a 100 % error was of an exceptional nature and does not point to an inherent weakness in the system. The Commission considers that the error rates determined by the Court over the last years taken together provide reliable evidence that the most likely error rate for EAGF is relatively close to the 2 % materiality threshold.

  The low error rates indicated in the control statistics which the Commission has received from Member States and which to a very large extent have been verified and validated by the certification bodies, also confirm that EAGF expenditure in financial year 2011 has generally been well managed.


  Finally, the risk to the EU budget is adequately covered by the conformity clearance procedures of the Commission.


  See also joint reply to points 3.11 and 3.12. |
| --- | --- |

3.10.

The low error rates indicated in the control statistics which the Commission has received from Member States and which to a very large extent have been verified and validated by the certification bodies, also confirm that EAGF expenditure in financial year 2011 has generally been well managed.

Finally, the risk to the EU budget is adequately covered by the conformity clearance procedures of the Commission.

See also joint reply to points 3.11 and 3.12.

| 3.11. | Of the 70 transactions affected by errors 60 (86 %) were affected by quantifiable errors, concerning accuracy 45 (75 %), eligibility 14 (23 %) and occurrence 1 (2 %). |
| --- | --- |

3.11.

Of the 70 transactions affected by errors 60 (86 %) were affected by quantifiable errors, concerning accuracy 45 (75 %), eligibility 14 (23 %) and occurrence 1 (2 %).

| 3.12. | Illustrations of quantifiable errors found by the Court are in example 3.1 and an illustration of a non-quantifiable error in example 3.2. The most frequent accuracy error relates to area over-declarations, most of which amount individually to less than 5 %. The larger accuracy errors relate to cases where the eligibility of permanent pasture has been incorrectly assessed and recorded in the Land Parcel Identification System (LPIS) (see also paragraph 3.20). |
| --- | --- |

3.12.

Illustrations of quantifiable errors found by the Court are in example 3.1 and an illustration of a non-quantifiable error in example 3.2. The most frequent accuracy error relates to area over-declarations, most of which amount individually to less than 5 %. The larger accuracy errors relate to cases where the eligibility of permanent pasture has been incorrectly assessed and recorded in the Land Parcel Identification System (LPIS) (see also paragraph 3.20).

| 3.11 and 3.12. | The Commission notes that most of the quantifiable errors are relatively small in financial terms and mainly concern small differences in the re-measurement of parcels carried out by the Court (see paragraph 3.12); indeed, 42 of the errors found by the Court concern very small differences in parcel re-measurement (24 errors at below 2 %). |
| --- | --- |

3.11 and 3.12.

Over-declaration of area (example of accuracy error)

In one Member State, reference parcels classified as permanent pasture are considered to be fully eligible even if substantial parts are covered by rocks or dense bushes rendering the areas ineligible. The Court found in two transactions in this Member State over-declarations of 28 % and 36 % respectively.

Over-declaration of area (example of accuracy error)

The Commission is aware of the issues related to the eligibility of pasture areas in this Member State. National authorities were requested to act on this matter and presented the LPIS Improvement Plan in November 2010 including, notably, measures to implement the application of an eligibility coefficient to pasture parcels and to ensure systematic update of LPIS with the results of on-the-spot checks. The Commission will continue to monitor the implementation of this plan by the national authorities.

Breach of public procurement rules (example of eligibility error)

A promotion measure to encourage the consumption of milk was awarded to a domestic market operator without publication of the tendering procedure at EU level as required by EU and national legislation. This restricted the access to the contract for potential operators from other Member States and represents a serious failure to respect public procurement rules rendering the payment of the aid irregular.

Breach of public procurement rules (example of eligibility error)

The Commission observes that the Member State does not share the Court’s finding. The Commission will assess whether and how to pursue the case, if necessary through the conformity clearance procedure, having regard also to the principle of proportionality.

Claim for non-existent animals (example of occurrence error)

A farmer was granted a special premium for 150 sheep. The Court found that the beneficiary did not have any sheep. The corresponding payment was therefore irregular.

Claim for non-existent animals (example of occurrence error)

The national authorities are in the process of recovering the overpaid amounts and the Commission will follow this up. In addition, a clearance procedure will be launched in order to verify the conformity of the Member State’s management and control system.

Example 3.2 —   Example of a non-quantifiable error

In one Member State the total value of entitlements allocated and recorded in the IACS database exceeded the ceiling provided for in EU legislation (16).

Example 3.2 —   
  Example of a non-quantifiable error

The Commission notes that the Member State reduced payments to farmers and thereby respected the ceiling for all direct aid payments established by Council Regulation (EC) No 73/2009.

The Commission will assess information provided by the Court and on this basis decide on any follow-up.

Cross compliance

| 3.13. | On the basis of its examination of selected cross-compliance obligations (see paragraph 3.9, second indent) the Court found infringements in 22 (17) of the 155 payments subject to these obligations (18). The errors found represent around 0,2 percentage points of the total error rate referred to in paragraph 3.10. |
| --- | --- |

3.13.

On the basis of its examination of selected cross-compliance obligations (see paragraph 3.9, second indent) the Court found infringements in 22 (17) of the 155 payments subject to these obligations (18). The errors found represent around 0,2 percentage points of the total error rate referred to in paragraph 3.10.

| 3.13. | See reply to point 3.9. |
| --- | --- |

3.13.

EFFECTIVENESS OF SYSTEMS

Member States' systems relating to regularity of transactions

| 3.14. | Annex 3.2
  contains a summary of the results of the Court’s examination of the Integrated Administration and Control System (IACS) (19). In all the six paying agencies examined, the Court found the IACS systems to be partially effective. |
| --- | --- |

3.14.

Annex 3.2
  contains a summary of the results of the Court’s examination of the Integrated Administration and Control System (IACS) (19). In all the six paying agencies examined, the Court found the IACS systems to be partially effective.

| 3.15. | The Court’s audits show that the effectiveness of IACS in the paying agencies audited is adversely affected by inaccurate data in the various databases and incorrect administrative treatment of claims by the paying agencies. Furthermore, some serious systems weaknesses reported in previous annual reports still persist (see paragraphs 3.19 to 3.22). |
| --- | --- |

3.15.

The Court’s audits show that the effectiveness of IACS in the paying agencies audited is adversely affected by inaccurate data in the various databases and incorrect administrative treatment of claims by the paying agencies. Furthermore, some serious systems weaknesses reported in previous annual reports still persist (see paragraphs 3.19 to 3.22).

| 3.14 and 3.15. | The Commission considers that IACS, which accounts for 91 % of total EAGF expenditure, is generally an effective control system for limiting the risk of error or irregular expenditure.

  The overall effectiveness and constant improvement of the IACS is confirmed by the results of the conformity audits which the Commission has carried out over the past years in all Member States and by the low error rate indicated in the control statistics which it receives from Member States. These statistics are verified and validated by the certification bodies and show a level of undue payments which is below the 2 % materiality threshold.


  Remaining deficiencies are generally of a lesser nature. Many of these deficiencies pertain to a rather limited scope, e.g. some kind of alpine pastures in Austria, and are not undermining seriously the effectiveness of IACS. All these deficiencies are followed up through conformity clearance procedures which ensure that the risk to the EU budget is adequately covered.


  Given that the deficiencies the Court detected in Austria are of a minor nature, the Commission considers the supervisory and control system in Austria to be effective. |
| --- | --- |

3.14 and 3.15.

The overall effectiveness and constant improvement of the IACS is confirmed by the results of the conformity audits which the Commission has carried out over the past years in all Member States and by the low error rate indicated in the control statistics which it receives from Member States. These statistics are verified and validated by the certification bodies and show a level of undue payments which is below the 2 % materiality threshold.

Remaining deficiencies are generally of a lesser nature. Many of these deficiencies pertain to a rather limited scope, e.g. some kind of alpine pastures in Austria, and are not undermining seriously the effectiveness of IACS. All these deficiencies are followed up through conformity clearance procedures which ensure that the risk to the EU budget is adequately covered.

Given that the deficiencies the Court detected in Austria are of a minor nature, the Commission considers the supervisory and control system in Austria to be effective.

| 3.16. | IACS covers the main schemes financed by EAGF, i.e. SPS, SAPS and all area related coupled aid schemes as well as animal premium schemes. The system consists of databases of holdings and applications, systems for identifying agricultural parcels and registering animals, as well as a register of entitlements in those Member States implementing the SPS. It provides for several eligibility checks including cross-checks between databases. |
| --- | --- |

3.16.

IACS covers the main schemes financed by EAGF, i.e. SPS, SAPS and all area related coupled aid schemes as well as animal premium schemes. The system consists of databases of holdings and applications, systems for identifying agricultural parcels and registering animals, as well as a register of entitlements in those Member States implementing the SPS. It provides for several eligibility checks including cross-checks between databases.

| 3.17. | The Court’s IACS audits covered compliance with the provisions of the relevant regulations and an assessment of the effectiveness of the systems in ensuring the regularity of transactions, notably the following elements:






  (a) | administrative and control procedures to ensure correct payment including quality of databases; |
| --- | --- | --- |

3.17.

The Court’s IACS audits covered compliance with the provisions of the relevant regulations and an assessment of the effectiveness of the systems in ensuring the regularity of transactions, notably the following elements:

(a)

administrative and control procedures to ensure correct payment including quality of databases;

| (b) | control systems based on physical on-the-spot checks; |
| --- | --- |

(b)

control systems based on physical on-the-spot checks;

| (c) | procedures to ensure recovery of undue payments. |
| --- | --- |

(c)

procedures to ensure recovery of undue payments.

Administrative and control procedures to ensure correct payment including quality of databases

| 3.18. | The administrative checks (20) by paying agencies must include cross-checks wherever possible and appropriate, inter alia with all IACS databases. The Court verified whether databases were complete and reliable, whether checks identified anomalies and whether action was taken to correct errors detected. The major systems weaknesses found are set out below. |
| --- | --- |

3.18.

The administrative checks (20) by paying agencies must include cross-checks wherever possible and appropriate, inter alia with all IACS databases. The Court verified whether databases were complete and reliable, whether checks identified anomalies and whether action was taken to correct errors detected. The major systems weaknesses found are set out below.

| 3.19. | EU legislation provides that after expiry of a specified deadline, farmers can no longer declare additional parcels and that any anomaly detected by the paying agency will lead to a reduction of the aid amount. However, the administration may correct a claim at any time without applying an aid reduction in the case of an obvious error defined as an inconsistency (21) which becomes apparent from the data contained in the claim itself. The Court found that four paying agencies (Denmark, Finland, Italy (Lombardia) and Romania) incorrectly applied the obvious error concept, by allowing the replacement of ineligible or double claimed parcels, with the result that the paying agencies did not apply aid reductions (see example 3.3). |
| --- | --- |

3.19.

EU legislation provides that after expiry of a specified deadline, farmers can no longer declare additional parcels and that any anomaly detected by the paying agency will lead to a reduction of the aid amount. However, the administration may correct a claim at any time without applying an aid reduction in the case of an obvious error defined as an inconsistency (21) which becomes apparent from the data contained in the claim itself. The Court found that four paying agencies (Denmark, Finland, Italy (Lombardia) and Romania) incorrectly applied the obvious error concept, by allowing the replacement of ineligible or double claimed parcels, with the result that the paying agencies did not apply aid reductions (see example 3.3).

| 3.19. | As regards Denmark, Finland and Italy, the national authorities have taken or are taking corrective actions by amending their internal instructions and procedures and, where necessary, by recovering overpaid amounts.

  As regards Romania, the Commission services’ own audit found that the national guidelines for the determination of obvious errors were not always applied correctly by the regional paying offices. |
| --- | --- |

3.19.

As regards Romania, the Commission services’ own audit found that the national guidelines for the determination of obvious errors were not always applied correctly by the regional paying offices.

Example 3.3 —   Incorrect treatment of the obvious error concept

In the case of Romania the incorrect application of the obvious error concept was systematic. Parcels affected by over-declarations or double declarations are replaced in a significant number of cases by other parcels in different locations and of a different size or shape. Such replacements cannot be considered as a correction of obvious errors (22).

Example 3.3
  —   
  Incorrect treatment of the obvious error concept

As from 2010 the Romanian authorities have implemented a web based LPIS (IPA online) which enhances parcel location. As regards the reference to the Court’s findings concerning Romania in its 2008 Annual Report (paragraph 5.38), and as already stated in its respective reply, the Commission does not share the view of the Court of Auditors concerning the application of the obvious error concept in case of misplacement of parcels.

| 3.20. | The LPIS is a database which contains a record of the entire agricultural area (reference parcels) of the Member State and the eligible areas which is of key importance for the quality of administrative cross-checks (see example 3.4). |
| --- | --- |

3.20.

The LPIS is a database which contains a record of the entire agricultural area (reference parcels) of the Member State and the eligible areas which is of key importance for the quality of administrative cross-checks (see example 3.4).

3.20.

Example 3.4 —   Incorrect data in the LPIS

In two Member States (23) (Italy (Lombardia) and Spain (Galicia)), the Court found cases where ‘permanent pasture’ reference parcels were recorded in the LPIS as being 100 % eligible despite the fact that they are fully or partially covered with dense forest or other ineligible features. The Court also observed that the LPIS was not updated with the results of on-the-spot inspections performed by paying agencies (Hungary, Italy (Lombardia) and Spain (Galicia)).

Example 3.4 —   
  Incorrect data in the LPIS

According to the Italian authorities, the issue has been rectified as from 2011. The Commission is pursuing this through the conformity clearance procedure of accounts.

The Commission is aware of the issues related to the eligibility of pasture areas in Spain. The Spanish authorities were requested to act on this matter and presented the LPIS Improvement Plan in November 2010 including, notably, measures to implement the application of an eligibility coefficient to pasture parcels and to ensure systematic update of LPIS with the results of on-the-spot checks. The Commission will continue to monitor the implementation of this plan by the national authorities.

The Commission has also found some cases in Hungary where LPIS was not updated with the results of the on-the-spot checks and has requested the Hungarian authorities in writing to take action in this respect.

| 3.21. | For SPS aid to be granted, every entitlement held by the farmer needs to be declared together with one hectare of eligible land. The Court has observed that this principle is not respected in certain circumstances in Austria (see example 3.5). |
| --- | --- |

3.21.

For SPS aid to be granted, every entitlement held by the farmer needs to be declared together with one hectare of eligible land. The Court has observed that this principle is not respected in certain circumstances in Austria (see example 3.5).

| 3.21. | The Commission has so far imposed 0,214 million euro in financial corrections on Austria concerning entitlements for alpine pastures in claim years 2005, 2006 and 2007 in the context of the conformity clearance procedure.

  See also joint reply to points 3.14 and 3.15. |
| --- | --- |

3.21.

See also joint reply to points 3.14 and 3.15.

Example 3.5 —   Incorrect activation of entitlements

In Austria, when an applicant claiming Alpine pasture areas does not have enough hectares to activate all entitlements the national authorities, contrary to EU legislation, reduce the number of applicant’s entitlements (to match it with the number of hectares) and increase their values proportionately (24).

Example 3.5 —   
  Incorrect activation of entitlements

See reply to point 3.21.

| 3.22. | All payment entitlements should be recorded in the entitlement database the total value of which must not exceed a ceiling laid down in EU legislation. In two Member States the Court found inaccurate information in the entitlements databases due to the incorrect treatment of unused entitlements (25) (Denmark) and to differences between regional and central databases (Spain) (26). |
| --- | --- |

3.22.

All payment entitlements should be recorded in the entitlement database the total value of which must not exceed a ceiling laid down in EU legislation. In two Member States the Court found inaccurate information in the entitlements databases due to the incorrect treatment of unused entitlements (25) (Denmark) and to differences between regional and central databases (Spain) (26).

| 3.22. | As regards Denmark, the Commission has found similar issues and Danish authorities have agreed to take appropriate corrective measures. The Commission will follow this up in the context of the conformity clearance procedure. |
| --- | --- |

3.22.

Control systems based on physical on-the-spot checks

| 3.23. | The quality of the on-the-spot measurements is of key importance for the correct determination of aid amounts. The Court has re-performed a number of measurements carried out by the paying agencies. In three Member States the Court’s measurements differed from the results reported by the paying agencies (in Denmark for five out of 18, in both Spain (Galicia) and Finland for four out of 21 measurements). |
| --- | --- |

3.23.

The quality of the on-the-spot measurements is of key importance for the correct determination of aid amounts. The Court has re-performed a number of measurements carried out by the paying agencies. In three Member States the Court’s measurements differed from the results reported by the paying agencies (in Denmark for five out of 18, in both Spain (Galicia) and Finland for four out of 21 measurements).

| 3.23. | The Commission services share the view of the Court that the quality of on-the-spot checks is important. Audits carried out by the Commission services have identified similar deficiencies in the quality of the on-the-spot checks, and the weaknesses found are followed up through conformity clearance procedures which ensure that the risk to the EU budget is adequately covered.

  Following Commission audits, the Spanish authorities presented an LPIS Improvement Plan in November 2010 including measures to improve the quality of on-the-spot checks. These measures are in effect as from claim year 2012. |
| --- | --- |

3.23.

Following Commission audits, the Spanish authorities presented an LPIS Improvement Plan in November 2010 including measures to improve the quality of on-the-spot checks. These measures are in effect as from claim year 2012.

Procedures to ensure recovery of undue payments

| 3.24. | The Court examined the accounting records of the paying agencies audited to establish if the amounts to be recovered are properly accounted for and if these amounts are correctly reported to the Commission. In Denmark the Court could not reconcile the amounts reported with underlying records. |
| --- | --- |

3.24.

The Court examined the accounting records of the paying agencies audited to establish if the amounts to be recovered are properly accounted for and if these amounts are correctly reported to the Commission. In Denmark the Court could not reconcile the amounts reported with underlying records.

| 3.24. | The Commission shares the Court’s assessment that four out of the six systems audited were effective and two partially effective (see Annex 3.2). The Commission also considers that the debts management and recovery systems have improved in the last years, not least due to the introduction in 2006 of the so-called 50/50 rule, which gives a strong incentive to Member States to recover undue payments as effectively and as quickly as possible. This is the reason why the Commission has proposed a ‘100 % rule’ for the 2014-2020 period (i.e. 100 % of unrecovered amounts after a four or eight-year delay — depending on whether the case is under administrative or judicial procedure — will be charged to the Member States concerned) (37).

  In the specific case of Denmark, the Certifying body also identified some reconciliation issues with regard to recovered amounts or between the reporting to the Commission through the Annex III tables and the paying agency’s debtors’ ledger. The Commission will review the compliance with the accreditation criteria and the infrastructure and control systems put in place. |
| --- | --- |

3.24.

In the specific case of Denmark, the Certifying body also identified some reconciliation issues with regard to recovered amounts or between the reporting to the Commission through the Annex III tables and the paying agency’s debtors’ ledger. The Commission will review the compliance with the accreditation criteria and the infrastructure and control systems put in place.

The Commission's supervisory system and management representation

| 3.25. | The Commission bases its assessment of the legality and regularity of expenditure for the policy area on four building blocks:






  — | an assessment of the proper functioning of management and control systems, |
| --- | --- | --- |

3.25.

The Commission bases its assessment of the legality and regularity of expenditure for the policy area on four building blocks:

—

an assessment of the proper functioning of management and control systems,

| — | the results of its own audits, |
| --- | --- |

—

the results of its own audits,

| — | the follow-up of previous years’ reservations and action plans, |
| --- | --- |

—

the follow-up of previous years’ reservations and action plans,

| — | the assurance received from other authorising officers in cases of sub-delegation. |
| --- | --- |

—

the assurance received from other authorising officers in cases of sub-delegation.

| 3.26. | The Court has analysed in particular the Commissions assessment of the proper functioning of management and control systems as described in its 2011 Annual Activity Report. |
| --- | --- |

3.26.

The Court has analysed in particular the Commissions assessment of the proper functioning of management and control systems as described in its 2011 Annual Activity Report.

The Commission’s assessment of the proper functioning of management and control systems

| 3.27. | The key elements for the Commission’s assessment of the efficiency of the management at Member State level are the statements of assurance given by heads of paying agencies on the legality and regularity of underlying transactions and the audit work performed on them by certification bodies. |
| --- | --- |

3.27.

The key elements for the Commission’s assessment of the efficiency of the management at Member State level are the statements of assurance given by heads of paying agencies on the legality and regularity of underlying transactions and the audit work performed on them by certification bodies.

| 3.27. | As stated in DG AGRI’s Annual Activity Report, the Commission assesses the legality and regularity of the underlying transactions on the basis of findings and indicators which can be summarised in three assurance blocks:







  (1) | the functioning of the paying agencies; |
| --- | --- | --- |

3.27.

(1)

the functioning of the paying agencies;

| (2) | the control results at the level of the final beneficiaries; and |
| --- | --- |

(2)

the control results at the level of the final beneficiaries; and

| (3) | the Commission’s conformity audits on Member States’ management and control systems. |
| --- | --- |

(3)

the Commission’s conformity audits on Member States’ management and control systems.

| 3.28. | For 2011 the Commission reports that for EAGF all 81 statements of assurance delivered by heads of paying agencies were unqualified and that all but one (Spain (Cantabria)) opinions given by the respective certification bodies were also unqualified (27). The certification bodies perform their audits on the basis of Commission guidelines under a ‘standard’ or, on a voluntary basis, ‘reinforcement of assurance’ procedure involving additional checks. |
| --- | --- |

3.28.

For 2011 the Commission reports that for EAGF all 81 statements of assurance delivered by heads of paying agencies were unqualified and that all but one (Spain (Cantabria)) opinions given by the respective certification bodies were also unqualified (27). The certification bodies perform their audits on the basis of Commission guidelines under a ‘standard’ or, on a voluntary basis, ‘reinforcement of assurance’ procedure involving additional checks.

The standard audit requirements for certification bodies

| 3.29. | The certification bodies check the accreditation criteria for the paying agencies, assess the internal control system, validate the compilation of inspection statistics and form an opinion on the statement of assurance given by the heads of the paying agencies. |
| --- | --- |

3.29.

The certification bodies check the accreditation criteria for the paying agencies, assess the internal control system, validate the compilation of inspection statistics and form an opinion on the statement of assurance given by the heads of the paying agencies.

| 3.30. | In its 2011 AAR the Commission states that 91 % of the certification bodies had audited the compilation of inspection statistics for EAGF-IACS and that 92 % of them concluded positively, i.e. that errors in the compilation of statistics amount to less than 2 %. Therefore, only 84 % of paying agencies’ statistics have been validated by the certification bodies. |
| --- | --- |

3.30.

In its 2011 AAR the Commission states that 91 % of the certification bodies had audited the compilation of inspection statistics for EAGF-IACS and that 92 % of them concluded positively, i.e. that errors in the compilation of statistics amount to less than 2 %. Therefore, only 84 % of paying agencies’ statistics have been validated by the certification bodies.

| 3.30. | Compared to previous years, DG AGRI adopted a stricter approach in its Annual Activity Report regarding the work done and conclusions drawn from the certification bodies’ work: only in case the certification body performed all required work was it considered in the evaluation of the work. |
| --- | --- |

3.30.

| 3.31. | According to the Commission guidelines, the validation of inspection statistics by the certification bodies is based on a review of a sample of 20 control reports (28). It does not however cover the completeness of the inspection statistics or the correct reporting of the results (29). |
| --- | --- |

3.31.

According to the Commission guidelines, the validation of inspection statistics by the certification bodies is based on a review of a sample of 20 control reports (28). It does not however cover the completeness of the inspection statistics or the correct reporting of the results (29).

| 3.31. | On the completeness of the reporting as such, the Commission services are developing the tools that will provide complete information enabling more generalised checks on the on-the-spot checks results. A test run is scheduled for 2012 claim year for area aids claims. |
| --- | --- |

3.31.

| 3.32. | In assessing the quality of on-the-spot inspections the Commission guidelines allow the certification bodies to either accompany or to re-perform on-the-spot inspections. Based on its experience, the Court considers that the quality of inspections would improve if certification bodies were required systematically to re-perform previous inspections (30). |
| --- | --- |

3.32.

In assessing the quality of on-the-spot inspections the Commission guidelines allow the certification bodies to either accompany or to re-perform on-the-spot inspections. Based on its experience, the Court considers that the quality of inspections would improve if certification bodies were required systematically to re-perform previous inspections (30).

| 3.32. | Even though the Commission agrees that, if carried out in due time, a re-performance of a previous check provides a better assessment of the quality of on-the-spot checks, it is still possible to evaluate the control environment through inspections accompanied by the certification body. In certain cases it may not even be possible to re-perform a check in due time. These limitations are inherent in many ex post controls performed by external auditors. In such situations, accompanied inspections are a good alternative. They also have the additional benefit of reducing the administrative burden on the farmer by avoiding an accumulation of controls. |
| --- | --- |

3.32.

Even though the Commission agrees that, if carried out in due time, a re-performance of a previous check provides a better assessment of the quality of on-the-spot checks, it is still possible to evaluate the control environment through inspections accompanied by the certification body. In certain cases it may not even be possible to re-perform a check in due time. These limitations are inherent in many ex post controls performed by external auditors. In such situations, accompanied inspections are a good alternative. They also have the additional benefit of reducing the administrative burden on the farmer by avoiding an accumulation of controls.

| 3.33. | Furthermore, several certification body reports indicate that the Commission requested further clarifications (31) by the paying agencies with regard to the inspection statistics initially submitted. Potential amendments to the inspection statistics resulting from these requests are not analysed in the context of certification body audits. |
| --- | --- |

3.33.

Furthermore, several certification body reports indicate that the Commission requested further clarifications (31) by the paying agencies with regard to the inspection statistics initially submitted. Potential amendments to the inspection statistics resulting from these requests are not analysed in the context of certification body audits.

| 3.33. | The Commission notes that the work to be performed by the certification body has to cover the subsequent transmissions of inspection statistics up to the time of preparation of its report. |
| --- | --- |

3.33.

The new reinforcement of assurance procedure

| 3.34. | In 2010 the Commission introduced on a voluntary basis (32) a new control framework called ‘Reinforcement of assurance on the legality and regularity of the transactions at the level of the final beneficiaries through the work of the certification bodies’. The reinforcement exercise requires the certification body to re-perform, for each paying agency and each of the four expenditure populations, EAGF-IACS, EAGF-non-IACS, EAFRD-IACS and EAFRD-non-IACS, the check of a representative sample of transactions which the paying agency has checked on the spot. |
| --- | --- |

3.34.

In 2010 the Commission introduced on a voluntary basis (32) a new control framework called ‘Reinforcement of assurance on the legality and regularity of the transactions at the level of the final beneficiaries through the work of the certification bodies’. The reinforcement exercise requires the certification body to re-perform, for each paying agency and each of the four expenditure populations, EAGF-IACS, EAGF-non-IACS, EAFRD-IACS and EAFRD-non-IACS, the check of a representative sample of transactions which the paying agency has checked on the spot.

| 3.35. | If the Commission considers that Member States apply this procedure correctly, financial corrections in the context of the clearance of accounts will be limited to the error rate derived from the inspection statistics certified. |
| --- | --- |

3.35.

If the Commission considers that Member States apply this procedure correctly, financial corrections in the context of the clearance of accounts will be limited to the error rate derived from the inspection statistics certified.

Conceptual inconsistencies

| 3.36. | The ultimate objective of the reinforcement of assurance procedure is to allow the Commission to establish a reliable residual error rate in the various expenditure populations. The Court has analysed the Commission instructions to the certification bodies for the reinforcement of assurance procedure (33). As regards substantive testing, the instructions provide for a sample of between 110 and 180 transactions and for a materiality threshold of 2 %. |
| --- | --- |

3.36.

The ultimate objective of the reinforcement of assurance procedure is to allow the Commission to establish a reliable residual error rate in the various expenditure populations. The Court has analysed the Commission instructions to the certification bodies for the reinforcement of assurance procedure (33). As regards substantive testing, the instructions provide for a sample of between 110 and 180 transactions and for a materiality threshold of 2 %.

| 3.37. | The Commission instructions, however, allow a 2 % tolerance margin between the aid amounts validated by the paying agency and the amounts determined by the certification body and a further 2 % tolerance margin for incorrect compilation of inspection statistics by the paying agency. The two tolerance margins allow the certification body to validate residual error rates which could be understated by up to 4 percentage points thereby undermining the materiality threshold set. |
| --- | --- |

3.37.

The Commission instructions, however, allow a 2 % tolerance margin between the aid amounts validated by the paying agency and the amounts determined by the certification body and a further 2 % tolerance margin for incorrect compilation of inspection statistics by the paying agency. The two tolerance margins allow the certification body to validate residual error rates which could be understated by up to 4 percentage points thereby undermining the materiality threshold set.

| 3.37. | The instructions foresee a 2 % margin for each of the opinions: the compilation of the statistics and the information as such. The financial effect of these two margins is not necessarily cumulative. |
| --- | --- |

3.37.

Implementation errors

| 3.38. | The Court noted substantial deficiencies in the implementation of the reinforcement of assurance procedure in both Member States audited (Bulgaria and Romania, see example 3.6). |
| --- | --- |

3.38.

The Court noted substantial deficiencies in the implementation of the reinforcement of assurance procedure in both Member States audited (Bulgaria and Romania, see example 3.6).

3.38.

Example 3.6 —   Deficiencies in the work carried out by certification bodies

In Bulgaria, the re-performance of the on-the-spot checks was outsourced by the certification body to a service provider. In several cases re-performed by the Court the service provider had incorrectly assessed the eligibility of land. Furthermore, the certification body did not observe that the paying agency did not offset area surpluses found on one parcel against deficits found on another parcel, as required by EU legislation. Another shortcoming undetected by the certification body was that where the same area was claimed by two farmers (multiple-claims) the paying agency, contrary to EU legislation, replaced the area claimed by one of the farmers concerned by an equivalent unclaimed area in another part of the reference parcel.

In Romania, the paying agency withheld all payments selected by the certification body and presented to that body payment simulations based on lists of parcels which excluded all ineligible parcels. However, after the completion of the audit and the validation of the payment simulations by the certification body, the paying agency added new parcels to the list by way of incorrect application of the obvious error concept (34) and paid higher amounts than those validated by the certification body. As a result, the certification body issued an unqualified opinion on the legality and regularity of payments despite the weaknesses highlighted by the Court.

Example 3.6 —   
  Deficiencies in the work carried out by certification bodies

See reply to point 3.39.

| 3.39. | Overall, the Court considers that the quality of the work performed by the certification bodies audited under reinforcement of assurance is insufficient. |
| --- | --- |

3.39.

Overall, the Court considers that the quality of the work performed by the certification bodies audited under reinforcement of assurance is insufficient.

| 3.39. | The Commission would like to point out that in none of the case the certification body certified the statistics. Consequently, they will not be used for the purposes indicated in point 3.35.

  As regards the Court’s findings, the Commission will raise them with the Member States concerned and will address these issues in any future guidance it will provide. |
| --- | --- |

3.39.

As regards the Court’s findings, the Commission will raise them with the Member States concerned and will address these issues in any future guidance it will provide.

DG AGRI’s management representation — the Annual Activity Report (AAR)

| 3.40. | DG AGRI’s 2011 AAR contains a reservation in respect of serious deficiencies in IACS in Bulgaria and Portugal. However, the Commission lifted its previous reservation for IACS expenditure in Romania. In the light of the observations referred to in paragraph 3.19 and example 3.6 the Court considers that this was premature. |
| --- | --- |

3.40.

DG AGRI’s 2011 AAR contains a reservation in respect of serious deficiencies in IACS in Bulgaria and Portugal. However, the Commission lifted its previous reservation for IACS expenditure in Romania. In the light of the observations referred to in paragraph 3.19 and example 3.6 the Court considers that this was premature.

| 3.40. | It should be recalled that the reservation for Romania was issued purely on a reputational basis due to serious deficiencies in the IACS which is the single most important control system for the CAP and did not entail a financial risk above the 2 % materiality threshold at EU level. In February 2012 Commission audits have determined that the Romanian action plan was completed, properly implemented and the system was operational at sufficient quality for claim year 2011. Therefore the Commission considers that it was justified to lift the reservation independently of the question whether the error rate was above materiality in Romania. An audit of the implementation of the revised IACS system will be carried out as part of the normal audit programme in 2012. |
| --- | --- |

3.40.

| 3.41. | Furthermore, DG AGRI considers that the anomalies found by paying agencies during randomly selected on-the-spot inspections reflect the residual error rates. The Court reiterates its criticism of this approach already made in its 2010 Annual Report because: |
| --- | --- |

3.41.

Furthermore, DG AGRI considers that the anomalies found by paying agencies during randomly selected on-the-spot inspections reflect the residual error rates. The Court reiterates its criticism of this approach already made in its 2010 Annual Report because:

| 3.41. | The Member States’ control statistics are verified and validated to a large extent by the certification bodies, as recommended as an option by the Court in its annual report for 2005, and the results of this works are disclosed in DG AGRI’s Annual Activity Report. |
| --- | --- |

3.41.

| — | it is based on inspections, the quality of which the Commission’s own audits (35) and the Court’s audits (see paragraph 3.23) have shown to be insufficient, in the case of a number of paying agencies, |
| --- | --- |

—

it is based on inspections, the quality of which the Commission’s own audits (35) and the Court’s audits (see paragraph 3.23) have shown to be insufficient, in the case of a number of paying agencies,

| — | In order to address the risk that the error rates derived from these control statistics could have been understated due to inaccuracies in the databases or inadequate follow up of anomalies, as referred to by the Court, DG AGRI applied a safety margin of a 25 % increase which it considers largely sufficient to cover the risks referred to by the Court. |
| --- | --- |

—

| — | it relies on inspection statistics which, according to certification body reports, are affected by compilation errors (see paragraph 3.30), and |
| --- | --- |

—

it relies on inspection statistics which, according to certification body reports, are affected by compilation errors (see paragraph 3.30), and

| — | See reply above. |
| --- | --- |

—

| — | it is incomplete because it disregards the residual errors in the administrative management of claims which the Court’s (see paragraphs 3.19, 3.21 and 3.22) and the Commission’s own audits have shown to be deficient (36). |
| --- | --- |

—

it is incomplete because it disregards the residual errors in the administrative management of claims which the Court’s (see paragraphs 3.19, 3.21 and 3.22) and the Commission’s own audits have shown to be deficient (36).

| — | See reply above. |
| --- | --- |

—

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

| 3.42. | Based on its audit work, the Court concludes that the payments for the year ended 31 December 2011 of market and direct support for agriculture were affected by material error. |
| --- | --- |

3.42.

Based on its audit work, the Court concludes that the payments for the year ended 31 December 2011 of market and direct support for agriculture were affected by material error.

| 3.42. | The most likely error determined by the Court for the financial year 2011 represents a slight increase compared to last year but is still within the normal range of statistical variation from one year to another and does not point to a deterioration of the overall quality in the management and control of expenditure by Member States. This is confirmed by the fact that, in the Commission’s view, one of the cases which the Court considers to be a 100 % error was of an exceptional nature and does not point to an inherent weakness in the system. The Commission considers that the error rates determined by the Court over the last years taken together provide reliable evidence that the most likely error rate for EAGF is relatively close to the 2 % materiality threshold.

  The low error rates indicated in the control statistics which the Commission has received from Member States and which to a very large extent have been verified and validated by the certification bodies, also confirm that EAGF expenditure in financial year 2011 has generally been well managed.


  Finally, the risk to the EU budget is adequately covered by the conformity clearance procedures of the Commission.


  See also reply to paragraph 3.12. |
| --- | --- |

3.42.

The low error rates indicated in the control statistics which the Commission has received from Member States and which to a very large extent have been verified and validated by the certification bodies, also confirm that EAGF expenditure in financial year 2011 has generally been well managed.

Finally, the risk to the EU budget is adequately covered by the conformity clearance procedures of the Commission.

See also reply to paragraph 3.12.

| 3.43. | Based on its audit work, the Court found that the examined supervisory and control systems for market and direct support for agriculture were partially effective. |
| --- | --- |

3.43.

Based on its audit work, the Court found that the examined supervisory and control systems for market and direct support for agriculture were partially effective.

| 3.43. | The Commission considers that the IACS is generally an effective control system for limiting the risk of error or irregular expenditure and that, based on the control statistics from Member States and its own audit findings, the level of undue direct payments covered by the IACS in 2011 was below the 2 % materiality threshold. See, also, reply to paragraph 3.15. Moreover, the remaining risk for the EU budget is adequately covered by the conformity clearance procedure. |
| --- | --- |

3.43.

Recommendations

| 3.44. | Annex 3.3
  shows the result of the Court’s review of progress in addressing recommendations made in previous annual reports (2008 and 2009). The Court recognises that the Commission has taken remedial action as regards the reliability and completeness of information recorded in the LPIS, such as introducing mandatory quality assessments by all paying agencies and action plans in Member States affected by major deficiencies. However, the Court noted that the Commission did not ensure that certain Member States remedied the LPIS and administrative weaknesses reported by the Court in previous annual reports (see paragraph 3.15). |
| --- | --- |

3.44.

Annex 3.3
  shows the result of the Court’s review of progress in addressing recommendations made in previous annual reports (2008 and 2009). The Court recognises that the Commission has taken remedial action as regards the reliability and completeness of information recorded in the LPIS, such as introducing mandatory quality assessments by all paying agencies and action plans in Member States affected by major deficiencies. However, the Court noted that the Commission did not ensure that certain Member States remedied the LPIS and administrative weaknesses reported by the Court in previous annual reports (see paragraph 3.15).

| 3.44. | As from 2010, Member States are required to perform an annual quality assessment of the LPIS according to determined procedures, the results of which the Commission will continue to monitor in the following years. Moreover, in 2010 the Commission introduced on a voluntary basis a new control framework called ‘Reinforcement of assurance on the legality and regularity of the transactions at the level of the final beneficiaries through the work of the certification bodies’. Finally, several Member States have developed action plans and the Commission will monitor their completion. |
| --- | --- |

3.44.

| 3.45. | Following this review and the findings and conclusions for 2011, the Court recommends for the current programming period that the Commission and Member States take appropriate action to ensure that: |
| --- | --- |

3.45.

Following this review and the findings and conclusions for 2011, the Court recommends for the current programming period that the Commission and Member States take appropriate action to ensure that:

| 3.45. | See joint reply to paragraphs 1.12 and 1.13. |
| --- | --- |

3.45.

| — | Recommendation 1: the eligibility of permanent pasture is properly assessed, especially in cases where areas are partly covered with bushes, shrubs, dense trees or rocks (see paragraphs 3.12 and 3.20). |
| --- | --- |

—

Recommendation 1: the eligibility of permanent pasture is properly assessed, especially in cases where areas are partly covered with bushes, shrubs, dense trees or rocks (see paragraphs 3.12 and 3.20).

The Commission is aware of this issue and is has made proposals aimed at clarifying the eligibility criteria in the context of the ongoing CAP reform towards 2020.

For the current period, where the Commission finds such weaknesses, recommendations for rectification are made to the Member State and financial corrections are imposed through conformity clearance procedures in order to protect the EU’s financial interests.

| — | Recommendation 2: paying agencies take immediate remedial action where their administrative and control systems and/or IACS databases are found to be deficient (see paragraphs 3.19 to 3.22). |
| --- | --- |

—

Recommendation 2: paying agencies take immediate remedial action where their administrative and control systems and/or IACS databases are found to be deficient (see paragraphs 3.19 to 3.22).

| — | Recommendation 3: on-the-spot inspections are of the quality necessary to identify the eligible area in a reliable manner (see paragraph 3.23). |
| --- | --- |

—

Recommendation 3: on-the-spot inspections are of the quality necessary to identify the eligible area in a reliable manner (see paragraph 3.23).

The Commission agrees with the Court and systematically recommends Member States to improve the control systems and ensure a more vigorous implementation thereof.

Moreover, the Commission services have identified similar deficiencies in the quality of the on-the-spot checks, and the weaknesses found are followed up through conformity clearance procedures which ensure that the risk to the EU budget is adequately covered.

| — | Recommendation 4: the design and quality of the work performed by the certification bodies provides a reliable assessment of the legality and regularity of operations in the paying agencies (see paragraphs 3.29 ff). |
| --- | --- |

—

Recommendation 4: the design and quality of the work performed by the certification bodies provides a reliable assessment of the legality and regularity of operations in the paying agencies (see paragraphs 3.29 ff).

The Commission considers the overall structure and reporting requirements with regards to the review of on-the-spot controls by the certification bodies to be appropriate. Consequently, no changes in the Commission’s guidelines to certification bodies are foreseen for financial year 2012. The Commission will, however, continue to monitor the quality of the work of the certification bodies.

However, the certification bodies are not presently required to give an opinion on the legality and regularity of operations. Such work is possible on a voluntary basis only at the moment. The Commission’s proposals for both the financial regulation and the horizontal regulation on the financing, management and monitoring of the CAP require the certification bodies (38), from the start of the new programming period, to deliver an opinion on legality and regularity of transactions.

---

(1)  Article 39 of the Treaty on the Functioning of the European Union.

(2)  Council Regulation (EC) No 1290/2005 of 21 June 2005 on the financing of the common agricultural policy (OJ L 209, 11.8.2005, p. 1).

(3)  With the exception of certain measures such as promotion measures and the school fruit scheme, which are co-financed.

(4)  The number and value of each farmer's entitlement was calculated by the national authorities according to one of the models provided for under EU legislation.

(5)  Bulgaria, Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Poland, Romania and Slovakia.

(6)  Articles 4 to 6 of Council Regulation (EC) No 73/2009 (OJ L 30, 31.1.2009, p. 16).

(7)  Whilst GAEC standards, as referred to in Annex III to Regulation (EC) No 73/2009, apply in all Member States, Statutory Management Requirements (SMRs) as referred to in Annex II to that Regulation are mandatory only in EU-15. For the EU-10, SMRs are being phased in between 2009 and 2013, and for EU-2 between 2012 and 2014.

(8)  According to Articles 70 and 71 of Commission Regulation (EC) No 1122/2009 (OJ L 316, 2.12.2009, p. 65), the level of the reduction per SMR or GAEC not complied with can vary between 1 % and 5 % in case of negligence and can lead to full rejection of the aid in case of intentional non-compliance.

(9)  Avoiding the encroachment of unwanted vegetation, retention of terraces, maintenance of olive groves and respect of minimum livestock stocking rates or mowing obligations.

(10)  SMR 4 relating to the nitrates Directive.

(11)  Cross-compliance obligations are substantive legal requirements that must be met by all recipients of direct aid and are the basic and in many cases the only conditions to be respected in order to justify the payment of the full amount of direct payments, hence the Court’s decision to treat failure to meet such requirements as errors.

(12)  For each infringement, the national system for reduction of payments has been used for the quantification of the error.

(13)  Regulation (EC) No 1122/2009 provides that, where the claimed area is found to be overstated by more than 3 % or two hectares, the aid amount shall be calculated on the basis of the area determined reduced by twice the area claimed irregularly. If the difference is more than 20 % no aid shall be granted for the crop group concerned. Similar provisions apply to animal premiums.

(14)  See paragraphs 3.34 and 3.35.

(15)  The Court calculates its estimate of error from a representative statistical sample. The figure quoted is the best estimate (known as the MLE). The Court has 95 % confidence that the rate of error in the population lies between LEL 1,1 % and UEL 4,7 % (the lower and upper error limits respectively).

(16)  The excess was more than 280 million euro, but in the absence of relevant information regarding the basis for allocating the entitlements the Court was unable to quantify the impact on the EU budget.

(17)  14 of the 22 cases affected the payment audited, while the remaining eight cases only affect future payments.

(18)  The most frequent cross-compliance infringements observed relate to no or insufficient storage capacity for nitrates of animal origin, nitrate output per hectare in excess of the allowed maximum threshold and lack of nutrient balance records.

(19)  These findings, except those concerning entitlements, apply also to area-related and animal-related rural development measures covered by IACS.

(20)  Articles 28 and 29 of Regulation (EC) No 1122/2009.

(21)  Such as clerical error, inconsistency between graphical and alphanumerical information contained in the application, map reading errors, etc.

(22)  The Court had already observed in its 2008 Annual Report (paragraph 5.38) that in Romania 5 500 farmers had benefited from a total of 2,2 million euro in EU SAPS aid as a result of the incorrect application of the obvious error concept.

(23)  The Court has already made this observation for Spain in Annual Reports for 2008, paragraph 5.36, for 2009, paragraph 3.38, and for 2010, paragraph 3.31, and for Italy in the 2009 Annual Report, paragraph 3.38.

(24)  The Court has raised this issue already in its 2006 Annual Report (paragraph 5.23).

(25)  EU legislation provides that entitlements not activated during two consecutive years revert back to the national reserve, see Article 42 of Regulation (EC) No 73/2009.

(26)  This issue has already been reported by the Court in its 2008 Annual Report (paragraph 5.37).

(27)  No certification body reports have been received for the two Romanian paying agencies.

(28)  The Commission guidelines provide for a review of a minimum sample of 20 inspection reports for IACS area aid and another sample of 20 for IACS animal premium measures.

(29)  A full match between random samples selected and reported in the statistics is a prerequisite for any meaningful assessment of the residual error rate in the payments made.

(30)  See also the 2010 Annual Report, paragraph 3.46.

(31)  The certification body report explains that the control statistics for Germany (Bayern) had been readjusted six times in response to clarification requests by the Commission, the last definite version was received on 7 November 2011.

(32)  For the financial year 2011 only Luxembourg, Bulgaria and Romania opted to apply the reinforcement of assurance procedure.

(33)  AGRI/D(2010) 248617Rev1, Part A — Audit Strategy and AGRI/D(2010) 251540Rev1, Part B — Reporting.

(34)  See also example 3.3.

(35)  Clearance of accounts reports AA/2011/15 (Portugal), paragraph 3.2, AA/2011/09 (Finland), paragraph 3.2.1, AA/2011/05 (Germany, Mecklenburg-Vorpommern), paragraph 6.2, AA/2011/12 (Italy, Emilia-Romagna), paragraph 3.4.2, AA/2010/16 (Romania), paragraph 3.3, AA/2011/17 (Slovenia), paragraph 3.2, AA/2011/06 (Spain, Navarra), paragraph 3.4, AA/2011/07 (Spain, Castilla y Leon), paragraph 3.4.

(36)  For example, clearance of accounts reports AA/2011/01 (Bulgaria), paragraph 3.3, AA/2010/15 (Portugal), paragraph 3.3, AA/2011/12 (Italy), paragraph 3.2, AA/2011/06 (Spain), paragraph 3.2 and AA/2011/13 (Lithuania), paragraph 3.3.

(37)  Article 56(2) of SEC(2011) 1153.

(38)  Article 9 of the Commission's proposal for a Regulation of the European Parliament and of the Council on the financing, management and monitoring of the common agricultural policy — COM(2011) 628 final/2.

(39)  This amount represents the total administrative expenditure for Title 05.

(40)  This figure includes 1,5 million euro which is centralised management (budget line 05 02 20 02).

(41)  The audit of administrative expenditure is reported in Chapter 9.

Source: 2011 annual accounts of the European Union.

ANNEX 3.1

RESULTS OF TRANSACTION TESTING FOR AGRICULTURE: MARKET AND DIRECT SUPPORT

| | 2011 | 2010 | 2009 | 2008 |
| --- | --- | --- | --- | --- |
| SIZE AND STRUCTURE OF THE SAMPLE |
| Total transactions (of which): | 180 | 146 | 148 | 151 |
| Advances | 0 | 0 | 0 | 0 |
| Interim/Final payments | 180 | 146 | 148 | 151 |
| RESULTS OF TESTING
   (1) |
| Proportion (number) of transactions tested found to be: |
| Free of error | 61 % | (110) | 73 % | 76 % | 72 % |
| Affected by one or more errors | 39 % | (70) | 27 % | 24 % | 28 % |
| Analysis of transactions affected by error |
| Analysis by type of error |
| Non-Quantifiable errors: | 14 % | (10) | 26 % | 31 % | 29 % |
| Quantifiable errors: | 86 % | (60) | 74 % | 69 % | 71 % |
| Eligibility | 23 % | (14) | 3 % | 13 % | 10 % |
| Occurrence | 2 % | (1) | 0 % | 0 % | 0 % |
| Accuracy | 75 % | (45) | 97 % | 87 % | 90 % |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| Most likely error rate | 2,9 % | | | |
| Upper Error Limit (UEL) | 4,7 % | | | |
| Lower Error Limit (LEL) | 1,1 % | | | |

2011

2010

2009

2008

SIZE AND STRUCTURE OF THE SAMPLE

Total transactions (of which):

180

146

148

151

Advances

0

0

0

0

Interim/Final payments

180

146

148

151

RESULTS OF TESTING
   (1)

Proportion (number) of transactions tested found to be:

Free of error

61 %

(110)

73 %

76 %

72 %

Affected by one or more errors

39 %

(70)

27 %

24 %

28 %

Analysis of transactions affected by error

Analysis by type of error

Non-Quantifiable errors:

14 %

(10)

26 %

31 %

29 %

Quantifiable errors:

86 %

(60)

74 %

69 %

71 %

Eligibility

23 %

(14)

3 %

13 %

10 %

Occurrence

2 %

(1)

0 %

0 %

0 %

Accuracy

75 %

(45)

97 %

87 %

90 %

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Most likely error rate

2,9 %

Upper Error Limit (UEL)

4,7 %

Lower Error Limit (LEL)

1,1 %

---

(1)  Numbers quoted in brackets represent the actual number of transactions.

ANNEX 3.2

RESULTS OF EXAMINATION OF SYSTEMS FOR AGRICULTURE: MARKET AND DIRECT SUPPORT

Assessment of selected supervisory and control systems — EAGF

| Member State


  (Paying agency) | Scheme | IACS related expenditure (national ceiling, Annex VIII to Regulation (EC) No 73/2009)


  (1 000 euro) | Administrative and control procedures to ensure correct payment including quality of databases | On-the-spot inspection methodology, selection, execution, quality control and reporting of individual results | Procedures for the recovery of undue payments | Overall assessment |
| --- | --- | --- | --- | --- | --- | --- |
| Austria | SPS | 745 235 | Partially effective
  1, 9 | Effective | Effective | Partially effective |
| Denmark | SPS | 1 030 478 | Partially effective
  1, 4, 7, 8 | Partially effective
  b | Partially effective
  A | Partially effective |
| Finland | SPS | 565 520 | Partially effective
  3, 5, 7, 8 | Partially effective
  b, c | Effective | Partially effective |
| Hungary | SAPS | 1 073 824 | Partially effective
  2, 6, 9 | Partially effective
  a, b | Partially effective
  B | Partially effective |
| Italy (Lombardia) | SPS | 4 227 177 | Partially effective
  2, 5, 8 | Effective | Effective | Partially effective |
| Spain (Galicia) | SPS | 5 108 650 | Partially effective
  1, 2, 3, 4 | Partially effective
  b, c | Effective | Partially effective |
| 1 | Weaknesses regarding the LPIS. |

Member State

(Paying agency)

Scheme

IACS related expenditure (national ceiling, Annex VIII to Regulation (EC) No 73/2009)

(1 000 euro)

Administrative and control procedures to ensure correct payment including quality of databases

On-the-spot inspection methodology, selection, execution, quality control and reporting of individual results

Procedures for the recovery of undue payments

Overall assessment

Austria

SPS

745 235

Partially effective

1, 9

Effective

Effective

Partially effective

Denmark

SPS

1 030 478

Partially effective

1, 4, 7, 8

Partially effective

b

Partially effective

A

Partially effective

Finland

SPS

565 520

Partially effective

3, 5, 7, 8

Partially effective

b, c

Effective

Partially effective

Hungary

SAPS

1 073 824

Partially effective

2, 6, 9

Partially effective

a, b

Partially effective

B

Partially effective

Italy (Lombardia)

SPS

4 227 177

Partially effective

2, 5, 8

Effective

Effective

Partially effective

Spain (Galicia)

SPS

5 108 650

Partially effective

1, 2, 3, 4

Partially effective

b, c

Effective

Partially effective

1

Weaknesses regarding the LPIS.

| 2 | Failure to update LPIS after on-the-spot checks. |
| --- | --- |

2

Failure to update LPIS after on-the-spot checks.

| 3 | Insufficient audit trail in IACS databases. |
| --- | --- |

3

Insufficient audit trail in IACS databases.

| 4 | Inaccuracies in the entitlements databases. |
| --- | --- |

4

Inaccuracies in the entitlements databases.

| 5 | SPS claims do not contain information allowing the location of the agricultural parcels to be determined. |
| --- | --- |

5

SPS claims do not contain information allowing the location of the agricultural parcels to be determined.

| 6 | Only limited retroactive checks of potential over-declaration in previous years. |
| --- | --- |

6

Only limited retroactive checks of potential over-declaration in previous years.

| 7 | Weaknesses in the claim registration procedure. |
| --- | --- |

7

Weaknesses in the claim registration procedure.

| 8 | Obvious error corrections do not meet the obvious error concept. |
| --- | --- |

8

Obvious error corrections do not meet the obvious error concept.

| 9 | Incorrect basis of payment calculation. |
| --- | --- |

9

Incorrect basis of payment calculation.

| a | No off-setting of area over-declarations and area under-declaration found within one crop group. |
| --- | --- |

a

No off-setting of area over-declarations and area under-declaration found within one crop group.

| b | Insufficient quality of area measurements during on-the-spot controls. |
| --- | --- |

b

Insufficient quality of area measurements during on-the-spot controls.

| c | Incorrect or incomplete information in the on-the-spot inspection reports. |
| --- | --- |

c

Incorrect or incomplete information in the on-the-spot inspection reports.

| A | Inaccuracies in the debtors accounts. |
| --- | --- |

A

Inaccuracies in the debtors accounts.

| B | Weaknesses concerning the use of enforcement procedures. |
| --- | --- |

B

Weaknesses concerning the use of enforcement procedures.

ANNEX 3.3

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR EAGF

| Year | Court recommendation | Court's analysis of the progress made | Commission reply |
| --- | --- | --- | --- |
| 2009 | As regards IACS the Court concluded that significant improvements were necessary especially in three out of the eight paying agencies audited (namely Cyprus, Greece, Malta) (paragraph 3.72). | In the three paying agencies the following corrective actions have been taken:






  — | Greece: an action plan to overcome deficiencies was implemented by the authorities. A new LPIS-GIS system and a revised claim procedure were put in place. |

Year

Court recommendation

Court's analysis of the progress made

Commission reply

2009

As regards IACS the Court concluded that significant improvements were necessary especially in three out of the eight paying agencies audited (namely Cyprus, Greece, Malta) (paragraph 3.72).

In the three paying agencies the following corrective actions have been taken:

—

Greece: an action plan to overcome deficiencies was implemented by the authorities. A new LPIS-GIS system and a revised claim procedure were put in place.

| — | Cyprus: a five year renewal plan was implemented. As of 2011 there was a redefinition of the reference parcels based on the most recent images. |
| --- | --- |

—

Cyprus: a five year renewal plan was implemented. As of 2011 there was a redefinition of the reference parcels based on the most recent images.

| — | Malta: the paying agency updated the LPIS in 2009 using 2008 ortho-photos and planned to finalise a full LPIS update with 2010 imagery for the 2011 claim year. |
| --- | --- |

—

Malta: the paying agency updated the LPIS in 2009 using 2008 ortho-photos and planned to finalise a full LPIS update with 2010 imagery for the 2011 claim year.

The Court considered that the Commission guidelines as regards the work to be performed by certification bodies must be reviewed concerning the nature, coverage and reporting obligations, especially as regards the work related to the validation of Member States' control and inspection statistics (paragraph 3.75).

The Commission put forward a new system for the validation of Member States' control and inspection statistics from 2010 called ‘reinforcement of assurance procedure’ (see paragraphs 3.34 and 3.35).

The Court during its audits of two out of the three paying agencies that opted to apply this procedure showed that due to conceptual and implementation deficiencies no or only very limited assurance can be gained from these audits for the two paying agencies audited (see paragraphs 3.36 ff).

The Commission does not share the view that the ‘reinforcement of assurance procedure’ is affected by conceptual deficiencies. The Commission has also checked the work performed by the certification bodies in relation to the control statistics of the two paying agencies concerned and shares the view that only limited assurance can be gained in these two specific cases.

2009 and 2008

The Court recommended that the systems weaknesses identified were resolved. In this regard, the most urgent deficiencies to be addressed for the SPS and SAPS are (paragraph 3.73 (1)):

| (a) | to overcome the systems weaknesses leading to errors relating to ineligible land or over-declarations of land as well as inaccurate entitlements, notably by improving the reliability and completeness of the data recorded in the LPIS (e.g. most recent ortho-photos); |
| --- | --- |

(a)

to overcome the systems weaknesses leading to errors relating to ineligible land or over-declarations of land as well as inaccurate entitlements, notably by improving the reliability and completeness of the data recorded in the LPIS (e.g. most recent ortho-photos);

| (a) | As from claim year 2010 Commission Regulation (EU) No 146/2010 introduced the requirement for Member States to perform a quality assessment of the LPIS-GIS on an annual basis according to determined procedures. |
| --- | --- |

(a)

As from claim year 2010 Commission Regulation (EU) No 146/2010 introduced the requirement for Member States to perform a quality assessment of the LPIS-GIS on an annual basis according to determined procedures.

| (a) | The Commission shares the Court's evaluation. It will continue to monitor the results in the following years. |
| --- | --- |

(a)

| (b) | to ensure that all IACS databases provide a reliable and full audit trail for all modifications made; |
| --- | --- |

(b)

to ensure that all IACS databases provide a reliable and full audit trail for all modifications made;

| (b) | No specific corrective actions were taken to address the Court’s recommendation. |
| --- | --- |

(b)

No specific corrective actions were taken to address the Court’s recommendation.

| (b) | As part of its audits, the Commission makes recommendations to Member States so as to improve the situation on a continual basis. Over the years, the results of audits show progress as regards the quality of information in the databases. |
| --- | --- |

(b)

2009 and 2008

| (c) | to clarify and enforce further the rules so that EU direct aid is not paid to claimants who have neither used the land for farming nor maintained it in GAEC; |
| --- | --- |

(c)

to clarify and enforce further the rules so that EU direct aid is not paid to claimants who have neither used the land for farming nor maintained it in GAEC;

| (c) | In the framework of the Health Check, the Commission gave Member States the possibility to exclude natural or legal persons whose principal business objects do not consist of agricultural activities or whose agricultural activities are insignificant.
  The Court considers that the risk of payments to claimants who have neither used the land for farming nor maintained it in GAEC still exists.
  In its proposal for the CAP post-2013, the Commission clarified the definition of a farmer. The Court considers that the risk persists that payments may continue to be made to beneficiaries who do not exercise any agricultural activity. |
| --- | --- |

(c)

In the framework of the Health Check, the Commission gave Member States the possibility to exclude natural or legal persons whose principal business objects do not consist of agricultural activities or whose agricultural activities are insignificant.

The Court considers that the risk of payments to claimants who have neither used the land for farming nor maintained it in GAEC still exists.

In its proposal for the CAP post-2013, the Commission clarified the definition of a farmer. The Court considers that the risk persists that payments may continue to be made to beneficiaries who do not exercise any agricultural activity.

| (c) | Following a recommendation by the Court, the Commission put forward a definition of ‘active farmer’ in the framework of its proposal for the CAP post-2013, which is currently still under negotiation among the legislative authority. |
| --- | --- |

(c)

Following a recommendation by the Court, the Commission put forward a definition of ‘active farmer’ in the framework of its proposal for the CAP post-2013, which is currently still under negotiation among the legislative authority.

| (d) | to set at EU level minimum annual maintenance requirements for grassland to be eligible for EU direct aid. |
| --- | --- |

(d)

to set at EU level minimum annual maintenance requirements for grassland to be eligible for EU direct aid.

| (d) | No progress has been made in the current programming period. |
| --- | --- |

(d)

No progress has been made in the current programming period.

| (d) | The current system provides for a common legal framework within which the Member States are responsible for defining the maintenance criteria under the GAEC. This allows for the diversity of agricultural areas and traditions in the EU to be taken into account. |
| --- | --- |

(d)

2008

The Court, based on the level of errors in transaction testing and its systems assessment, reiterated that IACS generally is an effective control system for limiting the risk of error or irregular expenditure. Nevertheless, the audit found that significant improvements are necessary in selected paying agencies in three Member States (namely UK (Scotland), Bulgaria, Romania) (paragraph 5.64).

The Commission took the following corrective actions:

| — | Bulgaria: an action plan for the period 2009-2011 was developed with the aim of mainly addressing a high level of negligent errors in farmers' aid application, the acquisition of new ortho-imagery and the update of LPIS-GIS with information from new ortho-photo and the results of on-the-spot checks. |
| --- | --- |

—

Bulgaria: an action plan for the period 2009-2011 was developed with the aim of mainly addressing a high level of negligent errors in farmers' aid application, the acquisition of new ortho-imagery and the update of LPIS-GIS with information from new ortho-photo and the results of on-the-spot checks.

| — | Romania: an action plan for the years 2009-2011 was established in order to address the acquisition of new ortho-imagery, the update of LPIS-GIS with information from new ortho-photo and results of on-the-spot checks. |
| --- | --- |

—

Romania: an action plan for the years 2009-2011 was established in order to address the acquisition of new ortho-imagery, the update of LPIS-GIS with information from new ortho-photo and results of on-the-spot checks.

| — | UK (Scotland): the national authorities have been reviewing and updating the information in the LPIS-GIS. |
| --- | --- |

—

UK (Scotland): the national authorities have been reviewing and updating the information in the LPIS-GIS.

The action plans for Romania and Bulgaria were completed in November 2011 and February 2011 respectively.

---

(1)  Similar recommendations were made in paragraph 5.65 of the 2008 Annual Report.

---

CHAPTER 4

Rural development, environment, fisheries and health

TABLE OF CONTENTS

Introduction

Specific characteristics of the policy group

Rural development

Environment and climate action, maritime affairs and fisheries, health and consumer protection

Audit scope and approach

Regularity of transactions

Rural development

Cross-compliance

Environment and climate action, maritime affairs and fisheries, health and consumer protection

Effectiveness of systems

Rural development

Member States' systems related to regularity of transactions

The Commission's clearance of accounts system and management representation

Environment and climate action, maritime affairs and fisheries, health and consumer protection

Internal Control System of DG MARE

Other DGs' management representation — the annual activity reports (AARs)

Conclusions and recommendations

Conclusions

Recommendations

| THE COURT’S OBSERVATIONS | THE COMMISSION’S REPLIES |
| --- | --- |
| INTRODUCTION |
| 4.1. | This Chapter presents the Court's specific assessment of rural development, environment, fisheries and health which comprises rural development (which is part of policy area 05 — Agriculture and rural development) and policy areas 07 — Environment and climate action, 11 — Maritime affairs and fisheries and 17 — Health and consumer protection. Key information on the activities covered and the spending in 2011 is provided in
  Table 4.1
  . |

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

4.1.

This Chapter presents the Court's specific assessment of rural development, environment, fisheries and health which comprises rural development (which is part of policy area 05 — Agriculture and rural development) and policy areas 07 — Environment and climate action, 11 — Maritime affairs and fisheries and 17 — Health and consumer protection. Key information on the activities covered and the spending in 2011 is provided in
  Table 4.1
  .

Table 4.1 —   Rural development, environment, fisheries and health — Key information 2011

| (million euro) |
| --- |
| Budget Title | Policy area | Description | Payments | Management mode |
| 05 | Rural development | Rural development | 12 292 | Shared |
| Pre-accession measures | 102 | Decentralised |
| International aspects of ‘agriculture and rural development’ policy area | 5 | Centralised direct |
| | 12 399 | |
| 07 | Environment and climate action | Administrative expenditure | 92 | Centralised direct |
| Operational expenditure | 240 | Centralised direct/Centralised indirect |
| | 332 | |
| 11 | Maritime affairs and fisheries | Administrative expenditure | 41 | Centralised direct |
| Operational expenditure | 731 | Centralised/Shared |
| | 772 | |
| 17 | Health and consumer protection | Administrative expenditure | 117 | Centralised direct |
| Operational expenditure | 506 | Centralised direct/Centralised indirect |
| | 623 | |
| Total administrative expenditure (24) | 250 | |
| Total operational expenditure | 13 876 | |
| Of which: | — | advances |

(million euro)

Budget Title

Policy area

Description

Payments

Management mode

05

Rural development

Rural development

12 292

Shared

Pre-accession measures

102

Decentralised

International aspects of ‘agriculture and rural development’ policy area

5

Centralised direct

12 399

07

Environment and climate action

Administrative expenditure

92

Centralised direct

Operational expenditure

240

Centralised direct/Centralised indirect

332

11

Maritime affairs and fisheries

Administrative expenditure

41

Centralised direct

Operational expenditure

731

Centralised/Shared

772

17

Health and consumer protection

Administrative expenditure

117

Centralised direct

Operational expenditure

506

Centralised direct/Centralised indirect

623

Total administrative expenditure (24)

250

Total operational expenditure

13 876

Of which:

—

566

| — | interim/final payments |
| --- | --- |

—

13 310

Total payments for the year

14 126

Total commitments for the year

16 779

Source: 2011 annual accounts of the European Union.

Specific characteristics of the policy group

Rural development

| 4.2. | Rural development is part of the common agricultural policy (CAP), for which the overall objectives and the sources of funding are presented in Chapter 3 (see paragraphs 3.2 and 3.3). |
| --- | --- |

4.2.

Rural development is part of the common agricultural policy (CAP), for which the overall objectives and the sources of funding are presented in Chapter 3 (see paragraphs 3.2 and 3.3).

| 4.3. | The European Agricultural Fund for Rural Development (EAFRD) co-finances at varying rates rural development expenditure through Member States' rural development programmes. The expenditure covers 45 measures which include both area-related measures (such as agri-environment payments and compensatory payments to farmers in areas with natural handicaps) and non-area-related measures (such as modernisation of agricultural holdings and the setting up of basic services for the economy and rural population) (12 394 million euro) (1). |
| --- | --- |

4.3.

The European Agricultural Fund for Rural Development (EAFRD) co-finances at varying rates rural development expenditure through Member States' rural development programmes. The expenditure covers 45 measures which include both area-related measures (such as agri-environment payments and compensatory payments to farmers in areas with natural handicaps) and non-area-related measures (such as modernisation of agricultural holdings and the setting up of basic services for the economy and rural population) (12 394 million euro) (1).

| 4.4. | The management and control of CAP expenditure is described in Chapter 3 (see paragraphs 3.6 and 3.7). Under certain EAFRD aid schemes (2), beneficiaries of EU aid have a legal obligation to fulfil ‘cross-compliance’ conditions, as described in paragraph 3.5. |
| --- | --- |

4.4.

The management and control of CAP expenditure is described in Chapter 3 (see paragraphs 3.6 and 3.7). Under certain EAFRD aid schemes (2), beneficiaries of EU aid have a legal obligation to fulfil ‘cross-compliance’ conditions, as described in paragraph 3.5.

| 4.4. | See reply to paragraph 3.5. |
| --- | --- |

4.4.

| 4.5. | In its 2010 Annual Report, the Court noted that rural development expenditure is particularly prone to error (3). The main risk to regularity is caused by the often complex rules and eligibility conditions. In addition, as some programmes have low implementation rates (4), there is a risk, especially towards the end of the programming period, that ineligible expenditure is declared to avoid decommitments. |
| --- | --- |

4.5.

In its 2010 Annual Report, the Court noted that rural development expenditure is particularly prone to error (3). The main risk to regularity is caused by the often complex rules and eligibility conditions. In addition, as some programmes have low implementation rates (4), there is a risk, especially towards the end of the programming period, that ineligible expenditure is declared to avoid decommitments.

| 4.5. | The Commission shares the Court’s view that some areas of rural development expenditure are affected by a higher incidence of errors, as compared to the first pillar of the CAP. However, the relatively higher error rates for rural development must also be seen in context of the rural development policy objectives which can only be achieved by the more complex rules and eligibility conditions referred to by the Court. |
| --- | --- |

4.5.

Environment and climate action, maritime affairs and fisheries, health and consumer protection

| 4.6. | The Union's policy on the environment is designed to contribute to protecting and improving environmental quality, the life of its citizens, and the rational utilisation of natural resources, including at international level. The financial instrument for the environment (LIFE) (5) is the most important programme in terms of funding (184 million euro expenditure in 2011) for co-financing projects in the Member States relating to nature and biodiversity; environment policy and governance; and information and communication. |
| --- | --- |

4.6.

The Union's policy on the environment is designed to contribute to protecting and improving environmental quality, the life of its citizens, and the rational utilisation of natural resources, including at international level. The financial instrument for the environment (LIFE) (5) is the most important programme in terms of funding (184 million euro expenditure in 2011) for co-financing projects in the Member States relating to nature and biodiversity; environment policy and governance; and information and communication.

| 4.7. | The common fisheries policy of the policy area maritime affairs and fisheries pursues the same overall objectives as the common agricultural policy (see paragraph 3.2). The European Fisheries Fund (6) (EFF) is the main instrument (441 million euro expenditure in 2011). |
| --- | --- |

4.7.

The common fisheries policy of the policy area maritime affairs and fisheries pursues the same overall objectives as the common agricultural policy (see paragraph 3.2). The European Fisheries Fund (6) (EFF) is the main instrument (441 million euro expenditure in 2011).

| 4.8. | Concerning health and consumer protection, the EU contributes both to human, animal and plant health protection and to consumer welfare. The majority of payments are made for animal disease eradication programmes and European agencies (7) (186 million euro and 171 million euro respectively in 2011). |
| --- | --- |

4.8.

Concerning health and consumer protection, the EU contributes both to human, animal and plant health protection and to consumer welfare. The majority of payments are made for animal disease eradication programmes and European agencies (7) (186 million euro and 171 million euro respectively in 2011).

Audit scope and approach

| 4.9. | Annex 1.1, Part 2
  , of Chapter 1 describes the Court's overall audit approach and methodology. For the audit of rural development, environment, fisheries and health, the following specific issues should be noted: |
| --- | --- |

4.9.

Annex 1.1, Part 2
  , of Chapter 1 describes the Court's overall audit approach and methodology. For the audit of rural development, environment, fisheries and health, the following specific issues should be noted:

4.9.

| — | the audit involved the examination of a sample of 178 interim and final payments, comprising 160 payments for rural development and 18 concerning environment and climate action, maritime affairs and fisheries, and health and consumer protection; |
| --- | --- |

—

the audit involved the examination of a sample of 178 interim and final payments, comprising 160 payments for rural development and 18 concerning environment and climate action, maritime affairs and fisheries, and health and consumer protection;

| — | with respect to cross-compliance, the Court focused its testing on compliance with GAEC (good agricultural and environmental condition) obligations and selected statutory management requirements (SMRs) (8) for which evidence could be obtained and a conclusion reached at the time of the audit visit; |
| --- | --- |

—

with respect to cross-compliance, the Court focused its testing on compliance with GAEC (good agricultural and environmental condition) obligations and selected statutory management requirements (SMRs) (8) for which evidence could be obtained and a conclusion reached at the time of the audit visit;

| — | See replies to paragraphs 4.16 to 4.18. |
| --- | --- |

—

| — | reductions and exclusions (to be applied by Member States in cases where beneficiaries of EU aid over-claim the actual area, number of animals or eligible expenditure (9)) are not included in the Court's error rate calculation (10); |
| --- | --- |

—

reductions and exclusions (to be applied by Member States in cases where beneficiaries of EU aid over-claim the actual area, number of animals or eligible expenditure (9)) are not included in the Court's error rate calculation (10);

| — | the assessment of systems for rural development covered one paying agency in each of six Member States: Denmark, Spain (Galicia), Italy (Lombardia), Hungary, Austria and Finland. For maritime affairs and fisheries the Court tested the internal control system of DG MARE; |
| --- | --- |

—

the assessment of systems for rural development covered one paying agency in each of six Member States: Denmark, Spain (Galicia), Italy (Lombardia), Hungary, Austria and Finland. For maritime affairs and fisheries the Court tested the internal control system of DG MARE;

| — | the review of the Commission's management representations covered the annual activity reports of DGs AGRI (concerning rural development), CLIMA, ENV, MARE and SANCO; |
| --- | --- |

—

the review of the Commission's management representations covered the annual activity reports of DGs AGRI (concerning rural development), CLIMA, ENV, MARE and SANCO;

| — | in addition, in order to assess the basis for the Commission's financial clearance decisions the Court reviewed DG AGRI's clearance of accounts audit work and the EAFRD certification bodies' certificates and reports related to 15 paying agencies. |
| --- | --- |

—

in addition, in order to assess the basis for the Commission's financial clearance decisions the Court reviewed DG AGRI's clearance of accounts audit work and the EAFRD certification bodies' certificates and reports related to 15 paying agencies.

REGULARITY OF TRANSACTIONS

| 4.10. | Annex 4.1
  contains a summary of the results of transaction testing. The Court's testing of its sample of transactions found 57 % to be affected by error. The most likely error estimated by the Court is 7,7 % (11). |
| --- | --- |

4.10.

Annex 4.1
  contains a summary of the results of transaction testing. The Court's testing of its sample of transactions found 57 % to be affected by error. The most likely error estimated by the Court is 7,7 % (11).

| 4.11. | With regard to rural development expenditure, of 160 transactions sampled, 93 (58 %) were affected by errors, of which 61 (66 %) were quantifiable errors. As regards environment and climate action, maritime affairs and fisheries, and health and consumer protection, of 18 transactions sampled, 8 (44 %) were affected by errors, of which 2 (25 %) were quantifiable errors. |
| --- | --- |

4.11.

With regard to rural development expenditure, of 160 transactions sampled, 93 (58 %) were affected by errors, of which 61 (66 %) were quantifiable errors. As regards environment and climate action, maritime affairs and fisheries, and health and consumer protection, of 18 transactions sampled, 8 (44 %) were affected by errors, of which 2 (25 %) were quantifiable errors.

| 4.10 and 4.11. | The Commission takes note of the most likely error rate estimated by the Court. Although it does not share the Court's assessment in certain cases, the Commission’s own estimate of the level of undue payments on the basis of the control statistics provided by the Member States in 2011, also shows a deterioration of the situation, albeit of a more limited magnitude. Therefore, the Director-General for DG AGRI has made a reservation, concerning rural development expenditure, in his declaration of assurance for 2011.

  This reservation is accompanied by a number of corrective actions to be determined by the Commission together with the Member States in order to address the situation.


  However, the relatively higher error rates for rural development compared to the first pillar of the CAP must also be seen in context of the rural development policy objectives which can only be achieved by the more complex rules and eligibility conditions referred to by the Court in paragraph 4.5.


  The Commission notes that half of the quantifiable errors are rather small in financial terms (below 5 %). |
| --- | --- |

4.10 and 4.11.

This reservation is accompanied by a number of corrective actions to be determined by the Commission together with the Member States in order to address the situation.

However, the relatively higher error rates for rural development compared to the first pillar of the CAP must also be seen in context of the rural development policy objectives which can only be achieved by the more complex rules and eligibility conditions referred to by the Court in paragraph 4.5.

The Commission notes that half of the quantifiable errors are rather small in financial terms (below 5 %).

Rural development

| 4.12. | For EAFRD, the Court's transaction testing resulted in auditing 26 different measures. 75 transactions concerned area-related and 85 non-area-related measures. The major part of the most likely error reported in paragraph 4.10 concerned the eligibility of non-area-related measures. The Court also found a high incidence of errors when beneficiaries were public bodies, such as municipalities or the paying agency itself: in the 34 transactions audited involving public beneficiaries, there were 17 errors (50 %) concerning issues such as declaring ineligible VAT or not complying with public procurement rules. |
| --- | --- |

4.12.

For EAFRD, the Court's transaction testing resulted in auditing 26 different measures. 75 transactions concerned area-related and 85 non-area-related measures. The major part of the most likely error reported in paragraph 4.10 concerned the eligibility of non-area-related measures. The Court also found a high incidence of errors when beneficiaries were public bodies, such as municipalities or the paying agency itself: in the 34 transactions audited involving public beneficiaries, there were 17 errors (50 %) concerning issues such as declaring ineligible VAT or not complying with public procurement rules.

| 4.12. | The Commission takes note of the Court’s findings, although they do not always coincide with the control statistics from the Member States, and will take them into account in the implementation of its action plan for rural development, if deemed necessary. |
| --- | --- |

4.12.

| 4.13. | The sample of 160 rural development transactions included 43 payments for agri-environment schemes. The Court found that in 10 cases (23 %), the farmers had not respected the agri-environmental commitments they had given. A description of such an error found by the Court is provided in example 4.1. For the measure ‘modernisation of agricultural holdings’, 21 payments were audited, in which the Court detected 8 cases (38 %) of ineligible expenditure. |
| --- | --- |

4.13.

The sample of 160 rural development transactions included 43 payments for agri-environment schemes. The Court found that in 10 cases (23 %), the farmers had not respected the agri-environmental commitments they had given. A description of such an error found by the Court is provided in example 4.1. For the measure ‘modernisation of agricultural holdings’, 21 payments were audited, in which the Court detected 8 cases (38 %) of ineligible expenditure.

4.13.

Example 4.1 —   Non-respect of agri-environment commitments (example of eligibility error)

The beneficiary applied for support for two agri-environment schemes. For the first scheme, he had committed on 14 parcels to refrain from cultivating crops in a one metre buffer strip and to leave this area uncultivated, unploughed, unfertilised and unsprayed. The audit found that this requirement was not respected on any of the 14 parcels. For the second scheme, the farmer committed to carry out appropriate orchard management techniques and good agricultural practices, including pruning and thinning of fruit trees. The audit found that the trees were not pruned and that the parts of the parcels where the trees grew were covered with waste matter. According to the applicable national rules, this significant breach of requirements for the two schemes should result in a 100 % reduction of the payment.

Example 4.1
   —   
  Non-respect of agri-environment commitments (example of eligibility error)

The Commission considers that the finding of the Court concerns a non-systematic case of non-compliance with a commitment entered under an agri-environment measure.

The Commission will request the relevant certification body to monitor the recovery of the amount unduly paid.

| 4.14. | In 31 of the transactions audited, the beneficiary was required to respect public procurement rules. The Court found that in 12 cases (39 %), one or more of these rules were not respected (see example 4.2). |
| --- | --- |

4.14.

In 31 of the transactions audited, the beneficiary was required to respect public procurement rules. The Court found that in 12 cases (39 %), one or more of these rules were not respected (see example 4.2).

| 4.14. | The Commission notes that some observations of the Court concern national rules on public procurement and that certain Member States have a different interpretation of those rules to that of the Court. |
| --- | --- |

4.14.

Example 4.2 —   Breach of public procurement rules (example of eligibility error)

The beneficiary of 5,1 million euro EU aid was the paying agency itself. The amount was paid for the measure ‘technical assistance’ and concerned a part of the larger operation of the paying agency's service and maintenance of the IT system. The Court found that the two contracts for this larger operation, with a value of around 58 million euro, were awarded to a company through negotiated procedures without notice. The paying agency did not provide the necessary analysis or required justification for awarding these contracts through such procedures, rather than through open or restricted procedures.

Example 4.2
   —   
  Breach of public procurement rules (example of eligibility error)

The Commission notes that, had an appropriate justification been made for this procedure, it would in principle have been legally possible for the beneficiary to award the contracts through negotiated procedure. In such a case, the Commission would possibly not exclude the entire expenditure from EU financing in the context of its conformity clearance procedure in order to respect the principle of proportionality.

| 4.15. | The Court found in more than one third of the cases that the error identified as part of the transaction testing was systematic, i.e. that it affected more payments than the one audited (see example 4.3). |
| --- | --- |

4.15.

The Court found in more than one third of the cases that the error identified as part of the transaction testing was systematic, i.e. that it affected more payments than the one audited (see example 4.3).

4.15.

Example 4.3 —   Ineligible VAT included (example of a systematic eligibility error)

One payment audited concerned the services provided to a public body for a training and information programme. The public body declared the full amount of the payment, including ineligible VAT, which was fully paid and charged to the EU budget. This systematic error affected all expenditure for the rural development measure concerned in this Member State totalling 0,8 million euro.

Example 4.3
   —   
  Ineligible VAT included (example of a systematic eligibility error)

In the framework of the financial clearance procedure, the Commission services will follow up the Court's findings vis-à-vis the national authorities in view of recovery of any undue payments.

Cross-compliance

| 4.16. | As noted in Chapter 3 (see paragraph 3.9), cross-compliance errors are included for the first time in the Court's error rate calculation. |
| --- | --- |

4.16.

As noted in Chapter 3 (see paragraph 3.9), cross-compliance errors are included for the first time in the Court's error rate calculation.

| 4.17. | For the 2011 DAS the Court found, on the basis of its examination (see paragraph 4.9, second indent), one or more cross-compliance infringements in 26 (12) of the 73 payments subject to cross-compliance (36 %). For each infringement, the Court used the national system for reducing payments to quantify the error. In all cases, this reduction was between 0 % and 5 %. The errors found represent around 0,2 percentage points of the total error rate referred to in paragraph 4.10. |
| --- | --- |

4.17.

For the 2011 DAS the Court found, on the basis of its examination (see paragraph 4.9, second indent), one or more cross-compliance infringements in 26 (12) of the 73 payments subject to cross-compliance (36 %). For each infringement, the Court used the national system for reducing payments to quantify the error. In all cases, this reduction was between 0 % and 5 %. The errors found represent around 0,2 percentage points of the total error rate referred to in paragraph 4.10.

| 4.18. | The Court noted in particular significant problems concerning the implementation of cross-compliance requirements for the identification and registration of animals. For the 46 farms with animals included in the sample, non-compliance with the requirements was detected in 16 cases (35 %). |
| --- | --- |

4.18.

The Court noted in particular significant problems concerning the implementation of cross-compliance requirements for the identification and registration of animals. For the 46 farms with animals included in the sample, non-compliance with the requirements was detected in 16 cases (35 %).

| 4.16 to 4.18. | Most of the cross-compliance requirements, i.e. the SMRs, are to be respected by all EU citizens, irrespectively of being a farmer benefiting from EU support under the CAP. The respect of cross-compliance does not constitute an eligibility criterion and, therefore, the controls of these requirements do not pertain to the legality and regularity of the underlying transactions. Farmers not respecting the requirements are entitled to receive their payments, but are sanctioned on the basis of the severity, extent, permanence and repetition of the non-compliance found as well as negligence or intent of the farmer concerned. This is also shown by the fact that payments can be made before the cross-compliance controls have been completed and that penalties are not applied on the payments made in respect of the calendar year when the farmer failed to comply with the requirements, but rather on the payments made in respect of the calendar year of the findings by the national authorities. For all these reasons, the Commission does not itself take violation of cross-compliance obligations into account in the calculation of the level of error for its own statement of assurance. |
| --- | --- |

4.16 to 4.18.

Environment and climate action, maritime affairs and fisheries, health and consumer protection

| 4.19. | An error found in the policy areas of environment and climate action, maritime affairs and fisheries, and health and consumer protection is outlined in example 4.4. |
| --- | --- |

4.19.

An error found in the policy areas of environment and climate action, maritime affairs and fisheries, and health and consumer protection is outlined in example 4.4.

4.19.

Example 4.4 —   Expenditure declared after eligibility period

Member States' national authorities have to submit declarations of expenses relating to animal disease eradication programmes to the Commission by 30 April, for the previous calendar year. A declaration from one Member State for 2010 amounting to 12,4 million euro included 0,3 million euro expenses paid after 30 April 2011.

Example 4.4
   —   
  Expenditure declared after eligibility period

The Commission decided to pay a first instalment in advance of fixing the final financial contribution, as the Member State's cost declaration could not be approved in 2011 due to an on-going on-the-spot control (C(2011) 9743, Articles 1 and 2). Checks whether the declared costs were paid after 30 April are foreseen in the standard check list for on-the-spot controls.

EFFECTIVENESS OF SYSTEMS

Rural development

Member States' systems related to regularity of transactions

| 4.20. | Annex 4.2
  contains a summary of the Court's examination of Member States' supervisory and control systems. Concerning the six rural development supervisory and control systems audited, the Court found that one of the control systems implemented was not effective (Denmark), four were partially effective (Spain (Galicia), Italy (Lombardia), Hungary and Finland) and one was effective (Austria) in ensuring the regularity of payments. |
| --- | --- |

4.20.

Annex 4.2
  contains a summary of the Court's examination of Member States' supervisory and control systems. Concerning the six rural development supervisory and control systems audited, the Court found that one of the control systems implemented was not effective (Denmark), four were partially effective (Spain (Galicia), Italy (Lombardia), Hungary and Finland) and one was effective (Austria) in ensuring the regularity of payments.

| 4.20. | The Commission takes note that the results presented are similar to the results of last year. |
| --- | --- |

4.20.

| 4.21. | For area-related rural development measures, such as agri-environment, verification of certain key elements such as eligible area is made through the Integrated Administration and Control System (IACS), described in Chapter 3 (paragraph 3.16). Other eligibility requirements are governed by specifically designed controls (13). As described in Chapter 3 (paragraphs 3.14 to 3.17), for 2011 the Court found the IACS systems to be partially effective in all paying agencies examined. |
| --- | --- |

4.21.

For area-related rural development measures, such as agri-environment, verification of certain key elements such as eligible area is made through the Integrated Administration and Control System (IACS), described in Chapter 3 (paragraph 3.16). Other eligibility requirements are governed by specifically designed controls (13). As described in Chapter 3 (paragraphs 3.14 to 3.17), for 2011 the Court found the IACS systems to be partially effective in all paying agencies examined.

| 4.21. | The Commission considers that IACS is generally an effective control system for limiting the risk of error or irregular expenditure.

  See also Commission replies to paragraphs 3.14 and 3.15. |
| --- | --- |

4.21.

See also Commission replies to paragraphs 3.14 and 3.15.

| 4.22. | The Court's audit covered compliance with the provisions of the relevant regulations and an assessment of the effectiveness of the systems in ensuring the regularity of transactions. In particular the following elements were examined: |
| --- | --- |

4.22.

The Court's audit covered compliance with the provisions of the relevant regulations and an assessment of the effectiveness of the systems in ensuring the regularity of transactions. In particular the following elements were examined:

| 4.22. | See joint replies to paragraphs 4.16 to 4.18. |
| --- | --- |

4.22.

| (a) | administrative and control procedures to ensure correct payment. |
| --- | --- |

(a)

administrative and control procedures to ensure correct payment.

| (b) | control systems based on physical on-the-spot checks; |
| --- | --- |

(b)

control systems based on physical on-the-spot checks;

| (c) | systems to ensure implementation and control of cross-compliance. |
| --- | --- |

(c)

systems to ensure implementation and control of cross-compliance.

Administrative and control procedures to ensure correct payment

| 4.23. | The administrative checks by paying agencies should cover the correctness of the declarations made by the claimant and the fulfilment of the eligibility requirements for the granting of the aid. |
| --- | --- |

4.23.

The administrative checks by paying agencies should cover the correctness of the declarations made by the claimant and the fulfilment of the eligibility requirements for the granting of the aid.

| 4.24. | The Court identified weaknesses in the implementation of administrative checks related to eligibility conditions and commitments in five of the six Member States audited (Denmark, Italy (Lombardia), Hungary, Austria and Finland). An illustration of this is given in example 4.5. In one Member State (Denmark), the Court examined a sample of five randomly selected projects for non-area-related measures. The audit identified ineligible expenditure in four of the projects, which had not been detected by the paying agency. |
| --- | --- |

4.24.

The Court identified weaknesses in the implementation of administrative checks related to eligibility conditions and commitments in five of the six Member States audited (Denmark, Italy (Lombardia), Hungary, Austria and Finland). An illustration of this is given in example 4.5. In one Member State (Denmark), the Court examined a sample of five randomly selected projects for non-area-related measures. The audit identified ineligible expenditure in four of the projects, which had not been detected by the paying agency.

| 4.25. | In addition, the Court found that three of the six Member States audited (Denmark, Italy (Lombardia) and Finland) did not correctly apply the reductions as stipulated in the legislation. |
| --- | --- |

4.25.

In addition, the Court found that three of the six Member States audited (Denmark, Italy (Lombardia) and Finland) did not correctly apply the reductions as stipulated in the legislation.

| 4.25. | Whenever in the framework of its audits the Commission identifies weaknesses in administrative checks, it pursues them through the conformity clearance procedure to protect the EU’s financial interests. |
| --- | --- |

4.25.

| 4.26. | One of the key administrative checks (14) of measures for improving the competitiveness of the agricultural sector, such as modernisation of farms, and improvement and development of rural infrastructure, is to assess whether the costs claimed are reasonable. Member States are therefore required to implement suitable systems for evaluating the amounts claimed by beneficiaries. The Court found that this regulatory requirement was not effectively implemented by four of the six national authorities audited (Denmark, Spain (Galicia), Italy (Lombardia) and Hungary). This situation is confirmed by the sample of transactions, where errors were reported for 21 out of the 70 transactions (30 %) examined. A similar finding was already reported last year but for other paying agencies (see paragraph 3.35 of the Court's 2010 Annual Report). |
| --- | --- |

4.26.

One of the key administrative checks (14) of measures for improving the competitiveness of the agricultural sector, such as modernisation of farms, and improvement and development of rural infrastructure, is to assess whether the costs claimed are reasonable. Member States are therefore required to implement suitable systems for evaluating the amounts claimed by beneficiaries. The Court found that this regulatory requirement was not effectively implemented by four of the six national authorities audited (Denmark, Spain (Galicia), Italy (Lombardia) and Hungary). This situation is confirmed by the sample of transactions, where errors were reported for 21 out of the 70 transactions (30 %) examined. A similar finding was already reported last year but for other paying agencies (see paragraph 3.35 of the Court's 2010 Annual Report).

| 4.26. | The Commission shares the view that administrative checks of the reasonableness of costs are essential for ensuring the effectiveness of the whole control system. These essential checks are systematically examined during Commission audit missions. However, the Commission notes that in the case of Italy the Court’s finding concerns amounts (general costs) which are usually paid on a flat rate basis of maximum 10 % or even fixed or outside the influence of the beneficiary (taxes, cost for quality system certification, etc.). |
| --- | --- |

4.26.

Control systems based on physical on-the-spot checks

| 4.27. | Member States must carry out on-the-spot checks covering, depending on the aid scheme, at least 5 % of all beneficiaries or of the expenditure (15). The Court's audit focussed on the adequacy of procedures to select beneficiaries for such checks, the quality and reporting of the checks and the adequacy of the corrections made. |
| --- | --- |

4.27.

Member States must carry out on-the-spot checks covering, depending on the aid scheme, at least 5 % of all beneficiaries or of the expenditure (15). The Court's audit focussed on the adequacy of procedures to select beneficiaries for such checks, the quality and reporting of the checks and the adequacy of the corrections made.

| 4.27 to 4.29 | The issues mentioned by the Court of Auditors are also systematically examined during the Commission audits missions. When weaknesses are found, they lead to financial corrections imposed on Member States through the conformity clearance of accounts procedure as well as recommendations for improving the control systems. |
| --- | --- |

4.27 to 4.29

| 4.28. | The Court found in five of the six Member States audited (Denmark, Spain (Galicia), Italy (Lombardia), Hungary and Finland) that the checks implemented did not cover all the commitments and obligations of a beneficiary which can be checked at the time of the visit, as required by the legislation. |
| --- | --- |

4.28.

The Court found in five of the six Member States audited (Denmark, Spain (Galicia), Italy (Lombardia), Hungary and Finland) that the checks implemented did not cover all the commitments and obligations of a beneficiary which can be checked at the time of the visit, as required by the legislation.

| 4.29. | In each of the six Member States visited, the Court carried out four randomly selected ‘re-performance’ checks. This involved the Court re-performing all checks originally carried out by the paying agency, including all administrative and on-the-spot checks. When re-performing on-the-spot checks carried out by paying agencies, the Court found that checks had not always been properly executed. An illustration of such a case is in example 4.5. |
| --- | --- |

4.29.

In each of the six Member States visited, the Court carried out four randomly selected ‘re-performance’ checks. This involved the Court re-performing all checks originally carried out by the paying agency, including all administrative and on-the-spot checks. When re-performing on-the-spot checks carried out by paying agencies, the Court found that checks had not always been properly executed. An illustration of such a case is in example 4.5.

Example 4.5 —   Insufficient quality of Member State's administrative and on-the-spot checks

One of the Court's re-performance checks in Italy (Lombardia) was of a project to construct a two-storey building on a farm including a laboratory for the processing of fruit and other farm products, a storage area and a terrace for drying fruits.

The paying agency approved the full amount of the final payment claim of 221 205 euro following both administrative and on-the-spot checks.

However, the Court found that the building had predominantly the characteristics of a private residence and not of an agricultural building and that thus the related costs were not eligible. The fact that the national authorities accepted the full amount of expenditure declared indicates a material system weakness in the administrative and on-the-spot checks.

Example 4.5
   —   
  Insufficient quality of Member State's administrative and on-the-spot checks

The Commission will, in the context of the conformity clearance procedure, follow up the case with the Italian authorities.

Systems to ensure implementation and control of cross-compliance

| 4.30. | The Court's examination of the design and implementation of the systems for cross-compliance revealed a number of important weaknesses which are also relevant to Chapter 3. None of the six Member States audited had established or were carrying out checks for the complete set of applicable requirements defined by the legislation. |
| --- | --- |

4.30.

The Court's examination of the design and implementation of the systems for cross-compliance revealed a number of important weaknesses which are also relevant to Chapter 3. None of the six Member States audited had established or were carrying out checks for the complete set of applicable requirements defined by the legislation.

| 4.30. | The Commission has carried out cross-compliance audits in the six Member States audited by the Court (although not the same regions in Spain and Italy) and has also observed serious weaknesses in the definition and control of the GAEC standards and SMRs. Whenever in these six Member States a risk for the Funds had been clearly established, the Commission has applied a financial correction in the framework of several of these enquiries (Denmark, Hungary, Austria and other regions of Italy and Spain) or clearance of accounts procedure is ongoing in relation to enquiries concerning these six Member States. |
| --- | --- |

4.30.

| 4.31. | Furthermore, the planning and timing of the checks showed weaknesses in five of the six Member States audited (Denmark, Spain (Galicia), Italy (Lombardia), Hungary and Finland). For instance, one Member State (Italy (Lombardia)) carried out all checks for three SMRs (16) between October and December. Hence the requirements which had to be respected outside these months, such as the ban on spreading manure and other substances containing nitrates on the fields until 28 February in nitrate vulnerable zones, were not effectively checked. |
| --- | --- |

4.31.

Furthermore, the planning and timing of the checks showed weaknesses in five of the six Member States audited (Denmark, Spain (Galicia), Italy (Lombardia), Hungary and Finland). For instance, one Member State (Italy (Lombardia)) carried out all checks for three SMRs (16) between October and December. Hence the requirements which had to be respected outside these months, such as the ban on spreading manure and other substances containing nitrates on the fields until 28 February in nitrate vulnerable zones, were not effectively checked.

| 4.31. | During the cross-compliance audits, the Commission systematically verifies the compliance with the planning and timing of on the spot checks requirements (whether appropriate level of control is achieved by the Member States during the year, whether inspections are carried forward to the following year, the respect of the notification deadlines, etc.). The Commission has also observed these weaknesses in Hungary, Italy and other Member States and follows them up through the conformity clearance procedure. |
| --- | --- |

4.31.

| 4.32. | The Court also found in three of the Member States audited (Italy (Lombardia), Hungary and Finland) that, when the checks were carried out, non-compliance did not always lead to the required reductions. In one Member State (Italy (Lombardia)), for the six SMRs relating to animals, no reductions on the basis of the criteria set by the legislation (extent, severity and permanence of the non-compliance) were set. Instead, this Member State evaluated whether the error was correctable and whether this was the first time that an error was identified for the beneficiary checked. Consequently, the majority of non-compliance cases were treated as minor for which no reduction was applied. |
| --- | --- |

4.32.

The Court also found in three of the Member States audited (Italy (Lombardia), Hungary and Finland) that, when the checks were carried out, non-compliance did not always lead to the required reductions. In one Member State (Italy (Lombardia)), for the six SMRs relating to animals, no reductions on the basis of the criteria set by the legislation (extent, severity and permanence of the non-compliance) were set. Instead, this Member State evaluated whether the error was correctable and whether this was the first time that an error was identified for the beneficiary checked. Consequently, the majority of non-compliance cases were treated as minor for which no reduction was applied.

| 4.32. | The Commission pays particular attention to the evaluation and sanctioning system established by the Member States for cross-compliance (leniency of the system, adequate use and follow-up of minor non-compliances, non-compliances not leading to a reduction because of the incorrect use of tolerances , etc.). These weaknesses have also been observed by the Commission in the Member States mentioned by the Court and the consequent risk for the Funds is being followed up through the conformity clearance procedure.

  The Commission has also observed specific serious deficiencies in relation to the cross-compliance controls on animal SMRs in Italy and is following this up through the conformity clearance procedure. |
| --- | --- |

4.32.

The Commission has also observed specific serious deficiencies in relation to the cross-compliance controls on animal SMRs in Italy and is following this up through the conformity clearance procedure.

The Commission's clearance of accounts system and management representation

The Commission's clearance of accounts procedure

| 4.33. | Management of most expenditure on agriculture is shared between Member States and the Commission. Aid is paid by the Member States, which are then reimbursed (on a quarterly basis for EAFRD and on a monthly basis for EAGF) by the Commission. The final recognition of expenditure is determined through a two-stage procedure called the clearance of accounts procedure. The two stages consist of an annual financial decision and multiannual conformity decisions taken by the Commission (17). |
| --- | --- |

4.33.

Management of most expenditure on agriculture is shared between Member States and the Commission. Aid is paid by the Member States, which are then reimbursed (on a quarterly basis for EAFRD and on a monthly basis for EAGF) by the Commission. The final recognition of expenditure is determined through a two-stage procedure called the clearance of accounts procedure. The two stages consist of an annual financial decision and multiannual conformity decisions taken by the Commission (17).

| 4.34. | In previous annual reports as well as in Special Report No 7/2010 ‘Audit on the clearance of accounts procedure’ (18) the Court has criticised the fact that the Member States, and not the final beneficiaries, are charged with the financial corrections and that the conformity adjustments involve considerable use of flat-rate corrections which are not directly related to the real amount of irregular payments. The conformity clearance system remained unchanged in 2011. |
| --- | --- |

4.34.

In previous annual reports as well as in Special Report No 7/2010 ‘Audit on the clearance of accounts procedure’ (18) the Court has criticised the fact that the Member States, and not the final beneficiaries, are charged with the financial corrections and that the conformity adjustments involve considerable use of flat-rate corrections which are not directly related to the real amount of irregular payments. The conformity clearance system remained unchanged in 2011.

| 4.34. | What the Court criticises in the conformity clearance system is inherent to this system. The conformity clearance is designed to exclude expenditure from EU financing which has not been effected in compliance with EU rules. In contrast, it is not a mechanism by which irregular payments to beneficiaries are recovered, which according to the principle of shared management is the sole responsibility of Member States.

  Where undue payments to beneficiaries can be identified as a result of the conformity clearance, Member States are required to follow them up with recovery actions against these beneficiaries. However, even where recoveries from beneficiaries are not needed because the financial correction relates only to deficiencies in the Member States' management and control system and not to undue payments, these corrections are an important means to improve the Member States' systems and thus to prevent or detect and recover irregular payments to beneficiaries.


  The use of flat rates has been accepted by the Court of Justice as being in conformity with the legal rules governing the conformity work and endorsed, under certain circumstances, by the European Parliament in its 2007 discharge resolution (22).


  Finally, the Commission has indicated (23) to Member States that if their certification bodies fully re-perform a representative sample of transactions which the paying agency has checked on the spot and, on this basis, confirm the reliability of a Member State's control statistics, then the Commission will accept that the resulting error rate represents the maximum risk possible and that any financial corrections for the year in question will not exceed that level. |
| --- | --- |

4.34.

Where undue payments to beneficiaries can be identified as a result of the conformity clearance, Member States are required to follow them up with recovery actions against these beneficiaries. However, even where recoveries from beneficiaries are not needed because the financial correction relates only to deficiencies in the Member States' management and control system and not to undue payments, these corrections are an important means to improve the Member States' systems and thus to prevent or detect and recover irregular payments to beneficiaries.

The use of flat rates has been accepted by the Court of Justice as being in conformity with the legal rules governing the conformity work and endorsed, under certain circumstances, by the European Parliament in its 2007 discharge resolution (22).

Finally, the Commission has indicated (23) to Member States that if their certification bodies fully re-perform a representative sample of transactions which the paying agency has checked on the spot and, on this basis, confirm the reliability of a Member State's control statistics, then the Commission will accept that the resulting error rate represents the maximum risk possible and that any financial corrections for the year in question will not exceed that level.

| 4.35. | The first stage of the clearance of accounts procedure is based on audits carried out by independent certification bodies in the Member States. These bodies submit to the Commission a certification report on the accounts and the internal control system of the paying agency and an opinion on the statement of assurance issued by the director of the paying agency. |
| --- | --- |

4.35.

The first stage of the clearance of accounts procedure is based on audits carried out by independent certification bodies in the Member States. These bodies submit to the Commission a certification report on the accounts and the internal control system of the paying agency and an opinion on the statement of assurance issued by the director of the paying agency.

| 4.36. | The Court's review of a sample of 32 of these audits for EAGF and EAFRD showed that the certification bodies generally follow closely the model report prescribed by DG AGRI. In their audits, certification bodies have to apply international standards on auditing, which includes the use of other sources, such as previous audits (19). However, the Court found that the certification bodies rarely consider observations raised by the Commission's or the Court's previous audits, such as reporting if the paying agency implemented sufficient remedial action regarding the observations identified. |
| --- | --- |

4.36.

The Court's review of a sample of 32 of these audits for EAGF and EAFRD showed that the certification bodies generally follow closely the model report prescribed by DG AGRI. In their audits, certification bodies have to apply international standards on auditing, which includes the use of other sources, such as previous audits (19). However, the Court found that the certification bodies rarely consider observations raised by the Commission's or the Court's previous audits, such as reporting if the paying agency implemented sufficient remedial action regarding the observations identified.

| 4.36. | The DG AGRI guidelines recall that the International standard on auditing (ISA) No 315 ‘Identifying and assessing the risks of material misstatement through understanding the entity and its environment’ requires the certification bodies to assess the design and implementation of controls and look at an organisation's ability to identify risks and assess the impact which this may have on the accounts.

  Therefore the Commission considers that EU auditors' findings, irrespective of whether they come from the Court of auditors or the Commission audit services, might be a very valuable source of information for the certification bodies to understand and evaluate the paying agencies' internal control systems. The certification bodies are reminded of the relevance to consider such findings in the certification bodies' expert group meeting. |
| --- | --- |

4.36.

Therefore the Commission considers that EU auditors' findings, irrespective of whether they come from the Court of auditors or the Commission audit services, might be a very valuable source of information for the certification bodies to understand and evaluate the paying agencies' internal control systems. The certification bodies are reminded of the relevance to consider such findings in the certification bodies' expert group meeting.

| 4.37. | The Court reviewed DG AGRI's audit work on the certification body reports and found that this was based on detailed checklists which addressed the most important issues. However, DG AGRI does not check if certification bodies' reports follow up previously detected observations, even if they were identified as part of the Commission's conformity clearance procedure. Currently, the Commission guidelines do not specify that certification bodies should include in their audit strategy and report information from other sources such as previous audits by the Commission or the Court. Therefore, the certification bodies do not have to assess either the risk of previously detected observations or their financial implications or if the paying agencies have remedied these findings. |
| --- | --- |

4.37.

The Court reviewed DG AGRI's audit work on the certification body reports and found that this was based on detailed checklists which addressed the most important issues. However, DG AGRI does not check if certification bodies' reports follow up previously detected observations, even if they were identified as part of the Commission's conformity clearance procedure. Currently, the Commission guidelines do not specify that certification bodies should include in their audit strategy and report information from other sources such as previous audits by the Commission or the Court. Therefore, the certification bodies do not have to assess either the risk of previously detected observations or their financial implications or if the paying agencies have remedied these findings.

| 4.37. | The certification bodies have to report on the paying agency's follow-up of their previous own findings, be it financial errors or recommendations to address systems weaknesses. When reviewing the certification bodies' reports, the Commission systematically ensures that the certification bodies adequately address the follow-up of their own findings from previous years.

  For what concerns other auditors' findings, the Commission considers that these might be a useful source of information to be considered by the certification body when planning its audit strategy (see reply to paragraph 4.36).


  It is however not in the certification bodies' mandate to report systematically in detail on the follow-up of the Commission, Court of auditors or any other external audit body's finding. |
| --- | --- |

4.37.

For what concerns other auditors' findings, the Commission considers that these might be a useful source of information to be considered by the certification body when planning its audit strategy (see reply to paragraph 4.36).

It is however not in the certification bodies' mandate to report systematically in detail on the follow-up of the Commission, Court of auditors or any other external audit body's finding.

| 4.38. | The Court also reviewed the work done by the certification body concerning EAFRD in the Member State (Denmark) where it had identified the most serious weaknesses in the supervisory and control systems. The Court found that this certification body: |
| --- | --- |

4.38.

The Court also reviewed the work done by the certification body concerning EAFRD in the Member State (Denmark) where it had identified the most serious weaknesses in the supervisory and control systems. The Court found that this certification body:

4.38.

| (a) | was not fully independent as legally required, as the firm which carried out the certification work was also involved in pre-payment eligibility checks in 35 % of the 65 files audited; |
| --- | --- |

(a)

was not fully independent as legally required, as the firm which carried out the certification work was also involved in pre-payment eligibility checks in 35 % of the 65 files audited;

| (b) | relied to a significant extent on the work carried out by the internal audit unit of the paying agency, without documentation showing that this work was sufficiently reviewed; |
| --- | --- |

(b)

relied to a significant extent on the work carried out by the internal audit unit of the paying agency, without documentation showing that this work was sufficiently reviewed;

| (a) and (b) | In the framework of the financial clearance procedure, the Commission will follow up the issue with the Danish authorities, notably with a view to reinforcing the operational independence of the certification body. |
| --- | --- |

(a) and (b)

| (c) | had not sufficiently checked that the expenditure complied with all eligibility conditions. In seven of 11 files selected which had been checked by the certification body, the Court identified ineligible expenditure representing 8 % of the EAFRD amount checked. |
| --- | --- |

(c)

had not sufficiently checked that the expenditure complied with all eligibility conditions. In seven of 11 files selected which had been checked by the certification body, the Court identified ineligible expenditure representing 8 % of the EAFRD amount checked.

| (c) | The work that the certification bodies have to do in relation to the financial clearance procedure is mostly aimed at checking that the accounts are complete, accurate and true. |
| --- | --- |

(c)

| 4.39. | The second stage of the clearance of accounts procedure is based on audits performed by the Commission. The Court reviewed all 27 audits carried out by DG AGRI in 2011 for EAFRD and found that these audits were generally a sufficient basis for the conformity clearance procedure subject to the weaknesses reported below. In its audits, the Commission found similar weaknesses as reported by the Court, e.g. concerning a lack of verification of the reasonableness of costs, public procurement and eligibility of expenditure. |
| --- | --- |

4.39.

The second stage of the clearance of accounts procedure is based on audits performed by the Commission. The Court reviewed all 27 audits carried out by DG AGRI in 2011 for EAFRD and found that these audits were generally a sufficient basis for the conformity clearance procedure subject to the weaknesses reported below. In its audits, the Commission found similar weaknesses as reported by the Court, e.g. concerning a lack of verification of the reasonableness of costs, public procurement and eligibility of expenditure.

| 4.40. | The Commission's conformity audit work is systems based, and is not aimed at checking the legality and regularity of underlying transactions. Samples are selected on a judgemental or random basis, and cover expenditure relating to several budgetary years. The Commission's audit work is thus not intended to calculate an annual error rate. |
| --- | --- |

4.40.

The Commission's conformity audit work is systems based, and is not aimed at checking the legality and regularity of underlying transactions. Samples are selected on a judgemental or random basis, and cover expenditure relating to several budgetary years. The Commission's audit work is thus not intended to calculate an annual error rate.

| 4.40. | See joint replies to paragraphs 1.12 and 1.13. |
| --- | --- |

4.40.

| 4.41. | The Court found that the Commission did not always have adequate records of the checks carried out. For instance, no standardised checklists were used for the 11 audits carried out for non-area-related measures. In addition, the audit work was generally not reviewed by an independent party. |
| --- | --- |

4.41.

The Court found that the Commission did not always have adequate records of the checks carried out. For instance, no standardised checklists were used for the 11 audits carried out for non-area-related measures. In addition, the audit work was generally not reviewed by an independent party.

| 4.41. | The Commission has adequate records of the checks carried out, although not in a standardised form in all cases. This is due to measures being very heterogeneous and, in addition, implemented by Member States in very different ways. The Commission services will consider using suitable standardised checklists in all cases.

  All audit findings and the resulting reports are reviewed and approved by team leaders and head of unit before being finalised. |
| --- | --- |

4.41.

All audit findings and the resulting reports are reviewed and approved by team leaders and head of unit before being finalised.

DG AGRI's management representation — the Annual Activity Report (AAR)

| 4.42. | DG AGRI's AAR contains a reservation for the total EAFRD expenditure for 2011 (11,8 billion euro) with a total residual amount at risk of 278 million euro (20). The Court considers that, in principle, this reservation corroborates the Court's observations on substantive testing and systems audit as presented above. |
| --- | --- |

4.42.

DG AGRI's AAR contains a reservation for the total EAFRD expenditure for 2011 (11,8 billion euro) with a total residual amount at risk of 278 million euro (20). The Court considers that, in principle, this reservation corroborates the Court's observations on substantive testing and systems audit as presented above.

| 4.43. | DG AGRI's main argument for including a reservation for EAFRD is because the residual error rate reported by DG AGRI of 2,36 % is above the 2 % materiality threshold. The Court noted that DG AGRI in its AAR (21): |
| --- | --- |

4.43.

DG AGRI's main argument for including a reservation for EAFRD is because the residual error rate reported by DG AGRI of 2,36 % is above the 2 % materiality threshold. The Court noted that DG AGRI in its AAR (21):

4.43.

| — | does not analyse nor explain why the residual error rate for EAFRD reported by DG AGRI has ‘increased significantly compared to the previous year’; |
| --- | --- |

—

does not analyse nor explain why the residual error rate for EAFRD reported by DG AGRI has ‘increased significantly compared to the previous year’;

| — | The higher error rate for rural development measures, as compared to measures under the first pillar of the CAP financed by the EAGF, is mainly due to the fact that support for certain of these measures such as, for example, agri-environmental measure is subject to a high number of conditions often of a very specific nature, which may increase the risk of errors by the beneficiaries and may render the controls by the national authorities more difficult.

  As a consequence of the reservation on rural development expenditure made by the Director-General of DG AGRI in his declaration of assurance in the Annual Activity Report 2011, the Commission services have started in cooperation with the Member States (June 2012), an in depth analysis of the situation in order to diagnose the underlying reasons for the higher error rates and determine specific corrective actions. |
| --- | --- |

—

As a consequence of the reservation on rural development expenditure made by the Director-General of DG AGRI in his declaration of assurance in the Annual Activity Report 2011, the Commission services have started in cooperation with the Member States (June 2012), an in depth analysis of the situation in order to diagnose the underlying reasons for the higher error rates and determine specific corrective actions.

| — | reports that it has put in place a plan with corrective actions envisaged to address the situation. |
| --- | --- |

—

reports that it has put in place a plan with corrective actions envisaged to address the situation.

| 4.44. | The Court notes in addition that the error rate reported by DG AGRI is based on figures reported by the Member States for 2010. One of the reasons why the Court has identified a much higher error rate than the one reported by DG AGRI is that as part of its audit the Court found that Member States do not detect and report all non-eligible expenditure due to weaknesses in the administrative and the on-the-spot checks of the paying agency, as illustrated in example 4.2, example 4.5 and analysed in paragraphs 4.24, 4.28, 4.29 and 4.39. |
| --- | --- |

4.44.

The Court notes in addition that the error rate reported by DG AGRI is based on figures reported by the Member States for 2010. One of the reasons why the Court has identified a much higher error rate than the one reported by DG AGRI is that as part of its audit the Court found that Member States do not detect and report all non-eligible expenditure due to weaknesses in the administrative and the on-the-spot checks of the paying agency, as illustrated in example 4.2, example 4.5 and analysed in paragraphs 4.24, 4.28, 4.29 and 4.39.

| 4.44. | In order to address the risk that the error rates derived from these control statistics could have been understated due to inaccuracies in the databases or inadequate follow-up of anomalies, as referred to by the Court, DG AGRI applied a safety margin of 25 % when calculating the residual risk to the Fund. The Commission considers this largely sufficient to cover the risks referred to by the Court.

  It should also be noted that the Member States' control statistics are verified and validated to a large extent by the certification bodies, as recommended as an option by the Court in its Annual Report for 2005, and the results of this works are presented in DG AGRI's Annual Activity Report.


  The Commission notes that some observations of the Court concern national rules on public procurement and that certain Member States have a different interpretation of those rules to that of the Court. |
| --- | --- |

4.44.

It should also be noted that the Member States' control statistics are verified and validated to a large extent by the certification bodies, as recommended as an option by the Court in its Annual Report for 2005, and the results of this works are presented in DG AGRI's Annual Activity Report.

The Commission notes that some observations of the Court concern national rules on public procurement and that certain Member States have a different interpretation of those rules to that of the Court.

Environment and climate action, maritime affairs and fisheries, health and consumer protection

| 4.45. | The policy areas of environment and climate action, maritime affairs and fisheries as well as health and consumer protection are managed by the Commission under specific control systems. The Court examined the internal control system of DG MARE. |
| --- | --- |

4.45.

The policy areas of environment and climate action, maritime affairs and fisheries as well as health and consumer protection are managed by the Commission under specific control systems. The Court examined the internal control system of DG MARE.

Internal Control System of DG MARE

| 4.46. | 30 randomly selected payments concerning the main budget areas of DG MARE were tested. The audit found that key controls were not always fully documented with the risk that such controls are not performed. Furthermore, there was insufficient monitoring of fish catches under an international fisheries agreement that resulted in unforeseen expenditure for the Commission, as illustrated in example 4.6. |
| --- | --- |

4.46.

30 randomly selected payments concerning the main budget areas of DG MARE were tested. The audit found that key controls were not always fully documented with the risk that such controls are not performed. Furthermore, there was insufficient monitoring of fish catches under an international fisheries agreement that resulted in unforeseen expenditure for the Commission, as illustrated in example 4.6.

| 4.46. | The monitoring of catches has been strengthened and an alert mechanism now prevents overshooting. |
| --- | --- |

4.46.

Example 4.6 —   Insufficient monitoring of fish catches

The Fisheries Partnership Agreement between the European Union and a third country, the Islamic Republic of Mauritania, for the four-year period ending 31 July 2012, allows EU registered fishing vessels to catch up to 300 000 tonnes of fish each year (ending 31 July), in exchange for an EU contribution of 40 euro per tonne caught. The protocol to this agreement provides that if the EU wishes to have an additional quota, it shall inform the national authorities no later than 15 February of each year, and pay at the same rate per tonne. In the year ending 31 July 2010, there was insufficient monitoring of fish catches under the partnership agreement by the Commission services, and the national authorities were not informed before 15 February 2010 that additional quota was sought. In October 2010, the national authorities informed the Commission that the 300 000 tonne quota for the year ending 31 July 2010 was exceeded. The Commission paid 1,9 million euro to the Islamic Republic of Mauritania for 47 346 tonnes caught in excess of the quota. Better monitoring of fish catches would have allowed the Commission services to consider taking preventive action to avoid making additional payments.

Example 4.6
   —   
  Insufficient monitoring of fish catches

The Commission acknowledges that there was some delay in the monitoring of pelagic catches during the protocol year 2009/2010 (1 August to 31 July) and that this had certain consequences in terms of additional payments to be made to Mauritania in 2010.

This issue has now been fully addressed by specifically deducting the exceeded quantity (and of course the related payment) from the additional pelagic quota for 2011/2012. In other words, what was caught and paid for in 2009/2010 was taken off in 2011/2012. Thus, both sustainability and sound financial management were respected.

Moreover, to further strengthen monitoring of catches, general working methods have improved substantially from 2010 onwards. An alert mechanism (pelagic catches which are close to the catch limits are being monitored on a weekly basis) was introduced to prevent the overshooting. In 2011, following the exhaustion of the quota, the Commission closed the pelagic fishery 16 days before the end of the Protocol year, after having monitored pelagic catches on a weekly and in the last period also on a daily basis. The same precautionary approach prevailed in 2012 (closing of the pelagic fishery already on 23 April 2012).

Other DGs' management representation — the annual activity reports (AARs)

| 4.47. | The Court examined the AARs and declarations by Directors-General for Commission DGs ENV, CLIMA, MARE and SANCO. |
| --- | --- |

4.47.

The Court examined the AARs and declarations by Directors-General for Commission DGs ENV, CLIMA, MARE and SANCO.

| 4.48. | DG ENV did not create a reservation, because its residual error rate was under the 2 % materiality threshold. The Court notes that the calculation of the residual error rate by DG ENV is based on assumptions that are not fully supported by representative testing. |
| --- | --- |

4.48.

DG ENV did not create a reservation, because its residual error rate was under the 2 % materiality threshold. The Court notes that the calculation of the residual error rate by DG ENV is based on assumptions that are not fully supported by representative testing.

| 4.48. | In line with the guidance in the AAR Standing Instructions, DG ENV complemented the results of the ex-post controls with an analysis of 245 on-site monitoring visits of LIFE projects performed in 2011. This testing provides a realistic and reasonably sound basis for estimating the likely error rate. |
| --- | --- |

4.48.

| 4.49. | DG CLIMA maintained its reservation from 2010 on reputational grounds related to a significant security breach identified in the national registries of the EU Emissions Trading System. There were no reservations relating to expenditure, most of which relates to procurement. |
| --- | --- |

4.49.

DG CLIMA maintained its reservation from 2010 on reputational grounds related to a significant security breach identified in the national registries of the EU Emissions Trading System. There were no reservations relating to expenditure, most of which relates to procurement.

| 4.49. | The Commission considers the procurement procedures currently in place to be adequate for limiting the risk of error or irregular expenditure. |
| --- | --- |

4.49.

| 4.50. | DG SANCO's only reservation related to the food and feed policy area, on the basis that the residual error rate was 4,3 %. All 2011 payments in the public health policy area (except for the contributions to regulatory agencies) relate to procurement. DG SANCO did not perform ex-post controls on this expenditure and assumed that, due to its ex-ante controls, the error rate for procurement related expenditure is approximately 0 %. |
| --- | --- |

4.50.

DG SANCO's only reservation related to the food and feed policy area, on the basis that the residual error rate was 4,3 %. All 2011 payments in the public health policy area (except for the contributions to regulatory agencies) relate to procurement. DG SANCO did not perform ex-post controls on this expenditure and assumed that, due to its ex-ante controls, the error rate for procurement related expenditure is approximately 0 %.

| 4.50. | DG SANCO concludes procurement contracts for which the prices fixed in the contract have to be paid when the good and services are delivered as requested. Once DG SANCO achieves a good price-quality ratio in the contractor's offer and ensures that the requested quality is delivered, it checks that the contractor's invoice complies with the prices agreed in the contract. Adequate procurement procedures as well as the technical and financial checks prior to payment are sufficient to give reasonable assurance that error rates are very low. Thus, additional checks after the final payment (ex-post) are unlikely to find significant errors and are thus an excessive administrative burden. |
| --- | --- |

4.50.

DG SANCO concludes procurement contracts for which the prices fixed in the contract have to be paid when the good and services are delivered as requested. Once DG SANCO achieves a good price-quality ratio in the contractor's offer and ensures that the requested quality is delivered, it checks that the contractor's invoice complies with the prices agreed in the contract. Adequate procurement procedures as well as the technical and financial checks prior to payment are sufficient to give reasonable assurance that error rates are very low. Thus, additional checks after the final payment (ex-post) are unlikely to find significant errors and are thus an excessive administrative burden.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

| 4.51. | Based on its audit work, the Court concludes that the payments for the year ended 31 December 2011 for rural development, environment, fisheries and health were affected by material error. |
| --- | --- |

4.51.

Based on its audit work, the Court concludes that the payments for the year ended 31 December 2011 for rural development, environment, fisheries and health were affected by material error.

| 4.51. | The Commission takes note of the most likely error rate estimated by the Court. Although it does not share the Court's assessment in certain cases, the Commission’s own estimate of the level of undue payments on the basis of the control statistics provided by the Member States in 2011 also shows a deterioration of the situation, albeit of a more limited magnitude. Therefore, the Director-General for DG AGRI has made a reservation, concerning rural development expenditure, in his declaration of assurance for 2011.

  This reservation is accompanied by a number of corrective actions to be determined by the Commission together with the Member States in order to address the situation.


  However, the relatively higher error rates for rural development compared to the first pillar of the CAP must also be seen in context of the rural development policy objectives which can only be achieved by the more complex rules and eligibility conditions referred to by the Court in paragraph 4.5. |
| --- | --- |

4.51.

This reservation is accompanied by a number of corrective actions to be determined by the Commission together with the Member States in order to address the situation.

However, the relatively higher error rates for rural development compared to the first pillar of the CAP must also be seen in context of the rural development policy objectives which can only be achieved by the more complex rules and eligibility conditions referred to by the Court in paragraph 4.5.

| 4.52. | Based on its audit work, the Court found that the examined supervisory and control systems for rural development, environment, fisheries and health were partially effective. |
| --- | --- |

4.52.

Based on its audit work, the Court found that the examined supervisory and control systems for rural development, environment, fisheries and health were partially effective.

| 4.52. | The Commission takes note that the results presented are similar to the results of last year. |
| --- | --- |

4.52.

Recommendations

| 4.53. | Annex 4.3
  shows the result of the Court's review of progress in addressing recommendations made in previous annual reports (2008 and 2009). It should be noted that the Court's recommendation to further simplify the rules and conditions for rural development remains valid. |
| --- | --- |

4.53.

Annex 4.3
  shows the result of the Court's review of progress in addressing recommendations made in previous annual reports (2008 and 2009). It should be noted that the Court's recommendation to further simplify the rules and conditions for rural development remains valid.

| 4.53. | The Commission proposals for the legal framework governing the future programming period (CAP towards 2020; COM(2012) 627 final/2) include a number of proposals for simplification. The Commission is also proposing to further increase the responsibility of Member States authorities in respect to ensure verifiability and controllability of measures in the rural development programmes. |
| --- | --- |

4.53.

| 4.54. | Following this review and the findings and conclusions for 2011, the Court recommends in the area of rural development for the current programming period that: |
| --- | --- |

4.54.

Following this review and the findings and conclusions for 2011, the Court recommends in the area of rural development for the current programming period that:

| 4.54. | See joint replies to paragraphs 1.12 and 1.13. |
| --- | --- |

4.54.

| — | Recommendation 1: the Member States carry out administrative and on-the-spot checks in a more rigorous manner so as to mitigate the risk of declaring ineligible expenditure to the EU; |
| --- | --- |

—

Recommendation 1: the Member States carry out administrative and on-the-spot checks in a more rigorous manner so as to mitigate the risk of declaring ineligible expenditure to the EU;

The Commission agrees with the Court and systematically recommends Member States to remedy any such deficiencies in framework of its conformity clearance procedures.

| — | Recommendation 2: the Commission and the Member States ensure that the existing rules are better enforced concerning:






  — | public procurement and VAT rules when public bodies are beneficiaries of the aid, |
| --- | --- | --- |

—

Recommendation 2: the Commission and the Member States ensure that the existing rules are better enforced concerning:

—

public procurement and VAT rules when public bodies are beneficiaries of the aid,

| — | agri-environment commitments and eligibility rules for modernisation of holdings; |
| --- | --- |

—

agri-environment commitments and eligibility rules for modernisation of holdings;

The enforcement of existing rules is at the core of the clearance of accounts system. The Commission imposes financial corrections on Member States when risks to the fund have been identified, and recommendations for improvements are addressed to the national authorities. This will continue with particular focus on the issues highlighted by the Court of Auditors as these have also been found by the Commission during its own audits.

| — | Recommendation 3: the Commission analyses the reasons for the material error rate; |
| --- | --- |

—

Recommendation 3: the Commission analyses the reasons for the material error rate;

The Director-General for DG AGRI has stated a reservation concerning rural development in his annual statement of assurance for 2011 due to the residual error rate communicated by the Member States exceeding the materiality threshold when taking into account a safety margin of 25 %. The reservation is accompanied by corrective actions aiming at identifying, in collaboration with the Member States concerned, the root causes for the higher error rates along with specific actions to be implemented in the current and the future programming period.

It should in this context also be recalled that according to Article 4(5), of Commission Regulation (EU) No 65/2011, Member States are obliged to identify the causes for problems encountered during controls and to implement corrective and preventive actions.

| — | Recommendation 4: the Commission takes account of the findings identified by the Court when establishing the audit strategy of DG AGRI's clearance of accounts audits; |
| --- | --- |

—

Recommendation 4: the Commission takes account of the findings identified by the Court when establishing the audit strategy of DG AGRI's clearance of accounts audits;

The Commission takes into duly account the findings of the Court and considers them as one of the elements to be taken into account in its central risk analysis for establishing its audit programme.

| — | Recommendation 5: the Commission extends the guidelines for the certification bodies with the requirement that these bodies include, in their audit strategy and reports, findings from previous audits by the Commission and the Court; |
| --- | --- |

—

Recommendation 5: the Commission extends the guidelines for the certification bodies with the requirement that these bodies include, in their audit strategy and reports, findings from previous audits by the Commission and the Court;

Although it is not in the certification bodies' mandate to report in detail on the follow-up of the Commission, Court of auditors or any other external audit body's findings, the findings from previous audits by the Commission and the Court are useful for the certification bodies at a planning stage when setting-up its audit strategy.

The Commission has reminded the certification bodies to consider such findings in the next certification bodies' expert group meeting

| — | Recommendation 6: regarding cross-compliance, the Member States should ensure the respect of the requirements concerning animal identification and registration and improve the spread of checks throughout the year so that all relevant requirements are properly checked. |
| --- | --- |

—

Recommendation 6: regarding cross-compliance, the Member States should ensure the respect of the requirements concerning animal identification and registration and improve the spread of checks throughout the year so that all relevant requirements are properly checked.

The Commission, in the framework of cross-compliance audits, systematically verifies that the Member States ensure the respect of the requirements concerning animal identification and registration as well as the timing of the on the spot checks.

| 4.55. | In the policy areas of environment, maritime affairs and fisheries, health and consumer protection, the Court recommends that: |
| --- | --- |

4.55.

In the policy areas of environment, maritime affairs and fisheries, health and consumer protection, the Court recommends that:

4.55.

| — | Recommendation 7: the Commission improves the monitoring of fish catches under fisheries partnership agreements with countries outside the EU. |
| --- | --- |

—

Recommendation 7: the Commission improves the monitoring of fish catches under fisheries partnership agreements with countries outside the EU.

To further strengthen monitoring of catches, general working methods have improved substantially from 2010 onwards. An alert mechanism (pelagic catches which are close to the catch limits are being monitored on a weekly basis) has been introduced to prevent the overshooting.

---

(1)  This amount includes expenditure for completion of earlier (2000-2006) programmes (500 million euro) and pre-accession measures in the field of agriculture and rural development (102 million euro).

(2)  As set out in Article 50a of Council Regulation (EC) No 1698/2005 (OJ L 277, 21.10.2005, p. 1).

(3)  See paragraph 3.18 of the Court's 2010 Annual Report.

(4)  Five years after the start of the 2007-2013 programming period, execution rates (i.e. payments/financial plan) were still very low for Bulgaria (29,1 %), Romania (34,3 %) and Italy (36,2 %) (based on data from DG AGRI as at 31.12.2011).

(5)  Regulation (EC) No 614/2007 of the European Parliament and of the Council (OJ L 149, 9.6.2007, p. 1).

(6)  The Financial Instrument for Fisheries Guidance (FIFG) has been replaced by the EFF for the current programming period (2007-2013) — Council Regulation (EC) No 1198/2006 (OJ L 223, 15.8.2006, p. 1).

(7)  European Centre for Disease Prevention and Control, European Food Safety Authority, European Medicines Agency.

(8)  All requirements for SMRs 6-8 (concerning the identification and registration of animals) and obvious non-compliance with SMRs 4 (nitrates Directive) and 18 (animal welfare).

(9)  Articles 16, 17 and 30 of Commission Regulation (EU) No 65/2011 of 27 January 2011 laying down detailed rules for the implementation of Council Regulation (EC) No 1698/2005, as regards the implementation of control procedures as well as cross-compliance in respect of rural development support measures (OJ L 25, 28.1.2011, p. 8).

(10)  Except in cases where Member States had already found the irregularity without applying the due reductions/exclusions.

(11)  The Court calculates its estimate of error from a representative statistical sample. The figure quoted is the best estimate (known as the MLE). The Court has 95 % confidence that the rate of error in the population lies between LEL 4,5 % and UEL 10,9 % (the lower and upper error limits respectively).

(12)  17 of the 26 cases affected also the payment audited, while the other 9 cases will only affect future payments.

(13)  For rural development measures under the 2007-2013 programming period, the detailed requirements are defined by Regulation (EU) No 65/2011.

(14)  Referred to in Article 24 of Regulation (EU) No 65/2011.

(15)  Articles 12 and 25 of Regulation (EU) No 65/2011.

(16)  SMR 1 (Council Directive 79/409/EEC of 2 April 1979 on the conservation of wild birds (OJ L 103, 25.4.1979, p. 1)); SMR 4 (Council Directive 91/676/EEC of 12 December 1991 concerning the protection of waters against pollution caused by nitrates from agricultural sources (OJ L 375, 31.12.1991, p. 1)) and SMR 5 (Council Directive 92/43/EEC of 21 May 1992 on the conservation of natural habitats and of wild flora and fauna (OJ L 206, 22.7.1992, p. 7)).

(17)  The accounts and payments of a paying agency are examined by an independent body (the certification body) which reports to the Commission in February of the following year. By 30 April of that year, the Commission must decide on whether to accept the accounts (financial clearance decision) or to ask for more work to be performed or for additional information. The Commission also carries out audits aiming to verify that Member States have applied EU rules for checking the legality and regularity of the expenditure (conformity audits). Based on these audits, the Commission can impose a correction to the Member States, who have the right to invoke a conciliation procedure. When this procedure has run its course, the Commission is in a position to include a financial correction in a conformity decision.

(18)  http://eca.europa.eu

(19)  International Standard on Auditing (ISA) No 200 (Overall objectives of the independent auditor and the conduct of an audit in accordance with international standards on auditing) includes under A28: ‘Audit evidence is necessary to support the auditor's opinion and report. It is cumulative in nature and is primarily obtained from audit procedures performed during the course of the audit. It may, however, also include information obtained from other sources such as previous audits [...]’.

(20)  The reservation does not cover expenditure for completion of earlier (2000-2006) programmes (500 million euro) and pre-accession measures in the field of agriculture and rural development (102 million euro).

(21)  Pages 58, 59 and 79 to 81 of DG AGRI's AAR.

(22)  See paragraph 83 of the European Parliament's 2007 discharge resolution.

(23)  Document D/413722/2009.

(24)  The audit of administrative expenditure is reported in Chapter 9.

Source: 2011 annual accounts of the European Union.

ANNEX 4.1

RESULTS OF TRANSACTION TESTING FOR RURAL DEVELOPMENT, ENVIRONMENT, FISHERIES AND HEALTH

| | 2011 | 2010 | 2009 | 2008 |
| --- | --- | --- | --- | --- |
| Rural development | Env., fish. and health | Total |
| SIZE AND STRUCTURE OF THE SAMPLE |
| Total transactions (of which): | 160 | 18 | 178 | 92 | 93 | 53 |
| Advances | 0 | 0 | 0 | 0 | 0 | 0 |
| Interim/Final payments | 160 | 18 | 178 | 92 | 93 | 53 |
| RESULTS OF TESTING
   (1) |
| Proportion (number) of transactions tested found to be: |
| Free of error | 42 % | (67) | 56 % | (10) | 43 % | (77) | 48 % | 67 % | 55 % |
| Affected by one or more errors | 58 % | (93) | 44 % | (8) | 57 % | (101) | 52 % | 33 % | 45 % |
| Analysis of transactions affected by error |
| Analysis by type of error |
| Non-quantifiable errors: | 34 % | (32) | 75 % | (6) | 38 % | (38) | 48 % | 42 % | 38 % |
| Quantifiable errors: | 66 % | (61) | 25 % | (2) | 62 % | (63) | 52 % | 58 % | 62 % |
| Eligibility | 69 % | (42) | 50 % | (1) | 68 % | (43) | 56 % | 22 % | 40 % |
| Occurrence | 0 % | (0) | 50 % | (1) | 2 % | (1) | 0 % | 6 % | 7 % |
| Accuracy | 31 % | (19) | 0 % | (0) | 30 % | (19) | 44 % | 72 % | 53 % |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| Most likely error rate | 7,7 % | | | |
| Upper error limit (UEL) | 10,9 % | | | |
| Lower error limit (LEL) | 4,5 % | | | |

2011

2010

2009

2008

Rural development

Env., fish. and health

Total

SIZE AND STRUCTURE OF THE SAMPLE

Total transactions (of which):

160

18

178

92

93

53

Advances

0

0

0

0

0

0

Interim/Final payments

160

18

178

92

93

53

RESULTS OF TESTING
   (1)

Proportion (number) of transactions tested found to be:

Free of error

42 %

(67)

56 %

(10)

43 %

(77)

48 %

67 %

55 %

Affected by one or more errors

58 %

(93)

44 %

(8)

57 %

(101)

52 %

33 %

45 %

Analysis of transactions affected by error

Analysis by type of error

Non-quantifiable errors:

34 %

(32)

75 %

(6)

38 %

(38)

48 %

42 %

38 %

Quantifiable errors:

66 %

(61)

25 %

(2)

62 %

(63)

52 %

58 %

62 %

Eligibility

69 %

(42)

50 %

(1)

68 %

(43)

56 %

22 %

40 %

Occurrence

0 %

(0)

50 %

(1)

2 %

(1)

0 %

6 %

7 %

Accuracy

31 %

(19)

0 %

(0)

30 %

(19)

44 %

72 %

53 %

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Most likely error rate

7,7 %

Upper error limit (UEL)

10,9 %

Lower error limit (LEL)

4,5 %

---

(1)  To improve insight into areas with different risk profiles within the policy group, the sample was split up into segments.

ANNEX 4.2

RESULTS OF EXAMINATION OF SYSTEMS FOR RURAL DEVELOPMENT

Assessment of selected supervisory and control systems

| Member State


  (Paying agency) | Administrative and control procedures | On-the-spot inspection methodology, selection, execution, quality control and reporting of results | Implementation and control of cross-compliance | Overall assessment |
| --- | --- | --- | --- | --- |
| Denmark | Not effective
  1, 2, 3, 4, 5 | Partially effective
  A, B, C | Partially effective
  2, A, D, a | Not effective |
| Spain (Galicia) | Partially effective
  2, 3 | Partially effective
  A, C, D | Partially effective
  2, C, D, a | Partially effective |
| Italy (Lombardy) | Partially effective
  1, 2, 3, 4 | Partially effective
  A, C, D | Not effective
  4, A, B, C, D, a, b | Partially effective |
| Hungary | Partially effective
  1, 3 | Partially effective
  B, C, D | Not effective
  2, 4, B, D, a, b | Partially effective |
| Austria | Partially effective
  1, 2 | Effective
  A | Effective
  a | Effective |
| Finland | Partially effective
  1, 2, 4 | Partially effective
  2, C, D | Partially effective
  2, 4, A, D, a | Partially effective |
| 1 | Ineffective checks related to eligibility conditions and commitments (e.g. ineligible VAT included, double financing). |

Member State

(Paying agency)

Administrative and control procedures

On-the-spot inspection methodology, selection, execution, quality control and reporting of results

Implementation and control of cross-compliance

Overall assessment

Denmark

Not effective

1, 2, 3, 4, 5

Partially effective

A, B, C

Partially effective

2, A, D, a

Not effective

Spain (Galicia)

Partially effective

2, 3

Partially effective

A, C, D

Partially effective

2, C, D, a

Partially effective

Italy (Lombardy)

Partially effective

1, 2, 3, 4

Partially effective

A, C, D

Not effective

4, A, B, C, D, a, b

Partially effective

Hungary

Partially effective

1, 3

Partially effective

B, C, D

Not effective

2, 4, B, D, a, b

Partially effective

Austria

Partially effective

1, 2

Effective

A

Effective

a

Effective

Finland

Partially effective

1, 2, 4

Partially effective

2, C, D

Partially effective

2, 4, A, D, a

Partially effective

1

Ineffective checks related to eligibility conditions and commitments (e.g. ineligible VAT included, double financing).

| 2 | Shortcomings in the administrative organisation and internal control of the checks. |
| --- | --- |

2

Shortcomings in the administrative organisation and internal control of the checks.

| 3 | Absence of a suitable system to evaluate the reasonableness of the costs proposed in the application for support. |
| --- | --- |

3

Absence of a suitable system to evaluate the reasonableness of the costs proposed in the application for support.

| 4 | Incorrect calculations and payments (e.g. reduction not applied). |
| --- | --- |

4

Incorrect calculations and payments (e.g. reduction not applied).

| 5 | Systematic weaknesses in Title II (i.e. non-area-related) measures resulting in the acceptance of ineligible expenditure. |
| --- | --- |

5

Systematic weaknesses in Title II (i.e. non-area-related) measures resulting in the acceptance of ineligible expenditure.

| A | Insufficient details on the extent of the checks carried out. |
| --- | --- |

A

Insufficient details on the extent of the checks carried out.

| B | Inconsistencies concerning the number of checks carried out. |
| --- | --- |

B

Inconsistencies concerning the number of checks carried out.

| C | Insufficient quality of the checks: non-compliances not detected and/or not all commitments and obligations covered. |
| --- | --- |

C

Insufficient quality of the checks: non-compliances not detected and/or not all commitments and obligations covered.

| D | Deficiencies in the planning and timing of the checks (e.g. checks carried out after the farming year). |
| --- | --- |

D

Deficiencies in the planning and timing of the checks (e.g. checks carried out after the farming year).

| a | Incomplete set of requirements (e.g. insufficient national GAEC standards, missing requirements for certain SMRs). |
| --- | --- |

a

Incomplete set of requirements (e.g. insufficient national GAEC standards, missing requirements for certain SMRs).

| b | Incorrect national implementation of the Nitrates Directive. |
| --- | --- |

b

Incorrect national implementation of the Nitrates Directive.

ANNEX 4.3

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR RURAL DEVELOPMENT, ENVIRONMENT, FISHERIES AND HEALTH

| Year | Court recommendation | Court's analysis of the progress made | Commission reply |
| --- | --- | --- | --- |
| 2009 | The Court recommended to take effective measures, together with the concerned national authorities, to avoid payment of ineligible expenditure for fisheries projects (DG MARE; paragraph 3.76 of the 2009 Annual Report). | The controls over eligible expenditure under the European Fisheries Fund have been strengthened compared with the controls carried out under the previous Financial Instrument for Fisheries Guidance. | |
| The Court recommended a clear segregation of functions between the Commission services and the development of appropriate formal control procedures for internal controls on payments for animal disease eradication and monitoring programmes to Member States (DG SANCO; paragraph 3.76 of the 2009 Annual Report). | The Commission services clarified the segregation of functions and took a number of mitigating actions such as the simplification of the legal base for the 2012 programmes. | |
| 2009 and 2008 | The Court reiterated that further efforts are required in the area of rural development to further simplify the rules and conditions (paragraph 3.74 (1)). | The Commission recast Regulation (EC) No 1975/2006 and replaced it by Regulation (EU) No 65/2011 per 1 January 2011.
  The new regulation clarifies to a certain extent provisions on control procedures, cross-compliance as well as reductions, exclusions and recoveries.
  The Commission considers that this initiative has been pursued by the CAP post-2013 where a set of simplifications in respect of rural development has been laid down.
  In its Opinion No 1/2012 on the Commission's legislative proposals for the reform of the common agricultural policy as of 2014, the Court recognised the efforts made by the Commission to simplify the provisions of the CAP, but considered that the legislative framework of the policy remained too complex. | |
| 2008 | The Court recommended to take effective measures so that the issues identified in the policy areas of environment, fisheries, health and consumer protection are resolved (DGs ENV, MARE and SANCO; paragraph 5.67 of the 2008 Annual Report). | The Commission took several initiatives to resolve the issues identified by the Court (see analysis concerning 2009). | |

Year

Court recommendation

Court's analysis of the progress made

Commission reply

2009

The Court recommended to take effective measures, together with the concerned national authorities, to avoid payment of ineligible expenditure for fisheries projects (DG MARE; paragraph 3.76 of the 2009 Annual Report).

The controls over eligible expenditure under the European Fisheries Fund have been strengthened compared with the controls carried out under the previous Financial Instrument for Fisheries Guidance.

The Court recommended a clear segregation of functions between the Commission services and the development of appropriate formal control procedures for internal controls on payments for animal disease eradication and monitoring programmes to Member States (DG SANCO; paragraph 3.76 of the 2009 Annual Report).

The Commission services clarified the segregation of functions and took a number of mitigating actions such as the simplification of the legal base for the 2012 programmes.

2009 and 2008

The Court reiterated that further efforts are required in the area of rural development to further simplify the rules and conditions (paragraph 3.74 (1)).

The Commission recast Regulation (EC) No 1975/2006 and replaced it by Regulation (EU) No 65/2011 per 1 January 2011.

The new regulation clarifies to a certain extent provisions on control procedures, cross-compliance as well as reductions, exclusions and recoveries.

The Commission considers that this initiative has been pursued by the CAP post-2013 where a set of simplifications in respect of rural development has been laid down.

In its Opinion No 1/2012 on the Commission's legislative proposals for the reform of the common agricultural policy as of 2014, the Court recognised the efforts made by the Commission to simplify the provisions of the CAP, but considered that the legislative framework of the policy remained too complex.

2008

The Court recommended to take effective measures so that the issues identified in the policy areas of environment, fisheries, health and consumer protection are resolved (DGs ENV, MARE and SANCO; paragraph 5.67 of the 2008 Annual Report).

The Commission took several initiatives to resolve the issues identified by the Court (see analysis concerning 2009).

---

(1)  Similar recommendations were made in paragraph 5.66 of the 2008 Annual Report.

---

CHAPTER 5

Regional policy; energy and transport

TABLE OF CONTENTS

Introduction

Specific characteristics of the policy group

Policy objectives

Policy instruments

Risks to regularity

Audit scope and approach

Regularity of transactions

Effectiveness of systems

Audit authorities

The Court’s examination of seven AAs

Assessment of the Commission’s supervision of AAs

Assessment of programme closure for the 2000-2006 programming period

Reliability of Commission management representations

DG Regional Policy

DG Mobility and Transport and DG Energy

Conclusions and recommendations

Conclusions

Recommendations

| THE COURT’S OBSERVATIONS | THE COMMISSION’S REPLIES |
| --- | --- |
| INTRODUCTION |
| 5.1. | This Chapter presents the Court’s specific assessment of regional policy, energy and transport, which comprises policy areas 06 — Mobility and transport, 13 — Regional policy and 32 — Energy. Key information on the activities covered and spending in 2011 is provided in
  Table 5.1
  . |

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

5.1.

This Chapter presents the Court’s specific assessment of regional policy, energy and transport, which comprises policy areas 06 — Mobility and transport, 13 — Regional policy and 32 — Energy. Key information on the activities covered and spending in 2011 is provided in
  Table 5.1
  .

Table 5.1 —   Regional policy; energy and transport — Key information 2011

| (million euro) |
| --- |
| Budget Title | Policy area | Description | Payments made | Management mode |
| 06 | Mobility and transport | Administrative expenditure | 71 | Centralised direct |
| Inland, air and maritime transport | 150 | Centralised direct and indirect |
| Trans-European Networks (TENs) | 833 | Centralised direct and indirect |
| Research related to transport | 59 | Centralised direct |
| | 1 113 | |
| 13 | Regional policy | Administrative expenditure | 84 | Centralised direct |
| European Regional Development Fund (ERDF) and other regional operations | 25 841 | Shared |
| Cohesion Fund (CF) | 6 450 | Shared |
| Pre-accession operations related to structural policies | 351 | Decentralised |
| Solidarity Fund | 269 | Centralised indirect |
| | 32 995 | |
| 32 | Energy | Administrative expenditure | 74 | Centralised direct |
| Trans-European Networks (TENs) | 18 | Centralised direct |
| Conventional and renewable energies | 591 | Centralised direct/centralised indirect/joint |
| Nuclear energy | 121 | Centralised direct/centralised indirect/joint |
| Research related to energy | 159 | Centralised direct |
| | 963 | |
| Total administrative expenditure (35) | 229 | |
| Total operational expenditure | 34 842 | |
| Of which: | — | advances |

(million euro)

Budget Title

Policy area

Description

Payments made

Management mode

06

Mobility and transport

Administrative expenditure

71

Centralised direct

Inland, air and maritime transport

150

Centralised direct and indirect

Trans-European Networks (TENs)

833

Centralised direct and indirect

Research related to transport

59

Centralised direct

1 113

13

Regional policy

Administrative expenditure

84

Centralised direct

European Regional Development Fund (ERDF) and other regional operations

25 841

Shared

Cohesion Fund (CF)

6 450

Shared

Pre-accession operations related to structural policies

351

Decentralised

Solidarity Fund

269

Centralised indirect

32 995

32

Energy

Administrative expenditure

74

Centralised direct

Trans-European Networks (TENs)

18

Centralised direct

Conventional and renewable energies

591

Centralised direct/centralised indirect/joint

Nuclear energy

121

Centralised direct/centralised indirect/joint

Research related to energy

159

Centralised direct

963

Total administrative expenditure (35)

229

Total operational expenditure

34 842

Of which:

—

1 469

| — | interim/final payments |
| --- | --- |

—

33 373

Total payments for the year

35 071

Total commitments for the year

42 964

Source: 2011 annual accounts of the European Union.

| 5.2. | Regional policy is mostly financed through the European Regional Development Fund (ERDF) and the Cohesion Fund (CF). These funds are governed by the same rules (subject to exceptions in the specific regulations of each fund) and are often managed by the same authorities as the European Social Fund (ESF). The ESF, which is the subject of Chapter 6, is referred to in this Chapter where issues common to all the funds are discussed. |
| --- | --- |

5.2.

Regional policy is mostly financed through the European Regional Development Fund (ERDF) and the Cohesion Fund (CF). These funds are governed by the same rules (subject to exceptions in the specific regulations of each fund) and are often managed by the same authorities as the European Social Fund (ESF). The ESF, which is the subject of Chapter 6, is referred to in this Chapter where issues common to all the funds are discussed.

| 5.3. | Regional policy accounts for 94 % of spending in this policy group while the remaining 6 % concerns the energy and transport areas. |
| --- | --- |

5.3.

Regional policy accounts for 94 % of spending in this policy group while the remaining 6 % concerns the energy and transport areas.

Specific characteristics of the policy group

Policy objectives

Regional policy

| 5.4. | Regional policy aims at strengthening economic and social cohesion within the European Union by reducing development disparities between different regions. |
| --- | --- |

5.4.

Regional policy aims at strengthening economic and social cohesion within the European Union by reducing development disparities between different regions.

Energy and transport

| 5.5. | Energy and transport policies aim to provide European citizens and businesses with secure, sustainable and competitive energy and transport systems and services and to develop innovative solutions that contribute to the formulation and implementation of these policies. |
| --- | --- |

5.5.

Energy and transport policies aim to provide European citizens and businesses with secure, sustainable and competitive energy and transport systems and services and to develop innovative solutions that contribute to the formulation and implementation of these policies.

Policy instruments

Regional policy

| 5.6. | The ERDF and CF are the main tools for the implementation of regional policy (1). The ERDF finances infrastructure works, the creation or preservation of jobs, regional economic development initiatives and activities supporting small and medium-sized enterprises (2). In Member States whose gross national income per capita is below 90 % of the EU average, the CF finances investments in infrastructure in the fields of environment and transport. |
| --- | --- |

5.6.

The ERDF and CF are the main tools for the implementation of regional policy (1). The ERDF finances infrastructure works, the creation or preservation of jobs, regional economic development initiatives and activities supporting small and medium-sized enterprises (2). In Member States whose gross national income per capita is below 90 % of the EU average, the CF finances investments in infrastructure in the fields of environment and transport.

| 5.7. | The ERDF (with payments of 26 billion euro) and the CF (with payments of 6 billion euro) accounted for 98 % of the expenditure under budget Title 13 in 2011 (3). |
| --- | --- |

5.7.

The ERDF (with payments of 26 billion euro) and the CF (with payments of 6 billion euro) accounted for 98 % of the expenditure under budget Title 13 in 2011 (3).

Management and control of spending by ERDF, CF and ESF

| 5.8. | The ERDF, the CF and the ESF (4) are governed by common rules and are subject to shared management by the Commission and the Member States. Additional provisions for each fund are set in specific regulations. These funds are spent in multiannual programmes. |
| --- | --- |

5.8.

The ERDF, the CF and the ESF (4) are governed by common rules and are subject to shared management by the Commission and the Member States. Additional provisions for each fund are set in specific regulations. These funds are spent in multiannual programmes.

| 5.9. | For each programming period, on the basis of Member States’ proposals, the Commission approves operational programmes (OPs) together with indicative financial plans which include the EU and national contributions (5). Projects implemented under the OPs are carried out by private individuals, associations, private or public undertakings or local, regional and national public bodies. |
| --- | --- |

5.9.

For each programming period, on the basis of Member States’ proposals, the Commission approves operational programmes (OPs) together with indicative financial plans which include the EU and national contributions (5). Projects implemented under the OPs are carried out by private individuals, associations, private or public undertakings or local, regional and national public bodies.

| 5.10. | In the Member States responsibility for day-to-day administration lies with designated managing authorities and intermediate bodies (6). This includes selecting individual projects, implementing controls to prevent, detect and correct errors within the declared expenditure and verifying that projects are actually implemented (‘first level checks’). Certifying authorities verify that ‘first level checks’ are effectively carried out and, where appropriate, undertake additional checks prior to declaring expenditure to the Commission. |
| --- | --- |

5.10.

In the Member States responsibility for day-to-day administration lies with designated managing authorities and intermediate bodies (6). This includes selecting individual projects, implementing controls to prevent, detect and correct errors within the declared expenditure and verifying that projects are actually implemented (‘first level checks’). Certifying authorities verify that ‘first level checks’ are effectively carried out and, where appropriate, undertake additional checks prior to declaring expenditure to the Commission.

| 5.11. | Audit authorities (AAs) in the Member States play a key role in ensuring that the expenditure reimbursed under the ERDF, ESF and CF is regular. They are responsible for carrying out system audits and audits of operations (i.e. projects or group of projects) in order to provide reasonable assurance on the effective functioning of the management and control systems of the programmes and on the regularity of the expenditure certified for each OP. They report on these audits to the Commission through annual control reports (ACRs) and annual opinions (7). |
| --- | --- |

5.11.

Audit authorities (AAs) in the Member States play a key role in ensuring that the expenditure reimbursed under the ERDF, ESF and CF is regular. They are responsible for carrying out system audits and audits of operations (i.e. projects or group of projects) in order to provide reasonable assurance on the effective functioning of the management and control systems of the programmes and on the regularity of the expenditure certified for each OP. They report on these audits to the Commission through annual control reports (ACRs) and annual opinions (7).

| 5.12. | At the start of each programming period the Commission makes pre-financing payments to the Member States (8). The financing of a project generally takes the form of the reimbursement of costs on the basis of expenditure declarations by the project promoters. These individual declarations are aggregated into periodic expenditure declarations per OP certified by the Member State authorities and submitted to the Commission. The share cofinanced by the EU is then reimbursed from the EU budget. |
| --- | --- |

5.12.

At the start of each programming period the Commission makes pre-financing payments to the Member States (8). The financing of a project generally takes the form of the reimbursement of costs on the basis of expenditure declarations by the project promoters. These individual declarations are aggregated into periodic expenditure declarations per OP certified by the Member State authorities and submitted to the Commission. The share cofinanced by the EU is then reimbursed from the EU budget.

| 5.13. | The eligibility rules are laid down at national or sometimes regional level, subject to exceptions in the specific regulations for each fund. Member States bear primary responsibility for preventing or detecting and correcting irregular expenditure, and for reporting on this to the Commission. |
| --- | --- |

5.13.

The eligibility rules are laid down at national or sometimes regional level, subject to exceptions in the specific regulations for each fund. Member States bear primary responsibility for preventing or detecting and correcting irregular expenditure, and for reporting on this to the Commission.

| 5.13. | The establishment of eligibility rules at national level (Article 56 of Council Regulation (EC) No 1083/2006) was one of the main elements of simplification introduced in the 2007-2013 programme period. It aimed at providing Member States with more flexibility in adapting eligibility rules to the specific needs of regions or programmes and to harmonise them with rules in force for other, national public schemes. |
| --- | --- |

5.13.

| 5.14. | The Commission has to obtain assurance that the Member States have set up management and control systems which meet the requirements of the regulations, and that the systems function effectively (9). If the Commission finds that a Member State has failed to correct irregular expenditure which had been certified and declared or that there are serious failings in the management and control systems, it may interrupt or suspend payments (10). If the Member State does not withdraw the irregular expenditure (which may be substituted by expenditure which is eligible) or does not remedy any detected system failures, the Commission may apply financial corrections, leading to a net reduction in EU funding (11). |
| --- | --- |

5.14.

The Commission has to obtain assurance that the Member States have set up management and control systems which meet the requirements of the regulations, and that the systems function effectively (9). If the Commission finds that a Member State has failed to correct irregular expenditure which had been certified and declared or that there are serious failings in the management and control systems, it may interrupt or suspend payments (10). If the Member State does not withdraw the irregular expenditure (which may be substituted by expenditure which is eligible) or does not remedy any detected system failures, the Commission may apply financial corrections, leading to a net reduction in EU funding (11).

| 5.14. | The Commission provided a detailed assessment of its assurance on the set up and subsequent functioning of management and control systems for each co-financed programme, as well as an overall assessment of national control systems in its 2011 Annual Activity Report.

  In case of systems deficiency, the Commission in its supervisory role does interrupt and/or suspend payments. It reports on the exercise of this responsibility in the annual activity report. For 2011, DG Regional Policy reports 70 interruptions of payment deadlines and initiation of suspension procedures for 10 programmes. DG Employment reports for 2011 the interruption of 21 interim payment requests and 3 further suspension decisions. |
| --- | --- |

5.14.

In case of systems deficiency, the Commission in its supervisory role does interrupt and/or suspend payments. It reports on the exercise of this responsibility in the annual activity report. For 2011, DG Regional Policy reports 70 interruptions of payment deadlines and initiation of suspension procedures for 10 programmes. DG Employment reports for 2011 the interruption of 21 interim payment requests and 3 further suspension decisions.

Energy and transport

| 5.15. | The European Union’s energy policy aims at contributing to provide citizens and business with affordable energy, competitive prices and technologically advanced energy services. It promotes sustainable energy production, transport and consumption, and a secure energy supply within the EU and its Member States. The main financial instrument is the European Energy Programme for Recovery (EEPR) which provides financing for projects, largely in the form of grants and subsidies. |
| --- | --- |

5.15.

The European Union’s energy policy aims at contributing to provide citizens and business with affordable energy, competitive prices and technologically advanced energy services. It promotes sustainable energy production, transport and consumption, and a secure energy supply within the EU and its Member States. The main financial instrument is the European Energy Programme for Recovery (EEPR) which provides financing for projects, largely in the form of grants and subsidies.

| 5.16. | Transport policies aim at developing the internal market, increasing competition and innovation and integrating transport networks. In this area, EU policies promote mobility, sustainable development and transport security. The Trans-European Network Programme for Transport (TEN-T) is the main financial instrument which provides funding for large infrastructure projects. |
| --- | --- |

5.16.

Transport policies aim at developing the internal market, increasing competition and innovation and integrating transport networks. In this area, EU policies promote mobility, sustainable development and transport security. The Trans-European Network Programme for Transport (TEN-T) is the main financial instrument which provides funding for large infrastructure projects.

| 5.17. | Payments in the field of energy and transport under budget Titles 06 and 32 were in the order of 2 billion euro in 2011 (12). |
| --- | --- |

5.17.

Payments in the field of energy and transport under budget Titles 06 and 32 were in the order of 2 billion euro in 2011 (12).

Management and control of energy and transport spending

| 5.18. | The Commission (DG Mobility and Transport and DG Energy) implements energy and transport expenditure under direct and indirect centralised management (through two executive agencies and a joint undertaking (13)), and also through joint management arrangements (such as nuclear decommissioning funds or the European energy efficiency finance facility). |
| --- | --- |

5.18.

The Commission (DG Mobility and Transport and DG Energy) implements energy and transport expenditure under direct and indirect centralised management (through two executive agencies and a joint undertaking (13)), and also through joint management arrangements (such as nuclear decommissioning funds or the European energy efficiency finance facility).

| 5.19. | The Commission generally finances projects following formal calls for project proposals. Payments for approved projects are made directly by the Commission to beneficiaries, based on grant agreements or Commission financing decisions. The beneficiaries are usually Member State authorities but may also be public or private companies. Nearly all payments are made in instalments: an advance or pre-financing payment upon signature of the grant agreement or financing decision, followed by interim and final payments to reimburse eligible expenditure reported by beneficiaries. |
| --- | --- |

5.19.

The Commission generally finances projects following formal calls for project proposals. Payments for approved projects are made directly by the Commission to beneficiaries, based on grant agreements or Commission financing decisions. The beneficiaries are usually Member State authorities but may also be public or private companies. Nearly all payments are made in instalments: an advance or pre-financing payment upon signature of the grant agreement or financing decision, followed by interim and final payments to reimburse eligible expenditure reported by beneficiaries.

| 5.20. | The principal elements of control of the expenditure by the Commission include the evaluation of proposals against specified selection and award criteria, the provision of information and guidance to beneficiaries, and the monitoring and verification of the implementation of projects based on financial and technical progress reports submitted by beneficiaries. Where required by financing agreements, expenditure claims have to be certified by an independent external auditor or a relevant national body. |
| --- | --- |

5.20.

The principal elements of control of the expenditure by the Commission include the evaluation of proposals against specified selection and award criteria, the provision of information and guidance to beneficiaries, and the monitoring and verification of the implementation of projects based on financial and technical progress reports submitted by beneficiaries. Where required by financing agreements, expenditure claims have to be certified by an independent external auditor or a relevant national body.

| 5.21. | In addition, the Commission carries out ex-post audits in order to detect and correct errors which may not have been prevented by earlier controls and to provide reasonable assurance on the regularity of the expenditure. |
| --- | --- |

5.21.

In addition, the Commission carries out ex-post audits in order to detect and correct errors which may not have been prevented by earlier controls and to provide reasonable assurance on the regularity of the expenditure.

Risks to regularity

Regional policy

| 5.22. | For ERDF and CF expenditure the main risks relate to the funding of projects which do not comply with EU and national public procurement rules or which do not fulfil the eligibility conditions specified in the EU regulations or the OPs. In addition, the risk also exists that beneficiaries declare specific costs that are ineligible. |
| --- | --- |

5.22.

For ERDF and CF expenditure the main risks relate to the funding of projects which do not comply with EU and national public procurement rules or which do not fulfil the eligibility conditions specified in the EU regulations or the OPs. In addition, the risk also exists that beneficiaries declare specific costs that are ineligible.

| 5.22. | The Commission shares this assessment, as detailed in its Staff Working Document ‘Analysis of errors in the Cohesion Policy for the years 2006-2009’ (SEC(2011) 1179 of 5 October 2011). In this document, the Commission indicates specific actions to mitigate these risks (in particular additional guidance and training to managing authorities on the identified risks, timely implementation of financial corrections, interruptions and suspensions procedures, more targeted audit activity on the most risky areas). |
| --- | --- |

5.22.

| 5.23. | In implementing the OPs, Member State authorities face competing priorities. On the one hand, spending has to be subject to appropriate controls of regularity, whilst, on the other hand, there is a need to ensure the timely absorption of the EU funds made available. In practice, the desire to implement the programme on a timely basis may militate against the consistent application of robust controls. |
| --- | --- |

5.23.

In implementing the OPs, Member State authorities face competing priorities. On the one hand, spending has to be subject to appropriate controls of regularity, whilst, on the other hand, there is a need to ensure the timely absorption of the EU funds made available. In practice, the desire to implement the programme on a timely basis may militate against the consistent application of robust controls.

| 5.23. | The Commission agrees that a sound management and control system is a system that allows certification of legal and regular expenditure while ensuring timely absorption of funds. |
| --- | --- |

5.23.

| 5.24. | If cases of non-compliance are neither detected nor corrected by the different layers of control in a Member State or by the Commission, this results in ineligible expenditure being reimbursed from the EU budget. |
| --- | --- |

5.24.

If cases of non-compliance are neither detected nor corrected by the different layers of control in a Member State or by the Commission, this results in ineligible expenditure being reimbursed from the EU budget.

| 5.24. | Since the management and control system has a multiannual character, an overpayment detected in a payment claim reimbursed by the Commission may not have been yet subject to the entire control chain at national and EU level at the time of certification. |
| --- | --- |

5.24.

Energy and transport

| 5.25. | For energy and transport expenditure the main risk is that ineligible costs declared by beneficiaries are not detected by the Commission before reimbursement. As under ERDF and CF, there are also risks related to non-compliance with public procurement rules. For TEN-T the potential impact of these risks on the EU budget is mitigated by the fact that eligible expenditure often exceeds the ceiling defined by the financing agreements. |
| --- | --- |

5.25.

For energy and transport expenditure the main risk is that ineligible costs declared by beneficiaries are not detected by the Commission before reimbursement. As under ERDF and CF, there are also risks related to non-compliance with public procurement rules. For TEN-T the potential impact of these risks on the EU budget is mitigated by the fact that eligible expenditure often exceeds the ceiling defined by the financing agreements.

| 5.26. | A concentration of a significant proportion of payments in a limited period may adversely affect the effectiveness of supervisory and control systems and increase the risk of error (see paragraph 1.35). In 2011, 32 % of the EEPR payments by value occurred in the month of December. Moreover, the programme aims at rapidly disbursing funds which may also be detrimental to the application of adequate controls. |
| --- | --- |

5.26.

A concentration of a significant proportion of payments in a limited period may adversely affect the effectiveness of supervisory and control systems and increase the risk of error (see paragraph 1.35). In 2011, 32 % of the EEPR payments by value occurred in the month of December. Moreover, the programme aims at rapidly disbursing funds which may also be detrimental to the application of adequate controls.

Audit scope and approach

| 5.27. | Annex 1.1, part 2
  , of Chapter 1 describes the Court's overall audit approach and methodology. For the audit of regional policy, energy and transport, the following specific issues should be noted:






  (a) | the audit involved the examination of a sample of 180 interim and final payments (14) in Member States and at the Commission; |
| --- | --- | --- |

5.27.

Annex 1.1, part 2
  , of Chapter 1 describes the Court's overall audit approach and methodology. For the audit of regional policy, energy and transport, the following specific issues should be noted:

(a)

the audit involved the examination of a sample of 180 interim and final payments (14) in Member States and at the Commission;

| (b) | the assessment of systems covered:






  — | audit authorities for ERDF, ESF and CF in the 2007-2013 programming period (15), |
| --- | --- | --- |

(b)

the assessment of systems covered:

—

audit authorities for ERDF, ESF and CF in the 2007-2013 programming period (15),

| — | the procedures implemented at Commission and Member State level with regard to the programme closure for the 2000-2006 programming period, |
| --- | --- |

—

the procedures implemented at Commission and Member State level with regard to the programme closure for the 2000-2006 programming period,

| — | a review of the Commission’s management representations contained in the Annual Activity Reports of DG Regional Policy, DG Mobility and Transport and DG Energy. |
| --- | --- |

—

a review of the Commission’s management representations contained in the Annual Activity Reports of DG Regional Policy, DG Mobility and Transport and DG Energy.

REGULARITY OF TRANSACTIONS

| 5.28. | Annex 5.1
  contains a summary of the results of transaction testing. The Court’s testing of its sample of transactions found 59 % of the 180 payments audited to be affected by error. The most likely error estimated by the Court is 6,0 % (16). |
| --- | --- |

5.28.

Annex 5.1
  contains a summary of the results of transaction testing. The Court’s testing of its sample of transactions found 59 % of the 180 payments audited to be affected by error. The most likely error estimated by the Court is 6,0 % (16).

| 5.28. | The Commission notes that for the third consecutive year, the level of error (MLE 6,0 %) remains well below those reported by the Court in the period 2006-2008. This positive development derives from the reinforced control provisions of the 2007-2013 programming period and its strict policy of interruptions/suspensions when deficiencies are identified, in line with its 2008 Action Plan.

  As shown in Table 1.3 of Chapter 1, the combined most likely error for regional policy, transport, energy and employment and social affairs also decreased considerably compared to 2010, from 7,7 % to 5,1 %.


  The Commission will continue to focus its actions on the most risky programmes and/or Member States. |
| --- | --- |

5.28.

As shown in Table 1.3 of Chapter 1, the combined most likely error for regional policy, transport, energy and employment and social affairs also decreased considerably compared to 2010, from 7,7 % to 5,1 %.

The Commission will continue to focus its actions on the most risky programmes and/or Member States.

| 5.29. | For 62 % of the regional policy transactions affected by error, the Court considers that sufficient information was available for the Member State authorities to have detected and corrected at least some of the errors prior to certifying the expenditure to the Commission. |
| --- | --- |

5.29.

For 62 % of the regional policy transactions affected by error, the Court considers that sufficient information was available for the Member State authorities to have detected and corrected at least some of the errors prior to certifying the expenditure to the Commission.

| 5.29. | The Commission is strictly following up these cases to ensure that the concerned systems better prevent errors before certification in the future.

  Managing authorities are required to perform documentary checks on all claims submitted by beneficiaries, before certification of expenditure. However, on-the-spot verifications on operations may also intervene at a later stage of project implementation, after certification and up to closure, which explains why part of the errors in the Court’s sample could not be detected (see also Commission replies to paragraphs 5.22 and 5.24). The impact of the control system in reducing error rates is usually only seen in subsequent years, after all layers of controls have been implemented. |
| --- | --- |

5.29.

Managing authorities are required to perform documentary checks on all claims submitted by beneficiaries, before certification of expenditure. However, on-the-spot verifications on operations may also intervene at a later stage of project implementation, after certification and up to closure, which explains why part of the errors in the Court’s sample could not be detected (see also Commission replies to paragraphs 5.22 and 5.24). The impact of the control system in reducing error rates is usually only seen in subsequent years, after all layers of controls have been implemented.

| 5.30. | In regional policy, weaknesses in verifications by national authorities were detected in particular in the ‘first level checks’ carried out by managing authorities and intermediate bodies. |
| --- | --- |

5.30.

In regional policy, weaknesses in verifications by national authorities were detected in particular in the ‘first level checks’ carried out by managing authorities and intermediate bodies.

Failures to respect public procurement rules identified in one quarter of transactions

| 5.31. | Previous years' audits have shown that public procurement procedures are particularly prone to error (17). In 2011, the Court audited 298 public procurement procedures for works and services underlying the expenditure for the 180 transactions certified to the Commission (18). The combined estimated contract value for the public procurements audited amounts to 6,7 billion euro (19). |
| --- | --- |

5.31.

Previous years' audits have shown that public procurement procedures are particularly prone to error (17). In 2011, the Court audited 298 public procurement procedures for works and services underlying the expenditure for the 180 transactions certified to the Commission (18). The combined estimated contract value for the public procurements audited amounts to 6,7 billion euro (19).

| 5.31. | Public procurement errors relate to non-compliance with internal market rules, and are not specific to cohesion policy, as shown in other chapters of this report. |
| --- | --- |

5.31.

| 5.32. | The Court identified instances of non-compliance with EU and national public procurement rules in 25 % of the 180 transactions audited. Serious failures to respect these rules were identified in 9 % of the transactions audited (see example 5.1). These errors account for 44 % of all quantifiable errors and make up approximately 58 % of the estimated error rate for this policy group. |
| --- | --- |

5.32.

The Court identified instances of non-compliance with EU and national public procurement rules in 25 % of the 180 transactions audited. Serious failures to respect these rules were identified in 9 % of the transactions audited (see example 5.1). These errors account for 44 % of all quantifiable errors and make up approximately 58 % of the estimated error rate for this policy group.

| 5.32. | While the Commission and the Court audit compliance with public procurement rules in the same way, the Commission applies proportionate flat-rate corrections in cohesion policy thereby addressing the risk of damage to the EU budget and taking into account the nature and gravity of the irregularities.

  These flat rates are applied by the Commission and by most national authorities when imposing financial corrections for infringements of public procurement rules, including when following up all public procurement errors reported by the Court. |
| --- | --- |

5.32.

These flat rates are applied by the Commission and by most national authorities when imposing financial corrections for infringements of public procurement rules, including when following up all public procurement errors reported by the Court.

Example 5.1 —   Serious failures to respect public procurement rules

| (a) | Use of direct award without justification: In the case of an EEPR project concerning the construction of a gas pipeline, the contracts related to the works in the second and third stage of the project were awarded without tendering to the consortium that had been awarded a contract for the first stage of the pipeline five years earlier. This is not in line with the applicable EU and national public procurement laws. |
| --- | --- |

(a)

Use of direct award without justification: In the case of an EEPR project concerning the construction of a gas pipeline, the contracts related to the works in the second and third stage of the project were awarded without tendering to the consortium that had been awarded a contract for the first stage of the pipeline five years earlier. This is not in line with the applicable EU and national public procurement laws.

| (b) | Direct award of additional works in the absence of unforeseeable circumstances: In the case of a CF project related to road construction, additional works relating to amendments made subsequent to the approval of the original plan were awarded directly to the same contractor. These additional works were not due to unforeseeable circumstances, therefore a breach of public procurement rules occurred. |
| --- | --- |

(b)

Direct award of additional works in the absence of unforeseeable circumstances: In the case of a CF project related to road construction, additional works relating to amendments made subsequent to the approval of the original plan were awarded directly to the same contractor. These additional works were not due to unforeseeable circumstances, therefore a breach of public procurement rules occurred.

| (c) | Contract awarded to single bidder without obtaining intended price reduction during negotiations: In the case of a CF project related to the construction of a sludge treatment facility, only one offer was received. The beneficiary judged the offer to be unacceptable due to its high price, which was more than double the estimated budget. The beneficiary then initiated negotiations with the sole bidder. Following these negotiations, the contract was awarded with only a 1 % decrease in the offered price. Given the lack of success of the negotiations to secure a better price, the beneficiary should have concluded that the tender procedure had been unsuccessful. |
| --- | --- |

(c)

Contract awarded to single bidder without obtaining intended price reduction during negotiations: In the case of a CF project related to the construction of a sludge treatment facility, only one offer was received. The beneficiary judged the offer to be unacceptable due to its high price, which was more than double the estimated budget. The beneficiary then initiated negotiations with the sole bidder. Following these negotiations, the contract was awarded with only a 1 % decrease in the offered price. Given the lack of success of the negotiations to secure a better price, the beneficiary should have concluded that the tender procedure had been unsuccessful.

| (d) | Artificial split of tenders: In the case of an ERDF project related to the provision of advisory services to a national ministry, several small-scale contracts were directly awarded for similar or identical services. In accordance with EU and national procurement laws, these services should have been procured together as a single service and, because the aggregate value would then have exceeded a certain threshold, a contract should only have been awarded following a public tendering procedure, allowing more bidders the possibility to submit an offer. |
| --- | --- |

(d)

Artificial split of tenders: In the case of an ERDF project related to the provision of advisory services to a national ministry, several small-scale contracts were directly awarded for similar or identical services. In accordance with EU and national procurement laws, these services should have been procured together as a single service and, because the aggregate value would then have exceeded a certain threshold, a contract should only have been awarded following a public tendering procedure, allowing more bidders the possibility to submit an offer.

| (e) | Significant changes in scope of the contracted works: In the case of a CF project related to the construction of a new metro line, the scope and budget of a related service contract was changed significantly through the involvement of experts who initially had not been foreseen. The additional tasks to be carried out were not due to unforeseeable circumstances, but rather to the way the contracting authority had planned the project. |
| --- | --- |

(e)

Significant changes in scope of the contracted works: In the case of a CF project related to the construction of a new metro line, the scope and budget of a related service contract was changed significantly through the involvement of experts who initially had not been foreseen. The additional tasks to be carried out were not due to unforeseeable circumstances, but rather to the way the contracting authority had planned the project.

| 5.33. | Moreover, the Court found other non-quantifiable errors related to tendering and contracting procedures in a further 16 % of the 180 transactions audited. These errors include cases of non-compliance with the information and publicity requirements (such as late publication of award notices), shortcomings in the tender specification and procedural weaknesses in the evaluation of offers. These errors do not contribute to the error rate estimated by the Court (see paragraph 5.28) (20). |
| --- | --- |

5.33.

Moreover, the Court found other non-quantifiable errors related to tendering and contracting procedures in a further 16 % of the 180 transactions audited. These errors include cases of non-compliance with the information and publicity requirements (such as late publication of award notices), shortcomings in the tender specification and procedural weaknesses in the evaluation of offers. These errors do not contribute to the error rate estimated by the Court (see paragraph 5.28) (20).

| 5.33. | The Commission will follow up all errors reported by the Court and will apply financial corrections where appropriate and legally possible. |
| --- | --- |

5.33.

Ineligible costs account for more than half of all quantifiable errors detected by the Court

| 5.34. | The Court found that ineligible costs had been declared in 12 % of the transactions audited. These account for 56 % of all quantifiable errors and make up approximately 42 % of the estimated error rate for this policy group (see example 5.2). |
| --- | --- |

5.34.

The Court found that ineligible costs had been declared in 12 % of the transactions audited. These account for 56 % of all quantifiable errors and make up approximately 42 % of the estimated error rate for this policy group (see example 5.2).

| 5.34. | The Commission seeks to ensure that beneficiaries and programmes managing authorities are well aware of eligibility rules. This can be through training and guidance and, for regional policy, managing authorities should carry over this knowledge to all bodies in charge of managing the funds. For regional policy, when the Commission identifies complex rules at programme level, it also makes recommendations to the Member State to simplify the rules.

  The Commission will continue to focus its actions on programme authorities where risks have been identified (see also replies to paragraphs 5.24 and 5.28). |
| --- | --- |

5.34.

The Commission will continue to focus its actions on programme authorities where risks have been identified (see also replies to paragraphs 5.24 and 5.28).

Example 5.2 —   Ineligible costs

| (a) | Non-compliance with project approval decision: A Financial Engineering Instrument funded by the ERDF to grant financial support to SMEs provided also funding to large enterprises. This was not permitted under the national approval decision for this project. |
| --- | --- |

(a)

Non-compliance with project approval decision: A Financial Engineering Instrument funded by the ERDF to grant financial support to SMEs provided also funding to large enterprises. This was not permitted under the national approval decision for this project.

| (b) | Revenue from the sale of old machinery that was replaced using ERDF funding was not taken into account: In the case of an ERDF project related to the purchase of metal processing machines, the revenue resulting from the disposal of the old machines that were replaced should have been taken into account and this would have reduced the expenditure declared for the purchase of the new machines. |
| --- | --- |

(b)

Revenue from the sale of old machinery that was replaced using ERDF funding was not taken into account: In the case of an ERDF project related to the purchase of metal processing machines, the revenue resulting from the disposal of the old machines that were replaced should have been taken into account and this would have reduced the expenditure declared for the purchase of the new machines.

| (c) | Non-compliance with specific provisions in national eligibility rules: In the case of a CF project related to the construction of a motorway, costs related to financial and insurance services were reimbursed. Such costs are, however, not eligible according to the national eligibility rules. |
| --- | --- |

(c)

Non-compliance with specific provisions in national eligibility rules: In the case of a CF project related to the construction of a motorway, costs related to financial and insurance services were reimbursed. Such costs are, however, not eligible according to the national eligibility rules.

| (d) | Declaration of multiple ineligible costs for a project: In the case of a TEN-T project related to preparatory studies for the building of a tunnel, an invoice had been declared twice. In addition, key documentation relating to public procurement procedures (such as the report by the evaluation committee and the applicant’s winning offer) was missing. Nevertheless, since the overall costs declared were significantly higher than the maximum EU contribution, this over-declaration had no impact on the EU budget (see paragraph 5.25). |
| --- | --- |

(d)

Declaration of multiple ineligible costs for a project: In the case of a TEN-T project related to preparatory studies for the building of a tunnel, an invoice had been declared twice. In addition, key documentation relating to public procurement procedures (such as the report by the evaluation committee and the applicant’s winning offer) was missing. Nevertheless, since the overall costs declared were significantly higher than the maximum EU contribution, this over-declaration had no impact on the EU budget (see paragraph 5.25).

EFFECTIVENESS OF SYSTEMS

Audit authorities

| 5.35. | The regulations defining the rules for the ERDF, ESF and CF for the 2007-2013 programming period introduced important changes with regard to the role and responsibilities of audit authorities (AAs) in the Member States (21). |
| --- | --- |

5.35.

The regulations defining the rules for the ERDF, ESF and CF for the 2007-2013 programming period introduced important changes with regard to the role and responsibilities of audit authorities (AAs) in the Member States (21).

| 5.35. | The audit authorities indeed play a central role in the assurance building process, as from the beginning of the programming period and set-up of systems. Thereafter, they report each year an audit opinion on the functioning of management and control systems to the Commission, based on audits on management and control systems and on statistical samples of operations carried out in accordance with an audit strategy. For this reason the Commission is closely cooperating and coordinating with them, and has started reviewing their methodologies and audit results as early as 2009, as described below. This contributed to capacity building by providing advice, guidance and recommendations to audit authorities through the Commission's reperformance work. The regulation provides the Commission the possibility to rely on the work of an audit authority for its assurance under certain conditions (Article 73). |
| --- | --- |

5.35.

| 5.36. | Within the 27 Member States, 112 AAs have been set up for the 434 OPs of the 2007-2013 programming period. More than half of these AAs are responsible for auditing OPs for all three funds within their region (i.e. ERDF, CF and ESF), whilst the remaining AAs audit specific OPs (22) under one fund. |
| --- | --- |

5.36.

Within the 27 Member States, 112 AAs have been set up for the 434 OPs of the 2007-2013 programming period. More than half of these AAs are responsible for auditing OPs for all three funds within their region (i.e. ERDF, CF and ESF), whilst the remaining AAs audit specific OPs (22) under one fund.

| 5.37. | ACRs and annual opinions provide information on the regularity of EU spending under the ERDF, ESF and CF for the 2007-2013 programming period (23). An effective verification of the accuracy and reliability of the information is necessary so that the results reported by the AAs in the ACRs can be used by the Commission as one of the main sources of assurance. In 2011, a total of 204 ACRs and annual opinions (24) for ERDF and CF and 117 ACRs and annual opinions for ESF were submitted to the Commission. |
| --- | --- |

5.37.

ACRs and annual opinions provide information on the regularity of EU spending under the ERDF, ESF and CF for the 2007-2013 programming period (23). An effective verification of the accuracy and reliability of the information is necessary so that the results reported by the AAs in the ACRs can be used by the Commission as one of the main sources of assurance. In 2011, a total of 204 ACRs and annual opinions (24) for ERDF and CF and 117 ACRs and annual opinions for ESF were submitted to the Commission.

| 5.37. | In their 2011 Annual Activity Report, DG Regional Policy and DG Employment, provided a detailed assessment of the accuracy and reliability of the audit information and results reported by audit authorities in their 2011 annual control reports, (see pages 63 to 66 of DG Regional Policy's 2011 AAR and pages 42 to 45 of DG Employment's 2011 AAR). |
| --- | --- |

5.37.

| 5.38. | For 2011, the Court carried out its own examination of seven AAs and assessed the work done by the Commission to supervise AAs (25). |
| --- | --- |

5.38.

For 2011, the Court carried out its own examination of seven AAs and assessed the work done by the Commission to supervise AAs (25).

| 5.38. | In the area of regional policy, the Commission carried out audits fully or partially to review the work of 34 audit authorities by end of 2011 (29 AA completed, 5 on-going) following a 2009 risk analysis that is updated every year. |
| --- | --- |

5.38.

The Court’s examination of seven AAs

| 5.39. | Annex 5.2
  contains the results of the individual key requirements tested and the overall assessment of the AAs examined. In drawing an overall conclusion, the Court paid particular attention to the ACRs and annual opinions and the parts of the AAs' work which had a direct and important effect on the conclusions reported in them (26). |
| --- | --- |

5.39.

Annex 5.2
  contains the results of the individual key requirements tested and the overall assessment of the AAs examined. In drawing an overall conclusion, the Court paid particular attention to the ACRs and annual opinions and the parts of the AAs' work which had a direct and important effect on the conclusions reported in them (26).

| 5.39. | The Commission takes the Court's findings into account for its assessment of the national audit authorities, with a view to encourage improvements, where still necessary and in order to ensure conditions for single auditing in the coming years. |
| --- | --- |

5.39.

| 5.40. | For each of the seven AAs sampled the Court reviewed:






  (a) | their organisational arrangements and audit methodology; |
| --- | --- | --- |

5.40.

For each of the seven AAs sampled the Court reviewed:

(a)

their organisational arrangements and audit methodology;

| (b) | their working documents for up to four system audits; |
| --- | --- |

(b)

their working documents for up to four system audits;

| (c) | their working documents for a sample of up to 25 audits of operations, including a re-performance of at least five of those 25 audits; and |
| --- | --- |

(c)

their working documents for a sample of up to 25 audits of operations, including a re-performance of at least five of those 25 audits; and

| (d) | their 2011 annual control reports and annual opinions, together with the related working papers. |
| --- | --- |

(d)

their 2011 annual control reports and annual opinions, together with the related working papers.

| 5.40. | The Commission notes that its audit methodology to review the work of the audit authorities is consistent with that of the Court. |
| --- | --- |

5.40.

| 5.41. | Of the seven AAs examined, the Court assessed four to be ‘effective’. For these four AAs, the annual control report and annual opinion is considered to be reliable and all or most of the key requirements were fulfilled. |
| --- | --- |

5.41.

Of the seven AAs examined, the Court assessed four to be ‘effective’. For these four AAs, the annual control report and annual opinion is considered to be reliable and all or most of the key requirements were fulfilled.

| 5.41. | The Commission shares the Court's assessment for these four audit authorities and reached similar conclusions through its own audits. |
| --- | --- |

5.41.

| 5.42. | For the three other AAs: |
| --- | --- |

5.42.

For the three other AAs:

| 5.42. | The Commission agrees with the Court’s assessment and is taking corrective and preventive actions. |
| --- | --- |

5.42.

| (a) | two AAs were assessed as ‘partially effective’ because problems were observed with some key requirements and the error rate reported in the annual control report was understated; and |
| --- | --- |

(a)

two AAs were assessed as ‘partially effective’ because problems were observed with some key requirements and the error rate reported in the annual control report was understated; and

| (a) | For the two AAs assessed as partially effective, the Commission accepted in one case the reported audit opinion for its own assurance as it was qualified. In the other case the Commission identified and corrected the incorrect extrapolation of errors for its assurance process, as indicated in the Annual Activity Reports. |
| --- | --- |

(a)

| (b) | one AA was assessed as ‘not effective’ because important problems were observed for nearly all the key requirements and, as a result, the error rate reported in the annual control report is considered to be unreliable. The Commission has observed the same problems for this AA as well as other aspects of the management and control systems for the operational programmes covered by the AA (see paragraph 5.49(b)). |
| --- | --- |

(b)

one AA was assessed as ‘not effective’ because important problems were observed for nearly all the key requirements and, as a result, the error rate reported in the annual control report is considered to be unreliable. The Commission has observed the same problems for this AA as well as other aspects of the management and control systems for the operational programmes covered by the AA (see paragraph 5.49(b)).

| 5.43. | The Court identified the following areas for improvement: |
| --- | --- |

5.43.

The Court identified the following areas for improvement:

5.43.

| (a) | for four AAs, the audit checklists used did not sufficiently cover the main risks to the regularity of expenditure. This concerns in particular the scope of verifications and the extent of checks with regard to public procurement, state aid rules, revenue generating projects and project selection procedures. For financial engineering instruments, guidance issued by the Commission had not yet been incorporated into the AAs’ audit checklists; |
| --- | --- |

(a)

for four AAs, the audit checklists used did not sufficiently cover the main risks to the regularity of expenditure. This concerns in particular the scope of verifications and the extent of checks with regard to public procurement, state aid rules, revenue generating projects and project selection procedures. For financial engineering instruments, guidance issued by the Commission had not yet been incorporated into the AAs’ audit checklists;

| (a) | The Commission also identified as a result of its extensive review of audit authorities during 2009-2011 the need to reinforce, in some cases and on particular issues, the existing checklists used by national audit authorities for the audit of operations. As a follow-up, the Commission shared its own checklist for audits on operations with the Member States audit authorities in October 2011.

  These check lists cover the issues raised by the Court: public procurement, state aid rules, revenue generating projects and project selection procedures. As far as public procurement is concerned, the Commission has shared with Member States an analysis of the types of errors detected in cohesion by EU audits in the previous years and has launched an exercise to collect best practices and possible answers by Member States to remedy such errors and reduce their occurrence (see also paragraph 6.29(a)). |
| --- | --- |

(a)

These check lists cover the issues raised by the Court: public procurement, state aid rules, revenue generating projects and project selection procedures. As far as public procurement is concerned, the Commission has shared with Member States an analysis of the types of errors detected in cohesion by EU audits in the previous years and has launched an exercise to collect best practices and possible answers by Member States to remedy such errors and reduce their occurrence (see also paragraph 6.29(a)).

| (b) | for two AAs, the quality control of audits of systems and/or operations was not in line with their own audit manual and for another two AAs it was not documented; and |
| --- | --- |

(b)

for two AAs, the quality control of audits of systems and/or operations was not in line with their own audit manual and for another two AAs it was not documented; and

| (c) | for two AAs, the methodology used to sample projects to be audited was not appropriate in view of the guidance specified by the Coordination Committee of the Funds (27) (COCOF) or the sampling methodology had been incorrectly applied by the AA, which meant that the results of their audits could not be extrapolated as required. |
| --- | --- |

(c)

for two AAs, the methodology used to sample projects to be audited was not appropriate in view of the guidance specified by the Coordination Committee of the Funds (27) (COCOF) or the sampling methodology had been incorrectly applied by the AA, which meant that the results of their audits could not be extrapolated as required.

| (c) | The Commission has found similar weaknesses during its audits and is intensifying its efforts to provide guidance on sampling. |
| --- | --- |

(c)

Assessment of the Commission’s supervision of AAs

| 5.44. | In 2011, the Commission carried out enquiries for a sample of AAs (28) and assessed, through a desk review, the implementation of their audit strategy and the reliability of the error rates reported in ACRs. |
| --- | --- |

5.44.

In 2011, the Commission carried out enquiries for a sample of AAs (28) and assessed, through a desk review, the implementation of their audit strategy and the reliability of the error rates reported in ACRs.

| 5.44. | During the period 2009-2011 the Commission has carried out 127 audit missions covering 34 ERDF/CF AAs and 78 audit missions covering 67 ESF AAs. At the end of 2011 the audit work both desk review and on the spot work covering review of systems audits, audit methodology, reperformance of systems audits and of audits on operations on the spot had been completed for 29 ERDF/CF audit authorities and 67 ESF audit authorities.

  The Commission has also assessed, through desk review completed by on-the-spot fact-finding missions where necessary, the implementation of the audit strategy and the reliability of the error rates reported in ACRs for all audit authorities. |
| --- | --- |

5.44.

The Commission has also assessed, through desk review completed by on-the-spot fact-finding missions where necessary, the implementation of the audit strategy and the reliability of the error rates reported in ACRs for all audit authorities.

Assessment of the Commission’s enquiries for a sample of AAs

| 5.45. | The Court reviewed the Commission’s working papers and supporting documentation for DG Regional Policy in relation to 14 AAs covering 39 OPs and for DG Employment, Social Affairs and Inclusion in relation to seven AAs covering seven OPs (29). |
| --- | --- |

5.45.

The Court reviewed the Commission’s working papers and supporting documentation for DG Regional Policy in relation to 14 AAs covering 39 OPs and for DG Employment, Social Affairs and Inclusion in relation to seven AAs covering seven OPs (29).

| 5.46. | The Commission found similar weaknesses to those observed by the Court in its own audits of AAs (see paragraphs 5.42 and 5.43). |
| --- | --- |

5.46.

The Commission found similar weaknesses to those observed by the Court in its own audits of AAs (see paragraphs 5.42 and 5.43).

| 5.46. | The Commission shares the Court’s assessment on the compliance and effectiveness of the work of audit authorities. |
| --- | --- |

5.46.

| 5.47. | The Court found that in all cases where the Commission identified specific weaknesses the Member States were notified about the corrective action to be taken. |
| --- | --- |

5.47.

The Court found that in all cases where the Commission identified specific weaknesses the Member States were notified about the corrective action to be taken.

| 5.47. | In the course of its extensive review of audit authorities, the Commission indeed notified targeted recommendations to audit authorities to remedy the identified weaknesses, when needed.

  This contributed to an extensive capacity building exercise that allowed to improve the work and to raise the quality of audit results overall for the audited audit authorities, thus allowing in some cases the Commission to enter into Article 73 agreements and to draw further lessons and disseminate good practices for all audit authorities. |
| --- | --- |

5.47.

This contributed to an extensive capacity building exercise that allowed to improve the work and to raise the quality of audit results overall for the audited audit authorities, thus allowing in some cases the Commission to enter into Article 73 agreements and to draw further lessons and disseminate good practices for all audit authorities.

Assessment of the Commission’s desk reviews of ACRs

| 5.48. | For all 112 AAs, the Commission checked that the ACRs and annual opinions complied with the requirements of the regulation in terms of content and format. It did this by analysing relevant information reported by the AAs on the functioning of the management and control systems and by checking the calculation of the reported error rate. This review also took account of other information regarding the supervisory and control systems for OPs which was available to the Commission. |
| --- | --- |

5.48.

For all 112 AAs, the Commission checked that the ACRs and annual opinions complied with the requirements of the regulation in terms of content and format. It did this by analysing relevant information reported by the AAs on the functioning of the management and control systems and by checking the calculation of the reported error rate. This review also took account of other information regarding the supervisory and control systems for OPs which was available to the Commission.

| 5.48. | The analysis of annual control reports (ACR) and audit opinions is an extensive exercise at the beginning of each year. It takes indeed into account all national audit results received by audit authorities during the year, as well as other Commission and ECA audit results. In addition, in 2012 the Commission services carried out fact finding missions on the spot in 11 Member States, to collect further evidence/obtain clarifications on the submitted ACR and in particular on the methodology for calculating the error rates. The results of this analysis is a main source of the assurance building process, as explained in the AAR. |
| --- | --- |

5.48.

| 5.49. | For 2011, the Commission considered that the error rates reported in the ACRs by the AAs are: |
| --- | --- |

5.49.

For 2011, the Commission considered that the error rates reported in the ACRs by the AAs are:

5.49.

| (a) | reliable for 363 of the 434 OPs (84 %). These 363 OPs account for 67 % of the estimated expenditure under the 2007-2013 programming period; |
| --- | --- |

(a)

reliable for 363 of the 434 OPs (84 %). These 363 OPs account for 67 % of the estimated expenditure under the 2007-2013 programming period;

| (b) | not reliable for 71 OPs (16 %). These 71 OPs account for 33 % of the estimated expenditure under the 2007-2013 programming period. For these OPs, on the basis of its own assessment of the functioning of the management and control systems, the Commission recalculated the error rate or applied a fixed error rate. These adjusted error rates were then used for the estimation of the amount of ‘payment at risk’ disclosed by DG Regional Policy and DG Employment, Social Affairs and Inclusion in their AARs (30) (see paragraphs 5.66 and 6.24). |
| --- | --- |

(b)

not reliable for 71 OPs (16 %). These 71 OPs account for 33 % of the estimated expenditure under the 2007-2013 programming period. For these OPs, on the basis of its own assessment of the functioning of the management and control systems, the Commission recalculated the error rate or applied a fixed error rate. These adjusted error rates were then used for the estimation of the amount of ‘payment at risk’ disclosed by DG Regional Policy and DG Employment, Social Affairs and Inclusion in their AARs (30) (see paragraphs 5.66 and 6.24).

| (b) | When the Commission could recalculate the error rate, it means that it obtained additional, reliable information either in the text of the ACR itself or after communicating with the audit authority. The Commission communicated these recalculated rates to the concerned audit authorities that will thus be able to provide more reliable information in the next exercise.

  For this reason the Commission presents separately in the respective Annual Activity Reports the error rates that it could recalculate and the ones that it considered unreliable. Only for these unreliable error rates the risk was estimated based on flat rates, This represented 9 % and 7 % of payments made in 2011 in total respectively for DG Regional Policy and DG Employment. |
| --- | --- |

(b)

For this reason the Commission presents separately in the respective Annual Activity Reports the error rates that it could recalculate and the ones that it considered unreliable. Only for these unreliable error rates the risk was estimated based on flat rates, This represented 9 % and 7 % of payments made in 2011 in total respectively for DG Regional Policy and DG Employment.

| 5.50. | Overall, the Court considers that the approach applied by the Commission is in principle appropriate. The possibility for the Commission to validate and, where necessary, adjust the error rates disclosed by national AAs in their ACRs is however limited since the AAs are not required by the regulations to provide information about their audits of operations to the Commission. For the 2011 ACRs, DG Regional Policy therefore organised fact-finding missions to 12 AAs in 11 Member States to clarify how the error rate reported in the ACR was calculated. Similarly, DG Employment, Social Affairs and Inclusion carried out additional examinations for 12 OPs following its review of ACRs. |
| --- | --- |

5.50.

Overall, the Court considers that the approach applied by the Commission is in principle appropriate. The possibility for the Commission to validate and, where necessary, adjust the error rates disclosed by national AAs in their ACRs is however limited since the AAs are not required by the regulations to provide information about their audits of operations to the Commission. For the 2011 ACRs, DG Regional Policy therefore organised fact-finding missions to 12 AAs in 11 Member States to clarify how the error rate reported in the ACR was calculated. Similarly, DG Employment, Social Affairs and Inclusion carried out additional examinations for 12 OPs following its review of ACRs.

| 5.50. | The Commission welcomes the Court's assessment for the second consecutive year, since the analysis of ACR and audit opinions constitute a key part of the assurance building process in the Annual Activity Reports. The fact-finding missions organised by DG Regional Policy and DG Employment, on the basis of doubts or risks identified, allowed to improve reliance on error rates reported, or in some cases to provide a sound basis for a recalculation of the error rates jointly agreed with the Audit Authority. |
| --- | --- |

5.50.

| 5.51. | The Court is of the opinion that the Commission drew appropriate conclusions from its reviews of ACRs and that the Commission, based on its assessment, had adjusted the reported error rates where necessary. |
| --- | --- |

5.51.

The Court is of the opinion that the Commission drew appropriate conclusions from its reviews of ACRs and that the Commission, based on its assessment, had adjusted the reported error rates where necessary.

Assessment of programme closure for the 2000-2006 programming period

| 5.52. | Payments relating to each programming period usually continue for some years beyond the end of the period. For the programming period 2000-2006, final beneficiaries were permitted to incur expenditure up to the end of June 2009 (with some exceptions). |
| --- | --- |

5.52.

Payments relating to each programming period usually continue for some years beyond the end of the period. For the programming period 2000-2006, final beneficiaries were permitted to incur expenditure up to the end of June 2009 (with some exceptions).

| 5.53. | The closure of an OP is the financial settlement of any outstanding EU budgetary commitments towards the programme, through payment of the final balance due to the Member State or by decommitment of any unused balance or by recovery of any amount unduly paid. |
| --- | --- |

5.53.

The closure of an OP is the financial settlement of any outstanding EU budgetary commitments towards the programme, through payment of the final balance due to the Member State or by decommitment of any unused balance or by recovery of any amount unduly paid.

| 5.54. | The Court noted in a recent special report that, for those programmes where the Commission cannot fully rely on the effective functioning of the management and control systems, the final assessment of the remaining risk of error in programmes has to be made by the Commission during the ongoing closure process (31). |
| --- | --- |

5.54.

The Court noted in a recent special report that, for those programmes where the Commission cannot fully rely on the effective functioning of the management and control systems, the final assessment of the remaining risk of error in programmes has to be made by the Commission during the ongoing closure process (31).

| 5.54. | The Commission's assurance for 2000-2006 programmes was built up over the years namely through substantial audit work carried out by the Commission services.

  As a result, the Commission services acquired an extensive knowledge of the audit results and risks related to each Member state, which provides a substantive basis for analysing the winding-up declarations. |
| --- | --- |

5.54.

As a result, the Commission services acquired an extensive knowledge of the audit results and risks related to each Member state, which provides a substantive basis for analysing the winding-up declarations.

| 5.55. | Member States are required to submit three documents to the Commission for the closure of each programme:






  (a) | a final implementation report provided by the managing authority on the extent to which the programme met its objectives and on the financial resources used; |
| --- | --- | --- |

5.55.

Member States are required to submit three documents to the Commission for the closure of each programme:

(a)

a final implementation report provided by the managing authority on the extent to which the programme met its objectives and on the financial resources used;

| (b) | a declaration by the winding-up body, summarising the conclusions of checks carried out during the programming period, and assessing the validity of the application for final payment and the regularity of the transactions covered by the certified statement of expenditure; |
| --- | --- |

(b)

a declaration by the winding-up body, summarising the conclusions of checks carried out during the programming period, and assessing the validity of the application for final payment and the regularity of the transactions covered by the certified statement of expenditure;

| (c) | a certified statement of expenditure, drawn up by the paying authority, together with an application for final payment if the final balance is in favour of the Member State. |
| --- | --- |

(c)

a certified statement of expenditure, drawn up by the paying authority, together with an application for final payment if the final balance is in favour of the Member State.

| 5.56. | After approval of the final implementation report and review of the winding-up documents, the Commission decides the final amount to be paid, recovered or decommitted. Where the final error rate validated by the Commission exceeds 2 % of total eligible expenditure, the Commission imposes financial corrections before paying the final balance or requesting a recovery. |
| --- | --- |

5.56.

After approval of the final implementation report and review of the winding-up documents, the Commission decides the final amount to be paid, recovered or decommitted. Where the final error rate validated by the Commission exceeds 2 % of total eligible expenditure, the Commission imposes financial corrections before paying the final balance or requesting a recovery.

| 5.56. | In the 2000-2006 regulatory framework, the Member States had to audit a sample of operations based on risks and ensuring representativity of the main bodies and beneficiaries.

  Therefore, the error rate reported at closure by the winding-up body has to be carefully analysed: all corrective actions taken by the Member States and the Commission during implementation have to be taken into account to conclude on the frequency of errors and residual risks, before evaluating possible additional corrections (see Commission Guidelines on Closure, paragraphs 3.6, 3.7 and 4.2 of Annex 2).


  If based on this analysis the Commission determines a residual risk above 2 %, a financial correction is applied. |
| --- | --- |

5.56.

Therefore, the error rate reported at closure by the winding-up body has to be carefully analysed: all corrective actions taken by the Member States and the Commission during implementation have to be taken into account to conclude on the frequency of errors and residual risks, before evaluating possible additional corrections (see Commission Guidelines on Closure, paragraphs 3.6, 3.7 and 4.2 of Annex 2).

If based on this analysis the Commission determines a residual risk above 2 %, a financial correction is applied.

| 5.57. | If closure is to be effective, winding-up declarations should be reliable and the Commission should address any significant weaknesses in these documents. The Court assessed whether the closure documents submitted by Member States were reliable and whether the Commission dealt appropriately with the documents. |
| --- | --- |

5.57.

If closure is to be effective, winding-up declarations should be reliable and the Commission should address any significant weaknesses in these documents. The Court assessed whether the closure documents submitted by Member States were reliable and whether the Commission dealt appropriately with the documents.

| 5.58. | The Court’s examination covered the initial phase of the closure process and was based on:






  (a) | a review of procedures, manuals, checklists, monitoring and reporting tools within DG Regional Policy and DG Employment, Social Affairs and Inclusion; |
| --- | --- | --- |

5.58.

The Court’s examination covered the initial phase of the closure process and was based on:

(a)

a review of procedures, manuals, checklists, monitoring and reporting tools within DG Regional Policy and DG Employment, Social Affairs and Inclusion;

| (b) | an examination of the Commission’s assessment of closure documents for a sample of 31 OPs (both ERDF and ESF) in eight Member States (32), none of which had been formally closed at the time of the audit; |
| --- | --- |

(b)

an examination of the Commission’s assessment of closure documents for a sample of 31 OPs (both ERDF and ESF) in eight Member States (32), none of which had been formally closed at the time of the audit;

| (c) | visits to nine winding-up bodies in two Member States, covering 14 of the 31 sampled programmes, and including analysis of the data underlying the information reported in their closure documents. |
| --- | --- |

(c)

visits to nine winding-up bodies in two Member States, covering 14 of the 31 sampled programmes, and including analysis of the data underlying the information reported in their closure documents.

| 5.57 and 5.58. | The Court examined the initial assessment the Commission made on closure documents submitted by Member States in the sample of the Court, as the closure process for those programmes was only starting at the time of the Court’s audit. The weaknesses in winding up declarations reported by the Court had been identified and analysed by the Commission before the Court’s audit. These weaknesses were addressed by the Commission during the closure process subsequently to the Court’s audit and additional audit work has been or is currently being performed after the initial assessment of the closure documents, where necessary, to conclude on the residual risk. Financial corrections were applied where appropriate. |
| --- | --- |

5.57 and 5.58.

| 5.59. | The Court found that the Commission, in cooperation with the Member States, had taken steps such as the early issue of guidelines and regular discussion of closure issues, which meant that the closure process was better prepared than in previous programming periods. |
| --- | --- |

5.59.

The Court found that the Commission, in cooperation with the Member States, had taken steps such as the early issue of guidelines and regular discussion of closure issues, which meant that the closure process was better prepared than in previous programming periods.

| 5.59. | The Commission also closely monitored the management and control systems and audit work during implementation of the 2000-2006 programming period up to the closure process.

  With a view to improving the closure process for 2000 to 2006 programmes, the guidelines to Member States on the closure of Structural Funds were published in August 2006, in due time for the beginning of the closure process. The Commission discussed closure issues with the control authorities of the Member States during their regular annual bilateral meetings. The Commission organised closure seminars with the Member States in September 2008 and December 2009, developed a list of ‘frequently asked questions’ and held technical meetings with the bodies responsible for drawing up the closure declarations. |
| --- | --- |

5.59.

With a view to improving the closure process for 2000 to 2006 programmes, the guidelines to Member States on the closure of Structural Funds were published in August 2006, in due time for the beginning of the closure process. The Commission discussed closure issues with the control authorities of the Member States during their regular annual bilateral meetings. The Commission organised closure seminars with the Member States in September 2008 and December 2009, developed a list of ‘frequently asked questions’ and held technical meetings with the bodies responsible for drawing up the closure declarations.

| 5.60. | However, the Court identified weaknesses undermining the reliability of some of the closure documents submitted by Member States to the Commission and highlighted weaknesses in the Commission’s procedures for the initial assessment of the closure documents. The submission of unreliable documents by Member States places additional pressure on the Commission by increasing the work which it has to carry out in order to ensure that programmes are closed without remaining material error. |
| --- | --- |

5.60.

However, the Court identified weaknesses undermining the reliability of some of the closure documents submitted by Member States to the Commission and highlighted weaknesses in the Commission’s procedures for the initial assessment of the closure documents. The submission of unreliable documents by Member States places additional pressure on the Commission by increasing the work which it has to carry out in order to ensure that programmes are closed without remaining material error.

| 5.60. | The Commission considers to have assessed all cases according to international auditing standards before the Court’s audit and addressed appropriately all risks identified. |
| --- | --- |

5.60.

| 5.61. | Some of the closure documents audited by the Court were affected by the following problems: |
| --- | --- |

5.61.

Some of the closure documents audited by the Court were affected by the following problems:

5.61.

| (a) | the second level checks in the Member States, which are fundamental to the winding-up declarations, were affected by a number of specific weaknesses; |
| --- | --- |

(a)

the second level checks in the Member States, which are fundamental to the winding-up declarations, were affected by a number of specific weaknesses;

| (a) | The Commission agrees with the Court’s assessment regarding 5 cases out of 10 cases underlying the Court’s observation.

  The Court’s observation was generally based on the Commission’s analysis of the winding up declarations at the time of the audit. The Commission subsequently took appropriate actions to tackle the issues and mitigate the residual risks in these cases. In the remaining cases, the Commission considers that second level checks were adequately performed and reported in the winding up declarations. |
| --- | --- |

(a)

The Court’s observation was generally based on the Commission’s analysis of the winding up declarations at the time of the audit. The Commission subsequently took appropriate actions to tackle the issues and mitigate the residual risks in these cases. In the remaining cases, the Commission considers that second level checks were adequately performed and reported in the winding up declarations.

| (b) | winding-up declarations contained incomplete information; |
| --- | --- |

(b)

winding-up declarations contained incomplete information;

| (b) | The Commission identified the same issues for two cases underlying the Court’s observation in its audits. Appropriate financial corrections will be proposed at closure.

  For the two remaining cases, the Commission services assessed the completeness of information in the winding-up declaration after a thorough analysis. |
| --- | --- |

(b)

For the two remaining cases, the Commission services assessed the completeness of information in the winding-up declaration after a thorough analysis.

| (c) | the winding-up bodies in some Member States submitted declarations which contained unjustified reductions of final error rates and opinions, which were not in line with the results of checks (see
  Table 5.2
  ). |
| --- | --- |

(c)

the winding-up bodies in some Member States submitted declarations which contained unjustified reductions of final error rates and opinions, which were not in line with the results of checks (see
  Table 5.2
  ).

| (c) | For three cases quoted in Table 5.2, the Commission considers that the reductions of error rates have been duly justified.

  The Commission services assessed the audit opinions provided by the winding-up bodies according to International Auditing Standards, taking into account all available audit results and evidence, as well as the application of self-corrections by Member States going beyond individual errors detected in the audited sample. In all cases, the Commission services took the necessary measures to address the issues including the interruption of the closure process, the request of additional information and the launch of a process leading to the application of financial corrections where necessary. |
| --- | --- |

(c)

The Commission services assessed the audit opinions provided by the winding-up bodies according to International Auditing Standards, taking into account all available audit results and evidence, as well as the application of self-corrections by Member States going beyond individual errors detected in the audited sample. In all cases, the Commission services took the necessary measures to address the issues including the interruption of the closure process, the request of additional information and the launch of a process leading to the application of financial corrections where necessary.

Table 5.2 —   Effect of unjustified reductions of final error rates reported in winding-up declarations

| Operational Programme | Total certified amount



  (euro) | Error rate before withdrawing atypical errors | Error rate reported |
| --- | --- | --- | --- |
| Steiermark, Objective 2, ERDF | 1 643 131 021 | 2,9 % | 0,7 % |
| West Midlands, Objective 2, ERDF | 2 131 670 207 | 10,6 % | 6,47 % |
| Merseyside, Objective 1, ERDF | 2 495 941 228 | 2,8 % | 1,1 % |
| Sicily, Objective 1, ERDF | 5 557 834 587 | 11,0 % | 1,2 % |
| Spain Local Development, Objective 1, ERDF | 1 644 137 526 | 6,7 % | 1,2 % |
| Note: In two further cases (France, Objective 3, ESF and UK West Wales and the Valleys, Objective 1, ERDF), the impact of the decrease could not be quantified from the information in the closure documents. The reduction in the Spanish ERDF programme concerns the part implemented by the local administration, representing around 25 % of the total programme expenditure. |

Operational Programme

Total certified amount

(euro)

Error rate before withdrawing atypical errors

Error rate reported

Steiermark, Objective 2, ERDF

1 643 131 021

2,9 %

0,7 %

West Midlands, Objective 2, ERDF

2 131 670 207

10,6 %

6,47 %

Merseyside, Objective 1, ERDF

2 495 941 228

2,8 %

1,1 %

Sicily, Objective 1, ERDF

5 557 834 587

11,0 %

1,2 %

Spain Local Development, Objective 1, ERDF

1 644 137 526

6,7 %

1,2 %

Note: In two further cases (France, Objective 3, ESF and UK West Wales and the Valleys, Objective 1, ERDF), the impact of the decrease could not be quantified from the information in the closure documents. The reduction in the Spanish ERDF programme concerns the part implemented by the local administration, representing around 25 % of the total programme expenditure.

| 5.62. | The problems identified by the Court in the winding-up declarations submitted by the Member States make it difficult for the Commission to assess the declarations and the underlying information. For the audited cases, the Commission’s assessment was affected by procedural weaknesses regarding in particular the use of interservice liaison and the monitoring and reporting of the closure process, as well as by some shortcomings in the Commission’s checks. |
| --- | --- |

5.62.

The problems identified by the Court in the winding-up declarations submitted by the Member States make it difficult for the Commission to assess the declarations and the underlying information. For the audited cases, the Commission’s assessment was affected by procedural weaknesses regarding in particular the use of interservice liaison and the monitoring and reporting of the closure process, as well as by some shortcomings in the Commission’s checks.

| 5.62. | The Commission considers that its closure procedure has allowed identifying remaining material risks at closure, and addresses it by performing additional audit work and/or by applying appropriate financial corrections.

  Consultations between Commission services, in line with agreed established procedures, were consistently carried out with the exception of a few cases where non-disclosure identified to other services did not entail any risk. The Commission underlines that the quality of reporting increased with time, as more qualitative information on the ongoing analysis was available. The Commission notes that the checks reported as missing by the Court were actually carried out by different services within the directorates-general. |
| --- | --- |

5.62.

Consultations between Commission services, in line with agreed established procedures, were consistently carried out with the exception of a few cases where non-disclosure identified to other services did not entail any risk. The Commission underlines that the quality of reporting increased with time, as more qualitative information on the ongoing analysis was available. The Commission notes that the checks reported as missing by the Court were actually carried out by different services within the directorates-general.

| 5.63. | The Court also noted that in four out of six audited programmes that were subject to financial corrections in the course of the programming period, error rates continued to be high afterwards, thus showing the persistence of weak management and control systems. This would require the Commission to perform additional work in order to obtain sufficient assurance at closure. |
| --- | --- |

5.63.

The Court also noted that in four out of six audited programmes that were subject to financial corrections in the course of the programming period, error rates continued to be high afterwards, thus showing the persistence of weak management and control systems. This would require the Commission to perform additional work in order to obtain sufficient assurance at closure.

| 5.63. | The Commission regrets that, for the four programmes mentioned, despite financial corrections during the programming period, the residual risk at closure might remain high. Therefore, regardless of financial corrections already implemented, the Commission systematically assesses the residual risk at closure for all programmes and performs additional checks to mitigate this risk.

  Furthermore, the Commission has included in its closure audits programmes for which some issues remain, thus allowing to reach high assurance at closure for these programmes as well. |
| --- | --- |

5.63.

Furthermore, the Commission has included in its closure audits programmes for which some issues remain, thus allowing to reach high assurance at closure for these programmes as well.

| 5.64. | In view of the problems found by the Court, in particular with regard to the unjustified reductions of final error rates, the Court considers that for five of the 31 programmes audited there is a risk that, unless the Commission takes the necessary action during subsequent stages, the closure might be based on unreliable closure documents. |
| --- | --- |

5.64.

In view of the problems found by the Court, in particular with regard to the unjustified reductions of final error rates, the Court considers that for five of the 31 programmes audited there is a risk that, unless the Commission takes the necessary action during subsequent stages, the closure might be based on unreliable closure documents.

| 5.64. | The Commission considers that in all cases referred to quoted by the Court’s assessment the remaining risks are being adequately covered during the ongoing closure process. The Commission services have made a thorough assessment of the closure documents and have taken the necessary measures to address the issues identified, including the interruption of the closure process, the request of additional information, the performance of closure audits and eventually for some programmes the application of financial corrections (see also Commission reply to paragraph 5.61(c)). |
| --- | --- |

5.64.

Reliability of Commission management representations

| 5.65. | The Court assessed the 2011 annual activity reports (AARs) and accompanying declarations of the Directorates-General for Regional Policy, Mobility and Transport, and Energy. In particular, with regard to the regularity of payments authorised during 2011, the Court:






  (a) | assessed the reservations made in the AARs; |
| --- | --- | --- |

5.65.

The Court assessed the 2011 annual activity reports (AARs) and accompanying declarations of the Directorates-General for Regional Policy, Mobility and Transport, and Energy. In particular, with regard to the regularity of payments authorised during 2011, the Court:

(a)

assessed the reservations made in the AARs;

| (b) | checked the consistency and accuracy of the Commission’s calculation of the residual error rate and the amounts of ‘payments at risk’. |
| --- | --- |

(b)

checked the consistency and accuracy of the Commission’s calculation of the residual error rate and the amounts of ‘payments at risk’.

DG Regional Policy

| 5.66. | DG Regional Policy estimated that between 3,1 % and 6,8 % of the interim payments for the 2007-2013 programming period authorised during 2011 (the latter amounted to approximately 29,8 billion euro in total) were at risk of error. This assessment of the ‘payments at risk’ includes all OPs; those under reservation as well as those not under reservation. The number of OPs subject to reservation by DG Regional Policy increased in 2011 compared to 2010 from 98 to 123. This was due to a stricter assessment by the Commission. In total, the scope of the financial reservations made by DG Regional Policy represented 31 % of the total payment appropriations authorised during the year. According to the AAR, the impact of these reservations represented between 1,9 % and 4,3 % of the payments authorised by DG Regional Policy during 2011. |
| --- | --- |

5.66.

DG Regional Policy estimated that between 3,1 % and 6,8 % of the interim payments for the 2007-2013 programming period authorised during 2011 (the latter amounted to approximately 29,8 billion euro in total) were at risk of error. This assessment of the ‘payments at risk’ includes all OPs; those under reservation as well as those not under reservation. The number of OPs subject to reservation by DG Regional Policy increased in 2011 compared to 2010 from 98 to 123. This was due to a stricter assessment by the Commission. In total, the scope of the financial reservations made by DG Regional Policy represented 31 % of the total payment appropriations authorised during the year. According to the AAR, the impact of these reservations represented between 1,9 % and 4,3 % of the payments authorised by DG Regional Policy during 2011.

| 5.66. | The Commission welcomes the Court’s reference to the Commission’s stricter assessment of the amounts at risk, which was intended to address observations made by the Court in its former Annual Reports. |
| --- | --- |

5.66.

| 5.67. | The Court notes that DG Regional Policy issued reservations for those OPs of the 2000-2006 programming period for which the Member State had not yet adequately corrected weaknesses identified during the closure process. The Commission did not quantify these reservations (which are referred to by the Commission as reservations for ‘reputational reasons’). As shown by the Court’s work there remains a risk that the closure might be based on unreliable closure documents leading to insufficient financial corrections (see paragraphs 5.60 to 5.61 and Special Report No 3/2012, paragraphs 65 to 67). |
| --- | --- |

5.67.

The Court notes that DG Regional Policy issued reservations for those OPs of the 2000-2006 programming period for which the Member State had not yet adequately corrected weaknesses identified during the closure process. The Commission did not quantify these reservations (which are referred to by the Commission as reservations for ‘reputational reasons’). As shown by the Court’s work there remains a risk that the closure might be based on unreliable closure documents leading to insufficient financial corrections (see paragraphs 5.60 to 5.61 and Special Report No 3/2012, paragraphs 65 to 67).

| 5.67. | As indicated in its reply to paragraph 5.62, the Commission considers that its closure procedure has allowed identifying remaining material risks at closure. The Commission has mitigating actions in place to address the risks identified at closure. Based on its risk assessment, the Commission carries out specific closure audits to verify and validate the quality of the winding-up declaration.

  The information provided by the winding-up body (WUB) is based on the cumulative audit information originating from all audit sources (national, Court and Commission audits), including from additional audits carried out at clo¬sure by the winding-up body when necessary. |
| --- | --- |

5.67.

The information provided by the winding-up body (WUB) is based on the cumulative audit information originating from all audit sources (national, Court and Commission audits), including from additional audits carried out at clo¬sure by the winding-up body when necessary.

DG Mobility and Transport and DG Energy

| 5.68. | DG Mobility and Transport and DG Energy estimated that approximately 4,5 % of payments authorised during 2011 in relation to the sixth and the seventh framework programmes for research and technological development were affected by errors. Accordingly, reservations were issued for each of these two expenditure programmes by both DGs. In total, the reservations made by DG Mobility and Transport and DG Energy cover respectively 25,7 % and 18,8 % of the total payment appropriations authorised during the year. The combined impact of these two reservations represented 0,9 % and 0,8 % of the payments authorised by DG Mobility and Transport and DG Energy, respectively. |
| --- | --- |

5.68.

DG Mobility and Transport and DG Energy estimated that approximately 4,5 % of payments authorised during 2011 in relation to the sixth and the seventh framework programmes for research and technological development were affected by errors. Accordingly, reservations were issued for each of these two expenditure programmes by both DGs. In total, the reservations made by DG Mobility and Transport and DG Energy cover respectively 25,7 % and 18,8 % of the total payment appropriations authorised during the year. The combined impact of these two reservations represented 0,9 % and 0,8 % of the payments authorised by DG Mobility and Transport and DG Energy, respectively.

| 5.69. | The Court noted the following issues: |
| --- | --- |

5.69.

The Court noted the following issues:

5.69.

| (a) | for both DG Mobility and Transport and DG Energy the Court considers that the amount of ‘payments at risk’ is understated for the part of expenditure related to the seventh framework programme. In both cases the reservation concerning the seventh framework programme (FP7) is based on the results of the audits carried out by DG Research and DG Information Society. Audits by DG Mobility and Transport and DG Energy for FP7 projects had however shown error rates significantly above the estimated error rate for the framework programme as a whole; |
| --- | --- |

(a)

for both DG Mobility and Transport and DG Energy the Court considers that the amount of ‘payments at risk’ is understated for the part of expenditure related to the seventh framework programme. In both cases the reservation concerning the seventh framework programme (FP7) is based on the results of the audits carried out by DG Research and DG Information Society. Audits by DG Mobility and Transport and DG Energy for FP7 projects had however shown error rates significantly above the estimated error rate for the framework programme as a whole;

| (a) | The Commission considers that both Directorates-General followed the standing instructions when quantifying the amount at risk for FP7 by using the best information available.

  Since Energy DG and Mobility and Transport DG manage a small number of FP7 projects, they conducted a small number of FP7 audits. As this was found to be not sufficiently representative, the Commission considered it appropriate to use the results of the considerably larger number of random, representative FP7 audits conducted by Research and Innovation DG and Information Society and Media DG.


  From 2012, the Commission DGs managing research projects will have a Common Representative Audit Sample for FP7. |
| --- | --- |

(a)

Since Energy DG and Mobility and Transport DG manage a small number of FP7 projects, they conducted a small number of FP7 audits. As this was found to be not sufficiently representative, the Commission considered it appropriate to use the results of the considerably larger number of random, representative FP7 audits conducted by Research and Innovation DG and Information Society and Media DG.

From 2012, the Commission DGs managing research projects will have a Common Representative Audit Sample for FP7.

| (b) | for DG Energy, the Court considers that the scope of the audit work carried out in relation to the EEPR in 2011 is insufficient concerning public procurement. |
| --- | --- |

(b)

for DG Energy, the Court considers that the scope of the audit work carried out in relation to the EEPR in 2011 is insufficient concerning public procurement.

| (b) | The Commission will take into account the Court’s observation in its audit of each of the 65 beneficiaries of EEPR funds during the lifetime of the EEPR. |
| --- | --- |

(b)

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

| 5.70. | Based on its audit work, the Court concludes that the interim and final payments for the year ended 31 December 2011 for the policy group regional policy, energy and transport were affected by material error. |
| --- | --- |

5.70.

Based on its audit work, the Court concludes that the interim and final payments for the year ended 31 December 2011 for the policy group regional policy, energy and transport were affected by material error.

| 5.70. | The Commission notes the considerable decrease in the error rate compared to last year which confirms a positive development for the third consecutive year.

  The Commission considers that this is in particular a result of its strict policy of interruptions/suspensions when deficiencies are identified, in line with its 2008 Action Plan.


  The Commission is taking measures to correct the errors detected by the Court including by applying financial corrections where appropriate, and focuses its actions on the most risky programmes and/or Member States (34). |
| --- | --- |

5.70.

The Commission considers that this is in particular a result of its strict policy of interruptions/suspensions when deficiencies are identified, in line with its 2008 Action Plan.

The Commission is taking measures to correct the errors detected by the Court including by applying financial corrections where appropriate, and focuses its actions on the most risky programmes and/or Member States (34).

| 5.71. | Based on its audit work on the examined supervisory and control systems, the Court found that: |
| --- | --- |

5.71.

Based on its audit work on the examined supervisory and control systems, the Court found that:

5.71.

| (a) | audit authorities were partially effective in ensuring the regularity of operations for the ERDF, ESF and CF of the 2007-2013 programming period; |
| --- | --- |

(a)

audit authorities were partially effective in ensuring the regularity of operations for the ERDF, ESF and CF of the 2007-2013 programming period;

| (a) | The Commission underlines that the effectiveness and quality of the work of audit authorities differs by programme and Member State, as shown by the Court’s assessment in paragraph 5.41 and by the results of the Commission’s audit work. In accordance with Article 73 of Regulation (EC) No 1083/2006, the Commission is as from July 2012 formally relying on the work of 13 audit authorities for ERDF/CF and 9 audit authorities for ESF. The Commission will continue to review the work of the remaining audit authorities and to monitor the situation for programmes for which an Article 73 letter was granted. |
| --- | --- |

(a)

| (b) | the procedures of the Commission and Member States have been partially effective in carrying out the initial phase of the closure process for the 2000-2006 programming period. |
| --- | --- |

(b)

the procedures of the Commission and Member States have been partially effective in carrying out the initial phase of the closure process for the 2000-2006 programming period.

| (b) | The Commission considers to have established robust procedures and guidance for the closure process, and considers that most Member States have carried out important and professional work to enable the closure of programmes and to increase assurance at closure. The Commission also considers to have made a comprehensive work at closure, analysing thoroughly all closure documents, carrying out additional audits and enquiries where necessary, which has led in many cases to additional financial corrections being applied at closure to address remaining risks. |
| --- | --- |

(b)

| 5.72. | The Court’s audits have shown that there is no assurance that financial correction mechanisms compensate for all OPs in an adequate manner the errors uncovered and that all material issues are resolved. There is equally no evidence that financial correction mechanisms necessarily translate into lasting improvements to systems which will prevent recurrence of the errors uncovered (33). |
| --- | --- |

5.72.

The Court’s audits have shown that there is no assurance that financial correction mechanisms compensate for all OPs in an adequate manner the errors uncovered and that all material issues are resolved. There is equally no evidence that financial correction mechanisms necessarily translate into lasting improvements to systems which will prevent recurrence of the errors uncovered (33).

| 5.72. | The multiannual nature of expenditure and control cycle includes the closure process, where final checks are performed on the legality and regularity of expenditure and final corrections are made where necessary.

  The closure process for 2007-2013 programmes will be further strengthened compared to the 2000-2006 period considering in particular reinforced requirements for the audit of a representative statistical sample on a yearly basis and the annual opinions.


  Moreover, for a limited number of OPs, the Commission’s audits also demonstrated that programmes authorities still need to improve their management and control systems despite corrections applied. In such cases additional actions by the Commission, such as interruptions or suspensions are applied.


  The Commission has proposed in the 2014-2020 legal framework to increase the possibility to make net financial corrections. |
| --- | --- |

5.72.

The closure process for 2007-2013 programmes will be further strengthened compared to the 2000-2006 period considering in particular reinforced requirements for the audit of a representative statistical sample on a yearly basis and the annual opinions.

Moreover, for a limited number of OPs, the Commission’s audits also demonstrated that programmes authorities still need to improve their management and control systems despite corrections applied. In such cases additional actions by the Commission, such as interruptions or suspensions are applied.

The Commission has proposed in the 2014-2020 legal framework to increase the possibility to make net financial corrections.

Recommendations

See joint reply to paragraphs 1.12 and 1.13.

| 5.73. | The Court recommends that the Commission: |
| --- | --- |

5.73.

The Court recommends that the Commission:

5.73.

| — | Recommendation 1: makes sanction systems more effective by increasing the impact of financial corrections and by reducing the possibility of replacing the ineligible expenditure with other expenditure, as proposed by the Commission in the area of cohesion for the next programming period. There should be a presumption that any irregularity detected subsequent to presentation of the annual accounts will lead to a net financial correction. |
| --- | --- |

—

Recommendation 1: makes sanction systems more effective by increasing the impact of financial corrections and by reducing the possibility of replacing the ineligible expenditure with other expenditure, as proposed by the Commission in the area of cohesion for the next programming period. There should be a presumption that any irregularity detected subsequent to presentation of the annual accounts will lead to a net financial correction.

The Commission considers that Member States should have the right to substitute ineligible expenditure they detect with legal and regular one in order to optimise the use of Cohesion spending, which contributes to its added value and to ensure efficient controls at Member State level. The Commission’s proposal for the 2014-2020 regulatory framework provides that ‘Where irregularities affecting annual accounts sent to the Commission are detected by the Commission or by the European Court of Auditors, the resulting financial correction shall reduce support from the Funds to the operational programme (Article 137(6))’ thereby limiting the possibilities of withdrawal/replacement to the ongoing financial year. This provision is intended as an incentive for expenditure included in the annual certified accounts to be legal and regular.

| — | Recommendation 2: requires strict compliance with the eligibility requirements for EU funding, in particular the correct application of EU and national public procurement rules. |
| --- | --- |

—

Recommendation 2: requires strict compliance with the eligibility requirements for EU funding, in particular the correct application of EU and national public procurement rules.

The Commission has made considerable efforts to ensure strict compliance with eligibility requirements and the correct application of public procurement rules. For example:

| — | For regional policy, it has provided training and guidance on eligibility rules to programme managing authorities to ensure they transmit this knowledge to all bodies in charge of managing the funds. Moreover, when it identifies complex rules at programme level, the Commission makes recommendations to simplify the rules. It has also shared with Member States an analysis of the types of procurement errors detected by EU audits in cohesion policy during previous years and has launched an exercise to collect best practices and possible answers by Member States to remedy such errors and reduce their occurrence. |
| --- | --- |

—

For regional policy, it has provided training and guidance on eligibility rules to programme managing authorities to ensure they transmit this knowledge to all bodies in charge of managing the funds. Moreover, when it identifies complex rules at programme level, the Commission makes recommendations to simplify the rules. It has also shared with Member States an analysis of the types of procurement errors detected by EU audits in cohesion policy during previous years and has launched an exercise to collect best practices and possible answers by Member States to remedy such errors and reduce their occurrence.

| — | For the TEN-T programme, strict compliance with the eligibility requirements is insisted upon throughout the funding process, for example, the guide for applicants contains clear instructions on the respect of these requirements. The respect of these rules is then checked through the sampling controls when making intermediate and final payments. |
| --- | --- |

—

For the TEN-T programme, strict compliance with the eligibility requirements is insisted upon throughout the funding process, for example, the guide for applicants contains clear instructions on the respect of these requirements. The respect of these rules is then checked through the sampling controls when making intermediate and final payments.

| — | Recommendation 3: addresses weaknesses in ‘first level checks’ at the level of managing authorities and intermediate bodies for ERDF and CF, where appropriate through training measures and specific guidance material. |
| --- | --- |

—

Recommendation 3: addresses weaknesses in ‘first level checks’ at the level of managing authorities and intermediate bodies for ERDF and CF, where appropriate through training measures and specific guidance material.

The Commission has been giving guidelines to the Member States on the way managing authorities should define and implement their management verifications.

Moreover, the Commission developed in 2009 comprehensive guidelines for the first level checks and a self-assessment tool for managing authorities, which they can use to improve their functioning. The Commission has also developed and disseminated in 2011 to audit authorities checklists for the audit of management verifications which can be used by the managing authorities themselves, as a benchmark.

| — | Recommendation 4: regarding the control system for audit authorities in the cohesion area: |
| --- | --- |

—

Recommendation 4: regarding the control system for audit authorities in the cohesion area:

| — | provides further guidance to AAs for the current programming period, in particular on sampling, the scope of verifications to be undertaken for audits of projects and quality control, |
| --- | --- |

—

provides further guidance to AAs for the current programming period, in particular on sampling, the scope of verifications to be undertaken for audits of projects and quality control,

| — | Since the beginning of the programming period, the Commission has provided detailed and technical guidance, offered training and conducted technical meetings with auditors of national audit authorities. Furthermore, guidance on the scope and extent of audits on operations that was delivered under the 2000-2006 programming period is still valid since such audits do not differ significantly between both programming periods. As far as sampling is concerned, a specific workshop was organised by the Commission in June 2012. |
| --- | --- |

—

| — | encourages AAs to carry out specific system audits concerning ‘first level checks’ done by managing authorities and intermediate bodies. |
| --- | --- |

—

encourages AAs to carry out specific system audits concerning ‘first level checks’ done by managing authorities and intermediate bodies.

| — | The Commission is actively implementing this recommendation and will continue to do so. When the Commission identifies weaknesses in management verifications (through various audit results at national or Community level), it requests the audit authority to review its audit strategy and audit plan to include targeted audits on management verifications or, alternatively, following revised risk assessments, it carries out directly such audits (under its audit enquiry ‘bridging the assurance gap’). Moreover, based on an assessment of the functioning of management verification across all co-financed programmes based on all audit results available, the Commission has encouraged audit authorities in October 2011 to pay particular attention in their systems audits to first level checks (cf. Homologues Group, dedicated workshop on the role of audit authorities to contribute to improvement of management verifications). |
| --- | --- |

—

| — | Recommendation 5: in order to make the procedure for closing multiannual programmes in the area of cohesion more efficient: |
| --- | --- |

—

Recommendation 5: in order to make the procedure for closing multiannual programmes in the area of cohesion more efficient:

| — | reminds the Member States to ensure that the final declarations submitted for the 2007-2013 programmes are reliable, |
| --- | --- |

—

reminds the Member States to ensure that the final declarations submitted for the 2007-2013 programmes are reliable,

| — | The 2007-2013 regulatory framework foresees quite different requirements for the audit of representative, statistical sample on a yearly basis, that support formal audit opinions of the audit authorities. This will form a more solid basis for closure declarations, which will allow identifying the residual risk after all corrections were taken during programme implementation. It should also be noted that guidelines for closure 2007-2013 were already presented to Member States during the COCOF meeting in June 2012. |
| --- | --- |

—

| — | examines the specific weaknesses identified by the Court in the winding-up declarations for closures of 2000-2006 programmes, |
| --- | --- |

—

examines the specific weaknesses identified by the Court in the winding-up declarations for closures of 2000-2006 programmes,

| — | These weaknesses were identified and addressed by the Commission. |
| --- | --- |

—

| — | considers whether these problems have also occurred for other OPs, and apply financial corrections where necessary, |
| --- | --- |

—

considers whether these problems have also occurred for other OPs, and apply financial corrections where necessary,

| — | More generally, the Commission analyses thoroughly each winding-up declaration and draws conclusions, including application of financial corrections where necessary. |
| --- | --- |

—

| — | ensures that ongoing closure audits adequately address the issues raised by the Court. |
| --- | --- |

—

ensures that ongoing closure audits adequately address the issues raised by the Court.

| — | The Commission is confident that its closure process will allow applying appropriate financial corrections at closure, when needed, once its services will have carried out the required assessments of all closure documents received and additional information requested, and taking into account the evidence gathered during the closure audits. |
| --- | --- |

—

---

(1)  Other regional policy instruments include the Instrument for Pre-Accession Assistance which supports regional and cross-border cooperation measures in the Western Balkan countries, Turkey and Iceland, and the EU Solidarity Fund, which provides support in the event of natural disasters in the Member States.

(2)  The ERDF and ESF provide support for SMEs through grants and Financial Engineering Instruments. See Special Report No 2/2012, ‘Financial instruments for SMEs co-financed by the European Regional Development Fund’ (http://eca.europa.eu).

(3)  In 2011, 29,9 billion euro or 93 % related to the 2007-2013 programming period, while 2,4 billion euro (7 %) were for the 2000-2006 period.

(4)  For the Court’s findings and conclusions on ESF see Chapter 6.

(5)  In total, 434 OPs have been approved by the Commission for the 2007-2013 programming period: 317 for ERDF/CF (out of which 24 OPs contain CF projects) and 117 for ESF.

(6)  Intermediate Bodies are public or private bodies acting under the responsibility of a managing authority and carrying out duties on their behalf.

(7)  In addition, AAs are required to submit copies of system audit reports to the Commission. For audits on operations, generally, no audit reports are sent to the Commission.

(8)  See Article 82 of Council Regulation (EC) No 1083/2006 (OJ L 210, 31.7.2006, p. 25).

(9)  Article 72 of Regulation (EC) No 1083/2006.

(10)  Article 39(2) of Council Regulation (EC) No 1260/1999 (OJ L 161, 26.6.1999, p. 1); Articles 91 and 92 of Regulation (EC) No 1083/2006.

(11)  Article 99 of Regulation (EC) No 1083/2006.

(12)  Around 41 % of energy and transport expenditure is for Trans-European Networks (TEN), 28 % is for conventional and renewable energy projects and another 11 % for research projects mainly funded by the research framework programmes. The other two main categories of expenditure is for projects concerning inland, air and maritime transport 7 % and nuclear energy 6 %.

(13)  TEN-Transport Executive Agency, Executive Agency for Competitiveness and Innovation and SESAR (Single European Sky Air Traffic Management Research) joint undertaking.

(14)  This sample comprises 180 payments made to 129 ERDF, 39 CF, 8 Energy and 4 Transport projects. 148 of the payments to ERDF/CF projects relate to the 2007-2013 programming period and 20 to the 2000-2006 period. The sample was drawn from all payments, with the exception of advances which amounted to 1,4 billion euro in 2011.

(15)  The Court’s audit work regarding AAs consisted of: (a) an examination of a sample of seven AAs (and, where applicable, delegated audit bodies) in seven Member States (Czech Republic, Greece, Italy (Sicily), Latvia, Hungary, Portugal and Romania); and (b) a review of the Commission’s supervisory activities of AAs as a whole. See the 2010 Annual Report, paragraphs 4.37 to 4.44.

(16)  The Court calculates its estimate of error from a representative statistical sample. The figure quoted is the best estimate (known as the MLE). The Court has 95 % confidence that the rate of error in the population lies between LEL 3,0 % and UEL 9,0 % (the lower and upper error limits respectively).

(17)  See European Commission: ‘Analysis of errors in the Cohesion Policy for the years 2006-2009’ (SEC(2011) 1179, 5.10.2011).

(18)  For 41 % of the 298 public procurement procedures audited by the Court the contract value was above the threshold which made them subject to EU public procurement rules as transposed into national law.

(19)  This amount represents the total expenditure for the contracts awarded, part of which has been certified under the audited expenditure declarations.

(20)  Further information regarding the Court's approach to the quantification of public procurement errors is set out in
  Annex 1.1
  , points 10 and 11.

(21)  The AAs replaced the control authorities in charge of ‘Article 10 checks’ and ‘Article 15 winding-up declarations’. See Article 10 and 15 of Commission Regulation (EC) No 438/2001 (OJ L 63, 3.3.2001, p. 21).

(22)  63 of these AAs are common for all three funds. 18 AAs are only for ERDF/CF OPs and 31 AAs are only for ESF OPs.

(23)  Each AA may produce one or more ACRs which in turn may relate to one or more OPs.

(24)  The ACRs and annual opinions are based on the findings of the AAs’ audits relating to expenditure certified to the Commission in the previous EU financial year (see Article 62(1)(d) of Regulation (EC) No 1083/2006).

(25)  The Commission’s assessment is based on an internal risk scoring and the total amount of EU co-financing for the OPs audited by the AA. In 2010, eight AAs were subject to detailed assessment by the Court. See the 2010 Annual Report, paragraphs 4.37 to 4.44.

(26)  In particular, as indicated in
  Annex 5.2
  , AAs were assessed to be ‘not effective’ if the Court identified significant shortcomings in the ACR and/or the annual opinion or if there were pervasive weaknesses in essential elements of the AAs’ work which undermined the reliability of the ACRs and annual opinions.

(27)  The COCOF is a standing committee of the European Commission. Its function is to discuss subjects relating to the application of regulations governing the ERDF, ESF and CF. Its meetings are chaired by the European Commission and attended by officials from Member States.

(28)  In 2011, DG Regional Policy completed enquiries for 14 AAs with regard to ERDF and CF. DG Employment, Social Affairs and Inclusion undertook specific examinations of 42 OPs for the ESF. This also included a review of the AAs in charge of the OPs examined.

(29)  These 14 AAs for DG Regional Policy and seven AAs for DG Employment, Social Affairs and Inclusion are additional to those reviewed by the Court in 2010 (see the 2010 Annual Report, paragraph 4.42).

(30)  See AAR for DG Regional Policy, table on ‘Shared management: assessment of national control systems’, p. 121, and AAR for DG Employment, Social Affairs and Inclusion, p. 76.

(31)  Paragraph 65 of Special Report 3/2012: ‘Structural Funds — Did the Commission successfully deal with deficiencies identified in the Member States management and control systems?’ (http://eca.europa.eu).

(32)  Germany, Ireland, Spain, France, Italy, Netherlands, Austria and United Kingdom. For Italy, the audit was carried out in coordination with the Italian Supreme Audit Institution (Corte dei Conti Italiana) on the basis of a Memorandum of Understanding and a Joint Declaration signed by the Presidents of the Corte dei Conti and of the European Court of Auditors. For this audit, the coordinated activities essentially covered the collection of audit evidence.

(33)  See the 2010 Annual Report, paragraph 1.25; and Special Report No 3/2012.

(34)  As demonstrated in the Staff Working Document ‘Analysis of errors in the Cohesion Policy for the years 2006-2009’ (cf SEC(2011) 1179 of 5.10.2011) and in DG Regional Policy's AAR for 2011.

(35)  The audit of administrative expenditure is reported in Chapter 9.

ANNEX 5.1

RESULTS OF TRANSACTION TESTING FOR REGIONAL POLICY, ENERGY AND TRANSPORT

| | 2011 | 2010 | 2009 | 2008 |
| --- | --- | --- | --- | --- |
| ERDF | CF | Energy | Transport | Total |
| SIZE AND STRUCTURE OF THE SAMPLE |
| Total transactions (of which): | 129 | 39 | 8 | 4 | 180 | 177 | 165 | 140 |
| Advances | 0 | 0 | 0 | 0 | 0 | 0 | 20 | 9 |
| Interim/Final payments | 129 | 39 | 8 | 4 | 180 | 177 | 145 | 131 |
| RESULTS OF TESTING
   (1)
   (2) |
| Proportion (number) of transactions tested found to be: |
| Free of error | 49 % | (63) | 18 % | (7) | 38 % | (3) | 0 % | (0) | 41 % | (73) | 43 % | 64 % | 49 % |
| Affected by one or more errors | 51 % | (66) | 82 % | (32) | 62 % | (5) | 100 % | (4) | 59 % | (107) | 57 % | 36 % | 51 % |
| Analysis of transactions affected by error |
| Analysis by type of expenditure |
| Advances | N/A | N/A | N/A | N/A | N/A | N/A | 3 % | 0 % |
| Interim/Final payments | 97 % | 100 % |
| Analysis by type of error |
| Non-quantifiable errors: | 58 % | (38) | 81 % | (26) | 20 % | (1) | 75 % | (3) | 64 % | (68) | 60 % | 59 % | 41 % |
| Quantifiable errors: | 42 % | (28) | 19 % | (6) | 80 % | (4) | 25 % | (1) | 36 % | (39) | 40 % | 41 % | 59 % |
| Eligibility | 96 % | (27) | 100 % | (6) | 100 % | (4) | 0 % | (0) | 94 % | (37) | 97 % | 71 % | 93 % |
| Occurrence | 0 % | (0) | 0 % | (0) | 0 % | (0) | 100 % | (1) | 3 % | (1) | 0 % | 0 % | 0 % |
| Accuracy | 4 % | (1) | 0 % | (0) | 0 % | (0) | 0 % | (0) | 3 % | (1) | 3 % | 29 % | 7 % |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| Most likely error rate | 6,0 % | | | |
| Upper Error Limit (UEL) | 9,0 % | | | |
| Lower Error Limit (LEL) | 3,0 % | | | |

2011

2010

2009

2008

ERDF

CF

Energy

Transport

Total

SIZE AND STRUCTURE OF THE SAMPLE

Total transactions (of which):

129

39

8

4

180

177

165

140

Advances

0

0

0

0

0

0

20

9

Interim/Final payments

129

39

8

4

180

177

145

131

RESULTS OF TESTING
   (1)
   (2)

Proportion (number) of transactions tested found to be:

Free of error

49 %

(63)

18 %

(7)

38 %

(3)

0 %

(0)

41 %

(73)

43 %

64 %

49 %

Affected by one or more errors

51 %

(66)

82 %

(32)

62 %

(5)

100 %

(4)

59 %

(107)

57 %

36 %

51 %

Analysis of transactions affected by error

Analysis by type of expenditure

Advances

N/A

N/A

N/A

N/A

N/A

N/A

3 %

0 %

Interim/Final payments

97 %

100 %

Analysis by type of error

Non-quantifiable errors:

58 %

(38)

81 %

(26)

20 %

(1)

75 %

(3)

64 %

(68)

60 %

59 %

41 %

Quantifiable errors:

42 %

(28)

19 %

(6)

80 %

(4)

25 %

(1)

36 %

(39)

40 %

41 %

59 %

Eligibility

96 %

(27)

100 %

(6)

100 %

(4)

0 %

(0)

94 %

(37)

97 %

71 %

93 %

Occurrence

0 %

(0)

0 %

(0)

0 %

(0)

100 %

(1)

3 %

(1)

0 %

0 %

0 %

Accuracy

4 %

(1)

0 %

(0)

0 %

(0)

0 %

(0)

3 %

(1)

3 %

29 %

7 %

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Most likely error rate

6,0 %

Upper Error Limit (UEL)

9,0 %

Lower Error Limit (LEL)

3,0 %

---

(1)  To improve insight into areas with different risk profiles within the policy group, the sample was split up into segments.

(2)  Numbers quoted in brackets represent the actual number of transactions.

ANNEX 5.2

RESULTS OF EXAMINATION OF SYSTEMS FOR COHESION (REGIONAL POLICY AND EMPLOYMENT, SOCIAL AFFAIRS AND INCLUSION)

Assessment of selected supervisory and control systems: Audit authorities (AA) — compliance with key regulatory requirements and effectiveness in ensuring the regularity of operations

| Key requirements tested by the Court | | Czech Republic AA for ERDF/CF/ESF | Greece AA for ERDF/CF/ESF | Italy-Sicily AA for ERDF/CF/ESF | Latvia AA for ERDF/CF/ESF | Hungary AA for ERDF/CF/ESF | Portugal AA for ERDF/CF/ESF | Romania AA for ERDF/CF/ESF |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| General aspects | The set up of the management and control systems of the operational programme provides for an appropriate definition, allocation and separation of functions within the AA and between the AA and other competent management and control bodies | Not compliant | Compliant | Compliant | Compliant | Compliant | Compliant | Compliant |
| Audit manual coverage | Existence of audit manual (for both audits on systems and audits on operations), which is in accordance with internationally accepted audit standards and clearly describes the audit procedures | Partially compliant | Compliant | Compliant | Compliant | Compliant | Compliant | Compliant |
| Audit methodology for systems audit | The audit work carried out by the AA to evaluate the effective functioning of the management and control system is based on a checklist that contains questions that verify key requirements of the applicable regulations (specified for MAs, IBs and CAs) and appropriate assessment criteria for each of these key requirements | Partially compliant | Compliant | Compliant | Compliant | Compliant | Compliant | Compliant |
| Review of audits on systems | The AA’s audit plan had been implemented in accordance with the approved audit strategy for the period, audits on systems were carried out in accordance with the methodology established by the AA and all phases of the audits on systems were properly documented | Not effective | Effective | Effective | Effective | Effective | Effective | Effective |
| Sampling methodology for audits of operations | An appropriate sampling methodology for audits of operations has been specified to draw the sample of operations to be audited for the period under review | Partially compliant | Compliant | Partially compliant | Compliant | Compliant | Compliant | Compliant |
| Drawing of sample for audits of operations | The sampling methodology for audits of operations has been used as specified to draw the sample of operations to be audited for the period under review | Partially effective | Effective | Partially effective | Effective | Effective | Effective | Effective |
| Audit methodology for audits of operations | The audit work carried out to examine the regularity of operations is based on a checklist that contains questions that verify the requirements of the applicable regulation at a sufficient level of detail to address the associated risks | Not compliant | Partially compliant | Compliant | Compliant | Partially compliant | Compliant | Partially compliant |
| Review of audits of operations | The audits of operations had been implemented in accordance with the sample selected for the period, were carried out in accordance with the methodology established by the AA and all phases of the audits of operations were properly documented | Partially effective | Effective | Effective | Effective | Effective | Effective | Partially effective |
| Re-performance of audits on operations | A re-performance by the Court of the AA’s audits of operations resulted in findings similar to those of the AA, as reported to the Commission | Not effective | Effective | Effective | Effective | Effective | Effective | Effective |
| Annual control report and audit opinion | The annual control report and audit opinion were established in accordance with the regulatory requirements and the guidance agreed between the Commission and the Member States, and the report and opinion are consistent with the results of the audits on systems and audits on operations carried out by the AA | Not compliant | Compliant | Partially compliant | Compliant | Compliant | Compliant | Partially compliant |
| Overall assessment
   (1) | | Not effective | Effective | Partially effective | Effective | Effective | Effective | Partially effective |

Key requirements tested by the Court

Czech Republic AA for ERDF/CF/ESF

Greece AA for ERDF/CF/ESF

Italy-Sicily AA for ERDF/CF/ESF

Latvia AA for ERDF/CF/ESF

Hungary AA for ERDF/CF/ESF

Portugal AA for ERDF/CF/ESF

Romania AA for ERDF/CF/ESF

General aspects

The set up of the management and control systems of the operational programme provides for an appropriate definition, allocation and separation of functions within the AA and between the AA and other competent management and control bodies

Not compliant

Compliant

Compliant

Compliant

Compliant

Compliant

Compliant

Audit manual coverage

Existence of audit manual (for both audits on systems and audits on operations), which is in accordance with internationally accepted audit standards and clearly describes the audit procedures

Partially compliant

Compliant

Compliant

Compliant

Compliant

Compliant

Compliant

Audit methodology for systems audit

The audit work carried out by the AA to evaluate the effective functioning of the management and control system is based on a checklist that contains questions that verify key requirements of the applicable regulations (specified for MAs, IBs and CAs) and appropriate assessment criteria for each of these key requirements

Partially compliant

Compliant

Compliant

Compliant

Compliant

Compliant

Compliant

Review of audits on systems

The AA’s audit plan had been implemented in accordance with the approved audit strategy for the period, audits on systems were carried out in accordance with the methodology established by the AA and all phases of the audits on systems were properly documented

Not effective

Effective

Effective

Effective

Effective

Effective

Effective

Sampling methodology for audits of operations

An appropriate sampling methodology for audits of operations has been specified to draw the sample of operations to be audited for the period under review

Partially compliant

Compliant

Partially compliant

Compliant

Compliant

Compliant

Compliant

Drawing of sample for audits of operations

The sampling methodology for audits of operations has been used as specified to draw the sample of operations to be audited for the period under review

Partially effective

Effective

Partially effective

Effective

Effective

Effective

Effective

Audit methodology for audits of operations

The audit work carried out to examine the regularity of operations is based on a checklist that contains questions that verify the requirements of the applicable regulation at a sufficient level of detail to address the associated risks

Not compliant

Partially compliant

Compliant

Compliant

Partially compliant

Compliant

Partially compliant

Review of audits of operations

The audits of operations had been implemented in accordance with the sample selected for the period, were carried out in accordance with the methodology established by the AA and all phases of the audits of operations were properly documented

Partially effective

Effective

Effective

Effective

Effective

Effective

Partially effective

Re-performance of audits on operations

A re-performance by the Court of the AA’s audits of operations resulted in findings similar to those of the AA, as reported to the Commission

Not effective

Effective

Effective

Effective

Effective

Effective

Effective

Annual control report and audit opinion

The annual control report and audit opinion were established in accordance with the regulatory requirements and the guidance agreed between the Commission and the Member States, and the report and opinion are consistent with the results of the audits on systems and audits on operations carried out by the AA

Not compliant

Compliant

Partially compliant

Compliant

Compliant

Compliant

Partially compliant

Overall assessment
   (1)

Not effective

Effective

Partially effective

Effective

Effective

Effective

Partially effective

---

(1)  As for last year's examination of AAs (see the 2010 Annual Report, Annex 4.2), the following criteria are applied to obtain the overall assessment of the AA on the basis of the assessment of the specific key requirements tested:

| (a) | ‘Effective’: the assessment of the key requirement ‘Annual control report and audit opinion’ is ‘Compliant’ and the assessments of the key requirements ‘Review of audits on systems’, ‘Drawing on sample’, ‘Review of audits of operations’ and ‘Re-performance of audits on operations’ are ‘Effective’. |
| --- | --- |

(a)

‘Effective’: the assessment of the key requirement ‘Annual control report and audit opinion’ is ‘Compliant’ and the assessments of the key requirements ‘Review of audits on systems’, ‘Drawing on sample’, ‘Review of audits of operations’ and ‘Re-performance of audits on operations’ are ‘Effective’.

| (b) | ‘Partially effective’: the assessment of the key requirement ‘Annual control report and audit opinion’ is at least ‘Partially compliant’ and the assessments of the key requirements ‘Review of audits on systems’, ‘Drawing on sample’, ‘Review of audits of operations’ and ‘Re-performance of audits on operations’ are at least ‘Partially effective’. |
| --- | --- |

(b)

‘Partially effective’: the assessment of the key requirement ‘Annual control report and audit opinion’ is at least ‘Partially compliant’ and the assessments of the key requirements ‘Review of audits on systems’, ‘Drawing on sample’, ‘Review of audits of operations’ and ‘Re-performance of audits on operations’ are at least ‘Partially effective’.

| (c) | ‘Not effective’: the assessment of the key requirement ‘Annual control report and audit opinion’ is ‘Not compliant’ or the assessments of at least one of the key requirements ‘Review of audits on systems’, ‘Drawing on sample’, ‘Review of audits of operations’ and ‘Re-performance of audits on operations’ is ‘Not effective’. |
| --- | --- |

(c)

‘Not effective’: the assessment of the key requirement ‘Annual control report and audit opinion’ is ‘Not compliant’ or the assessments of at least one of the key requirements ‘Review of audits on systems’, ‘Drawing on sample’, ‘Review of audits of operations’ and ‘Re-performance of audits on operations’ is ‘Not effective’.

---

CHAPTER 6

Employment and social affairs

TABLE OF CONTENTS

Introduction

Specific characteristics of the policy group

Policy objectives

Policy instruments

Risks to regularity

Audit scope and approach

Regularity of transactions

Effectiveness of systems

In-depth examination of two audit authorities (AAs)

Assessment of the Commission's supervision of AAs

Reliability of Commission management representations

Conclusions and recommendations

Conclusions

Recommendations

| THE COURT’S OBSERVATIONS | THE COMMISSION’S REPLIES |
| --- | --- |
| INTRODUCTION |
| 6.1. | This Chapter presents the Court’s specific assessment of policy group 04 — Employment and social affairs. Key information on the activities covered and the spending in 2011 is provided in
  Table 6.1
  . |

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

6.1.

This Chapter presents the Court’s specific assessment of policy group 04 — Employment and social affairs. Key information on the activities covered and the spending in 2011 is provided in
  Table 6.1
  .

| 6.2. | Employment and social affairs policy is mostly financed through the European Social Fund (ESF), which is governed by the same rules as the European Regional Development Fund (ERDF) and the Cohesion Fund (CF) as described in Chapter 5. Additional provisions for the ESF are set out in a specific regulation. For issues common to all three funds, reference is made in this Chapter to Chapter 5. |
| --- | --- |

6.2.

Employment and social affairs policy is mostly financed through the European Social Fund (ESF), which is governed by the same rules as the European Regional Development Fund (ERDF) and the Cohesion Fund (CF) as described in Chapter 5. Additional provisions for the ESF are set out in a specific regulation. For issues common to all three funds, reference is made in this Chapter to Chapter 5.

Table 6.1 —   Employment and social affairs — Key information 2011

| (million euro) |
| --- |
| Budget Title | Policy area | Description | Payments | Management mode |
| 04 | Employment and social affairs | Administrative expenditure | 93 | Centralised direct |
| European Social Fund | 9 966 | Shared |
| Working in Europe — Social dialogue and mobility | 59 | Centralised direct |
| Employment, social solidarity and gender equality | 132 | Centralised direct |
| European Globalisation Adjustment Fund | 114 | Shared |
| Instrument for Pre-Accession Assistance | 28 | Decentralised |
| | 10 392 | |
| Total administrative expenditure (4) | 93 | |
| Total operational expenditure | 10 299 | |
| Of which: | — | advances |

(million euro)

Budget Title

Policy area

Description

Payments

Management mode

04

Employment and social affairs

Administrative expenditure

93

Centralised direct

European Social Fund

9 966

Shared

Working in Europe — Social dialogue and mobility

59

Centralised direct

Employment, social solidarity and gender equality

132

Centralised direct

European Globalisation Adjustment Fund

114

Shared

Instrument for Pre-Accession Assistance

28

Decentralised

10 392

Total administrative expenditure (4)

93

Total operational expenditure

10 299

Of which:

—

128

| — | interim/final payments |
| --- | --- |

—

10 171

Total payments for the year

10 392

Total commitments for the year

11 638

Source: 2011 annual accounts of the European Union.

Specific characteristics of the policy group

Policy objectives

| 6.3. | The employment and social affairs policy group forms part of EU cohesion policy, which aims to reinforce economic, social and territorial cohesion within the EU by reducing the gap in the level of development between regions. Specifically, the main objectives of EU employment and social policy are to combat unemployment, to develop human resources and to promote integration in the labour market. |
| --- | --- |

6.3.

The employment and social affairs policy group forms part of EU cohesion policy, which aims to reinforce economic, social and territorial cohesion within the EU by reducing the gap in the level of development between regions. Specifically, the main objectives of EU employment and social policy are to combat unemployment, to develop human resources and to promote integration in the labour market.

Policy instruments

| 6.4. | The European Social Fund (ESF) is the main tool for the implementation of employment and social policy, accounting for 97 % of the policy area spending in 2011. The ESF funds investments in human capital through training and other employment measures. |
| --- | --- |

6.4.

The European Social Fund (ESF) is the main tool for the implementation of employment and social policy, accounting for 97 % of the policy area spending in 2011. The ESF funds investments in human capital through training and other employment measures.

| 6.5. | Other spending takes the form of subsidies and grants to organisations implementing and coordinating social and employment actions. This includes funding for the European Employment Services (EURES) network, which develops cooperation between the Commission and the Member States in the implementation of the European Employment Strategy, and the progress programme, which supports policy implementation in the Member States through studies, analysis and other measures. |
| --- | --- |

6.5.

Other spending takes the form of subsidies and grants to organisations implementing and coordinating social and employment actions. This includes funding for the European Employment Services (EURES) network, which develops cooperation between the Commission and the Member States in the implementation of the European Employment Strategy, and the progress programme, which supports policy implementation in the Member States through studies, analysis and other measures.

| 6.6. | Funding is also provided to EU Agencies: the European Institute for Gender Equality, the European Foundation for the Improvement of Living and Working Conditions, and the European Agency for Safety and Health at Work. |
| --- | --- |

6.6.

Funding is also provided to EU Agencies: the European Institute for Gender Equality, the European Foundation for the Improvement of Living and Working Conditions, and the European Agency for Safety and Health at Work.

| 6.7. | The European Globalisation Adjustment Fund (EGF) supports workers in the EU made redundant as a result of major structural changes in world trade patterns and of the financial and economic crisis. The Instrument for Pre-Accession Assistance (IPA) provides support to candidate countries in human resources development. |
| --- | --- |

6.7.

The European Globalisation Adjustment Fund (EGF) supports workers in the EU made redundant as a result of major structural changes in world trade patterns and of the financial and economic crisis. The Instrument for Pre-Accession Assistance (IPA) provides support to candidate countries in human resources development.

Management and control of spending

| 6.8. | ESF expenditure is subject to shared management by the Commission and the Member States. The ESF is governed by the management and control systems for cohesion spending as a whole, as described in the previous chapter (paragraphs 5.8 to 5.14). |
| --- | --- |

6.8.

ESF expenditure is subject to shared management by the Commission and the Member States. The ESF is governed by the management and control systems for cohesion spending as a whole, as described in the previous chapter (paragraphs 5.8 to 5.14).

| 6.8. | Although, as mentioned in paragraph 5.8, management and control systems for ESF, ERDF and CF are governed by common rules, in practice most ESF operational programmes have their own specific authorities and control systems. |
| --- | --- |

6.8.

| 6.9. | The EGF is also implemented through shared management. For EGF, the budgetary authority decides on the appropriations and, the Commission reviews the applications for funding submitted by Member States and approves the payments. The IPA instrument is implemented through decentralised management while the other social and employment expenditure is implemented under direct centralised management. |
| --- | --- |

6.9.

The EGF is also implemented through shared management. For EGF, the budgetary authority decides on the appropriations and, the Commission reviews the applications for funding submitted by Member States and approves the payments. The IPA instrument is implemented through decentralised management while the other social and employment expenditure is implemented under direct centralised management.

Risks to regularity

| 6.10. | The main risks for ESF expenditure are related to the intangible nature of the investments in human capital (such as training courses), the diversity of the co-financed activities and the involvement of multiple, often small-scale, partners in the implementation of projects. These factors lend themselves to ineligible costs being accepted or calculation errors affecting the accuracy of claims, which are then not detected by the systems in place. |
| --- | --- |

6.10.

The main risks for ESF expenditure are related to the intangible nature of the investments in human capital (such as training courses), the diversity of the co-financed activities and the involvement of multiple, often small-scale, partners in the implementation of projects. These factors lend themselves to ineligible costs being accepted or calculation errors affecting the accuracy of claims, which are then not detected by the systems in place.

| 6.10. | The Commission has taken specific actions in order to mitigate the risks identified, which include in particular preventive and corrective measures, such as guidance, training, and interruptions of payments. |
| --- | --- |

6.10.

| 6.11. | For EGF, the principal risk is that the applications contain inaccurate information, which is not detected by the Commission during approval or in subsequent checks. For IPA, the main risk is related to the ability of the candidate countries to set up and operate the necessary structures and controls. For the other social and employment spending, the main risk is that beneficiaries may include ineligible costs in their cost claims. |
| --- | --- |

6.11.

For EGF, the principal risk is that the applications contain inaccurate information, which is not detected by the Commission during approval or in subsequent checks. For IPA, the main risk is related to the ability of the candidate countries to set up and operate the necessary structures and controls. For the other social and employment spending, the main risk is that beneficiaries may include ineligible costs in their cost claims.

Audit scope and approach

| 6.12. | Annex 1.1, Part 2
  , of Chapter 1 describes the Court's overall audit approach and methodology. For the audit of employment and social affairs, the following specific issues should be noted:






  (a) | the audit involved examination of a sample of 180 interim and final payments; |
| --- | --- | --- |

6.12.

Annex 1.1, Part 2
  , of Chapter 1 describes the Court's overall audit approach and methodology. For the audit of employment and social affairs, the following specific issues should be noted:

(a)

the audit involved examination of a sample of 180 interim and final payments;

| (b) | the assessment of systems focused on two audit authorities (AAs) for the 2007-2013 programming period in cohesion; |
| --- | --- |

(b)

the assessment of systems focused on two audit authorities (AAs) for the 2007-2013 programming period in cohesion;

| (c) | the review of Commission management representations covered the Annual Activity Report of DG Employment, Social Affairs and Inclusion (DG EMPL). |
| --- | --- |

(c)

the review of Commission management representations covered the Annual Activity Report of DG Employment, Social Affairs and Inclusion (DG EMPL).

REGULARITY OF TRANSACTIONS

| 6.13. | Annex 6.1
  contains a summary of the results of transaction testing. The Court’s testing of its sample of transactions found 40 % of the 180 payments audited to be affected by error. The most likely error estimated by the Court is 2,2 % (1). |
| --- | --- |

6.13.

Annex 6.1
  contains a summary of the results of transaction testing. The Court’s testing of its sample of transactions found 40 % of the 180 payments audited to be affected by error. The most likely error estimated by the Court is 2,2 % (1).

| 6.13. | The most likely error rate estimated by the Court in 2011 is in line with the positive development in recent years. This is the result of improvements made by Member States in their management and control systems, the strict interruptions and suspensions policy applied by DG EMPL since 2008 and the positive impact of the simplification measures provided in the regulations for the current programming period.

  As shown in Table 1.3 of Chapter 1, the combined most likely error for Regional Policy, Transport, Energy and Employment and Social Affairs decreased considerably compared to 2010, from 7,7 % to 5,1 %. |
| --- | --- |

6.13.

As shown in Table 1.3 of Chapter 1, the combined most likely error for Regional Policy, Transport, Energy and Employment and Social Affairs decreased considerably compared to 2010, from 7,7 % to 5,1 %.

| 6.14. | Management and control systems established in the Member States should provide procedures for ensuring the correctness and regularity of declared expenditure (2). The results of the Court’s audit indicate weaknesses in particular in the ‘first level checks’ of the expenditure, which are the responsibility of the managing authorities and intermediate bodies in the Member States. |
| --- | --- |

6.14.

Management and control systems established in the Member States should provide procedures for ensuring the correctness and regularity of declared expenditure (2). The results of the Court’s audit indicate weaknesses in particular in the ‘first level checks’ of the expenditure, which are the responsibility of the managing authorities and intermediate bodies in the Member States.

| 6.14. | Managing authorities are required to perform documentary checks on all claims submitted by beneficiaries, before certification of expenditure. However, on-the-spot verifications on operations may also intervene at a later stage of project implementation, after certification and up to closure, which explains why part of the errors in the Court’s sample could not be detected. The impact of the control system in reducing error rates is usually only seen in subsequent years, after all layers of controls have been implemented. |
| --- | --- |

6.14.

| 6.15. | For ESF, the Court considers, on the basis of its review of each transaction affected by error, that sufficient information was available for the Member State authorities to have detected and corrected at least some of the errors before certifying the expenditure to the Commission for 76 % of the transactions affected by error. |
| --- | --- |

6.15.

For ESF, the Court considers, on the basis of its review of each transaction affected by error, that sufficient information was available for the Member State authorities to have detected and corrected at least some of the errors before certifying the expenditure to the Commission for 76 % of the transactions affected by error.

| 6.15. | The Commission is strictly following up these cases to ensure that appropriate action plans are implemented in the concerned systems in order to prevent errors prior to certification of expenditure in the future.

  See also reply to paragraph 6.14. |
| --- | --- |

6.15.

See also reply to paragraph 6.14.

Ineligible and incorrectly calculated costs

| 6.16. | The Court detected the reimbursement of ineligible costs (eligibility errors) in 13 % of the 180 transactions audited. All of these eligibility errors related to ESF projects. Such errors account for 77 % of all quantifiable errors and make up approximately 73 % of the estimated error rate for this policy group (see example 6.1). |
| --- | --- |

6.16.

The Court detected the reimbursement of ineligible costs (eligibility errors) in 13 % of the 180 transactions audited. All of these eligibility errors related to ESF projects. Such errors account for 77 % of all quantifiable errors and make up approximately 73 % of the estimated error rate for this policy group (see example 6.1).

| 6.16 and 6.17. | The Commission will follow up all errors reported by the Court and will ensure that corrective measures are adopted by the Member States and, where necessary, financial corrections made. |
| --- | --- |

6.16 and 6.17.

Example 6.1 —   Ineligible costs

| (a) | Ineligible training participants: ESF funding was provided for training courses to increase the qualifications and knowledge of employees working in the electronics sector. The Court found that many of the participants were employed outside of the electronics sector and were therefore not eligible for such training. The cost declared for the ineligible participants was 29 % of the audited amount. |
| --- | --- |

(a)

Ineligible training participants: ESF funding was provided for training courses to increase the qualifications and knowledge of employees working in the electronics sector. The Court found that many of the participants were employed outside of the electronics sector and were therefore not eligible for such training. The cost declared for the ineligible participants was 29 % of the audited amount.

| (b) | Overcharging of staff costs: ESF funding was provided to a commercial association, as support for its activities, which included the provision of advice to small and medium-sized enterprises (SMEs). The costs of several staff members of the association were charged to the ESF project, although evidence supporting the charging of their time to the project could not be provided. The Court considers that the project staff costs have been overcharged by 60 %. |
| --- | --- |

(b)

Overcharging of staff costs: ESF funding was provided to a commercial association, as support for its activities, which included the provision of advice to small and medium-sized enterprises (SMEs). The costs of several staff members of the association were charged to the ESF project, although evidence supporting the charging of their time to the project could not be provided. The Court considers that the project staff costs have been overcharged by 60 %.

| (c) | Ineligible staff costs: for a professional training course, the expenditure declared by the beneficiary included payments received by staff working on the project as termination of employment benefits. However, the national eligibility rules specify that such payments are considered ineligible. Therefore, 2,5 % of the declared costs for the audited project is considered as being ineligible. |
| --- | --- |

(c)

Ineligible staff costs: for a professional training course, the expenditure declared by the beneficiary included payments received by staff working on the project as termination of employment benefits. However, the national eligibility rules specify that such payments are considered ineligible. Therefore, 2,5 % of the declared costs for the audited project is considered as being ineligible.

| 6.17. | A further 3 % of the 180 transactions audited concerned projects where the costs claimed for reimbursement had been incorrectly calculated (accuracy errors). These errors represent 20 % of all transactions affected by quantifiable error and make up approximately 9 % of the total estimated error rate (see example 6.2). |
| --- | --- |

6.17.

A further 3 % of the 180 transactions audited concerned projects where the costs claimed for reimbursement had been incorrectly calculated (accuracy errors). These errors represent 20 % of all transactions affected by quantifiable error and make up approximately 9 % of the total estimated error rate (see example 6.2).

Example 6.2 —   Incorrectly calculated costs

| (a) | Incorrect calculation of overhead costs: for a project consisting of training courses for unemployed persons, the overhead costs for the project were allocated using a ratio based on the proportion of the area of the building used by the project. The Court found that the ratio had been incorrectly calculated, leading to an overstatement of 2,4 % of the audited amount. |
| --- | --- |

(a)

Incorrect calculation of overhead costs: for a project consisting of training courses for unemployed persons, the overhead costs for the project were allocated using a ratio based on the proportion of the area of the building used by the project. The Court found that the ratio had been incorrectly calculated, leading to an overstatement of 2,4 % of the audited amount.

| (b) | Incorrectly calculated cost declaration: the project concerned measures for upgrading the quality of education and modernising the educational system, managed by local authorities. The Court identified a difference in the amount declared by the audited local authority to the managing authority, compared to the amount for the project declared by the managing authority to the Commission. The managing authority had made calculation errors when compiling the reporting from the local authority, resulting in an overstatement of eligible costs of 6,7 % of the audited amount. |
| --- | --- |

(b)

Incorrectly calculated cost declaration: the project concerned measures for upgrading the quality of education and modernising the educational system, managed by local authorities. The Court identified a difference in the amount declared by the audited local authority to the managing authority, compared to the amount for the project declared by the managing authority to the Commission. The managing authority had made calculation errors when compiling the reporting from the local authority, resulting in an overstatement of eligible costs of 6,7 % of the audited amount.

Numerous failures to observe procedural requirements

| 6.18. | Almost all of the transactions affected by non-quantifiable error found by the Court (40 out of 42) concerned various failures by managing authorities and beneficiaries to observe procedural requirements in the management and implementation of ESF projects. In 23 cases, the failures are considered by the Court as serious issues of non-compliance. Example 6.3 shows the main categories of such error. |
| --- | --- |

6.18.

Almost all of the transactions affected by non-quantifiable error found by the Court (40 out of 42) concerned various failures by managing authorities and beneficiaries to observe procedural requirements in the management and implementation of ESF projects. In 23 cases, the failures are considered by the Court as serious issues of non-compliance. Example 6.3 shows the main categories of such error.

| 6.18. | The Commission will follow up all errors reported by the Court and ensure that corrective measures take place. |
| --- | --- |

6.18.

Example 6.3 —   Failures to observe procedural requirements

| (a) | Absence of separate accounting: for a set of vocational training actions targeting young unemployed persons, the project accounting did not separately identify all expenditure related to the project, such as the staff salary costs. In the absence of adequate separate accounting, there is no assurance that the costs have not also been declared for other projects. |
| --- | --- |

(a)

Absence of separate accounting: for a set of vocational training actions targeting young unemployed persons, the project accounting did not separately identify all expenditure related to the project, such as the staff salary costs. In the absence of adequate separate accounting, there is no assurance that the costs have not also been declared for other projects.

| (b) | Non-compliance with accreditation rules for training companies: the beneficiary was a training company which, in order to maintain its accredited status, should have put procedures in place to measure the degree of satisfaction of trainees and to follow up whether or not they had gained employment as a result of the training. The Court found that the beneficiary had not complied with these requirements. |
| --- | --- |

(b)

Non-compliance with accreditation rules for training companies: the beneficiary was a training company which, in order to maintain its accredited status, should have put procedures in place to measure the degree of satisfaction of trainees and to follow up whether or not they had gained employment as a result of the training. The Court found that the beneficiary had not complied with these requirements.

| (c) | Contract award notice sent late: according to public procurement rules contracting authorities must send a notice of the results of the award procedure no later than 48 days after the award of the contract. The Court found three cases where this rule has not been followed. |
| --- | --- |

(c)

Contract award notice sent late: according to public procurement rules contracting authorities must send a notice of the results of the award procedure no later than 48 days after the award of the contract. The Court found three cases where this rule has not been followed.

EFFECTIVENESS OF SYSTEMS

In-depth examination of two audit authorities (AAs)

| 6.19. | The Court assessed the work of two audit authorities (AAs) in two Member States in 2011, as part of its examination of a total of seven AAs covering the ERDF, CF and ESF. The scope of the Court’s audit is described in paragraph 5.40. For the two ESF AAs audited in Italy (Sicily) and Latvia the review of their work and re-performance of their audits of operations focused on ESF expenditure. The results of the Court’s audit of the AAs for all Structural Funds are reported in Chapter 5 (paragraphs 5.41 to 5.43 and
  Annex 5.2
  ). |
| --- | --- |

6.19.

The Court assessed the work of two audit authorities (AAs) in two Member States in 2011, as part of its examination of a total of seven AAs covering the ERDF, CF and ESF. The scope of the Court’s audit is described in paragraph 5.40. For the two ESF AAs audited in Italy (Sicily) and Latvia the review of their work and re-performance of their audits of operations focused on ESF expenditure. The results of the Court’s audit of the AAs for all Structural Funds are reported in Chapter 5 (paragraphs 5.41 to 5.43 and
  Annex 5.2
  ).

| 6.19. | The audit authorities indeed play a central role in the assurance building process, as from the beginning of the programming period and set-up of systems. Thereafter, they report each year an audit opinion on the functioning of management and control systems to the Commission, based on audits on management and control systems and on statistical samples of operations carried out in accordance with an audit strategy. For this reason the Commission is closely cooperating and coordinating with them, and has started reviewing their methodologies and audit results as early as 2009. This contributed to capacity building by providing advice, guidance and recommendations to audit authorities through the Commission’s reperformance work. The regulation provides the Commission the possibility to rely on the work of an audit authority for its assurance under certain conditions (Article 73). |
| --- | --- |

6.19.

| 6.20. | The AA of Latvia is rated as effective in complying with key regulatory requirements and in ensuring the regularity of transactions. The AA of Italy (Sicily) is rated as partially effective. The Court noted particular problems in the AA’s sampling of operations for audit and in its extrapolation of errors, which led to the disclosure of an understated error rate in the AA’s Annual Control Report (ACR). The Commission, based on its own work, also considered the error rate as unreliable (see paragraphs 5.42 to 5.43). |
| --- | --- |

6.20.

The AA of Latvia is rated as effective in complying with key regulatory requirements and in ensuring the regularity of transactions. The AA of Italy (Sicily) is rated as partially effective. The Court noted particular problems in the AA’s sampling of operations for audit and in its extrapolation of errors, which led to the disclosure of an understated error rate in the AA’s Annual Control Report (ACR). The Commission, based on its own work, also considered the error rate as unreliable (see paragraphs 5.42 to 5.43).

| 6.20. | In 2011, DG EMPL carried out audits to review the work of 42 ESF audit authorities, including the AA of Sicily and Latvia. In this sample, 12 AAs were selected following a risk analysis, updated on an annual basis, and the other 30 were chosen at random. Based on its own audit work, DG EMPL concurs with the assessment of the two AAs sampled by the Court. |
| --- | --- |

6.20.

Assessment of the Commission’s supervision of AAs

| 6.21. | The results of the Court’s review of the Commission’s supervision of AAs are shown in paragraphs 5.44 to 5.51. |
| --- | --- |

6.21.

The results of the Court’s review of the Commission’s supervision of AAs are shown in paragraphs 5.44 to 5.51.

| 6.22. | The Court found that in all cases where the Commission identified specific weaknesses as a result of its enquiries in Member States, the national authorities were notified about the corrective action to be taken (paragraph 5.47). |
| --- | --- |

6.22.

The Court found that in all cases where the Commission identified specific weaknesses as a result of its enquiries in Member States, the national authorities were notified about the corrective action to be taken (paragraph 5.47).

| 6.23. | The Court is of the opinion that the Commission drew appropriate conclusions from its reviews of ACRs and that the Commission, based on its assessment, had adjusted the reported error rates where necessary (paragraph 5.51). |
| --- | --- |

6.23.

The Court is of the opinion that the Commission drew appropriate conclusions from its reviews of ACRs and that the Commission, based on its assessment, had adjusted the reported error rates where necessary (paragraph 5.51).

Reliability of Commission management representations

| 6.24. | The Court assessed the 2011 Annual Activity Report (AAR) and accompanying declaration of the Director-General for DG Employment, Social Affairs and Inclusion. In particular, with regard to the regularity of payments authorised during 2011, the Court:






  (a) | assessed the reservations made in the AAR; |
| --- | --- | --- |

6.24.

The Court assessed the 2011 Annual Activity Report (AAR) and accompanying declaration of the Director-General for DG Employment, Social Affairs and Inclusion. In particular, with regard to the regularity of payments authorised during 2011, the Court:

(a)

assessed the reservations made in the AAR;

| (b) | checked the consistency and accuracy of the Commission’s calculation of the residual error rate and the amounts of ‘payments at risk’. |
| --- | --- |

(b)

checked the consistency and accuracy of the Commission’s calculation of the residual error rate and the amounts of ‘payments at risk’.

| 6.25. | DG EMPL estimates that the overall error rate for the 2011 interim payments in the 2007-2013 programming period is in the range of 2 % to 2,5 %. The Annual Activity Report of DG EMPL contains a reservation relating to the payments made for the 2007-2013 programming period for an amount of 58,7 million euro covering 24 of 117 OPs and a reservation, without financial impact, for the 2000-2006 programming period. |
| --- | --- |

6.25.

DG EMPL estimates that the overall error rate for the 2011 interim payments in the 2007-2013 programming period is in the range of 2 % to 2,5 %. The Annual Activity Report of DG EMPL contains a reservation relating to the payments made for the 2007-2013 programming period for an amount of 58,7 million euro covering 24 of 117 OPs and a reservation, without financial impact, for the 2000-2006 programming period.

| 6.25. | Further to the Court’s positive assessment of DG Employment’s Annual Activity Report 2010, the Court made a recommendation with regard to risks related to Operational Programmes with an estimated error rate below 5 %. In order to address these risks, DG EMPL has enhanced its methodology which now includes this category in the assessment of the potential reservations to be made. Therefore, the methodology applied in the 2011 AAR is stricter, in line with the Court’s recommendation. |
| --- | --- |

6.25.

| 6.26. | DG EMPL has issued its reservations for those OPs of the 2000-2006 programming period for which the Member State had not yet adequately corrected weaknesses identified during the closure process. The Commission did not quantify these reservations (which are referred to by the Commission as the follow-up of last year’s reservation). As shown by the Court’s work there remains a risk that the closure might be based on unreliable closure documents leading to insufficient financial corrections (see paragraphs 5.63 to 5.64 and Special Report No 3/2012 (3), paragraphs 65 to 67). |
| --- | --- |

6.26.

DG EMPL has issued its reservations for those OPs of the 2000-2006 programming period for which the Member State had not yet adequately corrected weaknesses identified during the closure process. The Commission did not quantify these reservations (which are referred to by the Commission as the follow-up of last year’s reservation). As shown by the Court’s work there remains a risk that the closure might be based on unreliable closure documents leading to insufficient financial corrections (see paragraphs 5.63 to 5.64 and Special Report No 3/2012 (3), paragraphs 65 to 67).

| 6.26. | The Commission considers that the remaining risks referred to by the Court for the 2000-2006 programming period are being adequately covered during the ongoing closure process. The Commission services have made a thorough assessment of the closure documents submitted by the Winding Up Bodies and have taken the necessary measures to address the issues identified, including the interruption of the closure process, the request of additional information, the performance of closure audits based on its risk assessment and eventually for some programmes the application of financial corrections.

  Based on the above closure procedures, only once the residual error for each operational programme is considered to be below the 2 % materiality threshold, the Commission proceeds with the final payment. Therefore, no quantification of the follow up reservations for the 2000-2006 programming period was made in DG EMPL’s AAR since these had no impact on the final payments made in 2011. |
| --- | --- |

6.26.

Based on the above closure procedures, only once the residual error for each operational programme is considered to be below the 2 % materiality threshold, the Commission proceeds with the final payment. Therefore, no quantification of the follow up reservations for the 2000-2006 programming period was made in DG EMPL’s AAR since these had no impact on the final payments made in 2011.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

| 6.27. | Based on its audit work, the Court concludes that the payments for the year ended 31 December 2011 for employment and social affairs were affected by material error. |
| --- | --- |

6.27.

Based on its audit work, the Court concludes that the payments for the year ended 31 December 2011 for employment and social affairs were affected by material error.

| 6.27. | The Commission notes the low error rate in 2011 which confirms the positive development in recent years. This improvement has been achieved thanks to appropriate action taken by Member States, and an effective interruptions and suspensions policy applied by DG EMPL since 2008 coupled with a successful implementation of simplification measures.

  The Commission intends to continue, in partnership with Member States, with its efforts to further improve on its performance as recommended by the Court. |
| --- | --- |

6.27.

The Commission intends to continue, in partnership with Member States, with its efforts to further improve on its performance as recommended by the Court.

| 6.28. | Based on its audit work on the examined supervisory and control systems, the Court found that:






  (a) | audit authorities were partially effective in ensuring the regularity of operations for the 2007-2013 programming period; |
| --- | --- | --- |

6.28.

Based on its audit work on the examined supervisory and control systems, the Court found that:

(a)

audit authorities were partially effective in ensuring the regularity of operations for the 2007-2013 programming period;

| (b) | the procedures of the Commission and Member States have been partially effective in carrying out the initial phase of the closure process for the 2000-2006 programming period. |
| --- | --- |

(b)

the procedures of the Commission and Member States have been partially effective in carrying out the initial phase of the closure process for the 2000-2006 programming period.

| 6.28. | The Commission underlines that the effectiveness and quality of the work of audit authorities differs by programme and Member State, as shown by the Court’s assessment in paragraph 5.41 and by the results of the Commission’s audit work. In accordance with Article 73 of Council Regulation (EC) No 1083/2006, the Commission is as from June 2012 formally relying on the work of nine audit authorities for ESF. The Commission will continue to review the work of the remaining audit authorities and to monitor the situation for programmes for which an Article 73 letter was granted.

  The Commission considers to have established robust procedures and guidance for the closure process, and considers that most Member States have carried out important and professional work to enable the closure of programmes and to increase assurance at closure. The Commission also considers to have made a comprehensive work at closure, analysing thoroughly all closure documents, carrying out additional audits and enquiries where necessary, which has lead in many cases to additional financial corrections being applied at closure to address remaining risks. |
| --- | --- |

6.28.

The Commission considers to have established robust procedures and guidance for the closure process, and considers that most Member States have carried out important and professional work to enable the closure of programmes and to increase assurance at closure. The Commission also considers to have made a comprehensive work at closure, analysing thoroughly all closure documents, carrying out additional audits and enquiries where necessary, which has lead in many cases to additional financial corrections being applied at closure to address remaining risks.

Recommendations

| 6.29. | Annex 6.2
  shows the results of the Court’s review of progress in addressing recommendations made in previous annual reports (2008 and 2009) for the cohesion area. The following points should be noted: |
| --- | --- |

6.29.

Annex 6.2
  shows the results of the Court’s review of progress in addressing recommendations made in previous annual reports (2008 and 2009) for the cohesion area. The following points should be noted:

6.29.

| (a) | the Commission has published a working document in May 2011 on the main audit findings regarding the application of public procurement rules, in view of launching a discussion with Member States on reducing non-compliance with public procurement rules; |
| --- | --- |

(a)

the Commission has published a working document in May 2011 on the main audit findings regarding the application of public procurement rules, in view of launching a discussion with Member States on reducing non-compliance with public procurement rules;

| (a) | The Commission has made considerable efforts to ensure strict compliance with eligibility requirements and the correct application of public procurement rules. Training and guidance have been provided on eligibility and public procurement rules. Moreover, when it identifies complex rules at programme level, the Commission makes recommendations to simplify the rules. It has also shared with Member States an analysis of the types of procurement errors detected by EU audits in cohesion policy during previous years and has launched an exercise to collect best practices and possible answers by Member States to remedy such errors and reduce their occurrence.

  The application of public procurement rules is mostly relevant to ERDF and CF funding and has a limited impact on ESF funded projects. |
| --- | --- |

(a)

The application of public procurement rules is mostly relevant to ERDF and CF funding and has a limited impact on ESF funded projects.

| (b) | the Commission has continued its programme of audits in the Member States during the current programming period, but, as demonstrated by the results of the Court’s audit, the national management and control systems are only partially effective; |
| --- | --- |

(b)

the Commission has continued its programme of audits in the Member States during the current programming period, but, as demonstrated by the results of the Court’s audit, the national management and control systems are only partially effective;

| (c) | the Commission has continued to interrupt or suspend payments, and to impose financial corrections, but the expenditure certified to the Commission by the Member States remains affected by material error. |
| --- | --- |

(c)

the Commission has continued to interrupt or suspend payments, and to impose financial corrections, but the expenditure certified to the Commission by the Member States remains affected by material error.

| (b) and (c) | In the course of its extensive audit work, the Commission notified targeted recommendations to management and control authorities to remedy the identified weaknesses.

  The Commission will continue to pursue a strict approach to interruptions and suspensions. As a result of this policy and efforts made by Member States a positive impact on the error rate in the Cohesion area can be observed (see Table 1.3 of Chapter 1). |
| --- | --- |

(b) and (c)

The Commission will continue to pursue a strict approach to interruptions and suspensions. As a result of this policy and efforts made by Member States a positive impact on the error rate in the Cohesion area can be observed (see Table 1.3 of Chapter 1).

| 6.30. | Following this review and the findings and conclusions for 2011, the Court recommends that the Commission: |
| --- | --- |

6.30.

Following this review and the findings and conclusions for 2011, the Court recommends that the Commission:

| 6.30. | See joint reply to paragraphs 1.12 and 1.13. |
| --- | --- |

6.30.

| — | Recommendation 1: strictly requires compliance with the eligibility requirements for ESF funding and, on the basis of its experience gained during the 2007-2013 programming period, carries out an assessment of the use of national eligibility rules in view of identifying possible areas for further simplification and to eliminate potential sources of errors for the period after 2013; |
| --- | --- |

—

Recommendation 1: strictly requires compliance with the eligibility requirements for ESF funding and, on the basis of its experience gained during the 2007-2013 programming period, carries out an assessment of the use of national eligibility rules in view of identifying possible areas for further simplification and to eliminate potential sources of errors for the period after 2013;

The Commission has committed in 2010 to continue to monitor compliance with eligibility rules through its regular audit activity and the follow-up of all EU and national audits. Information on this is reported in the annual activity report of the Director-General of DG EMPL. When necessary the Commission will continue to take corrective measures.

In terms of assessing national eligibility rules and seeking further ways of simplification, the Commission refers to the significant efforts already made in this regard as part of its targeted action plan on specific Member States where recurring issues have been identified. The Commission will continue to pursue these efforts with a special focus on tackling ineligible costs, overcharged staff costs and streamlining national rules.

| — | Recommendation 2: reminds Member States of their responsibility to provide for procedures which ensure the correctness and regularity of expenditure declared and addresses the weaknesses in ‘first level checks’ by managing authorities and intermediate bodies through further guidance and training measures; |
| --- | --- |

—

Recommendation 2: reminds Member States of their responsibility to provide for procedures which ensure the correctness and regularity of expenditure declared and addresses the weaknesses in ‘first level checks’ by managing authorities and intermediate bodies through further guidance and training measures;

The Commission will continue to draw Member States' attention to the critical importance of the recurring issues identified by the Court concerning management verifications.

| — | Recommendation 3: encourages national authorities to rigorously apply the corrective mechanisms prior to certification of the expenditure to the Commission (2008). Whenever significant deficiencies in the functioning of the management and control systems are identified, the Commission should interrupt or suspend payments until remedial corrective action has been taken by the Member State and make financial corrections if necessary; |
| --- | --- |

—

Recommendation 3: encourages national authorities to rigorously apply the corrective mechanisms prior to certification of the expenditure to the Commission (2008). Whenever significant deficiencies in the functioning of the management and control systems are identified, the Commission should interrupt or suspend payments until remedial corrective action has been taken by the Member State and make financial corrections if necessary;

The Commission took the commitment in 2010, to continue to timely interrupt or suspend payments, when necessary. This strict policy is again reflected in the 2011 Annual Activity Report of the Director-General of DG EMPL (see Commission reply to paragraph 6.29(c).

| — | Recommendation 4: provides further guidance to AAs for the current programming period, in particular on sampling and the scope of verifications to be undertaken for audits of projects and quality control; |
| --- | --- |

—

Recommendation 4: provides further guidance to AAs for the current programming period, in particular on sampling and the scope of verifications to be undertaken for audits of projects and quality control;

The Commission will continue to provide guidance and advice to audit authorities on a wide range of technical and regulatory issues. In this respect, DG REGIO and DG EMPL organised a seminar in June 2012, during which guidance on sampling was provided.

| — | Recommendation 5: rigorously verifies the accuracy and completeness of information disclosed by AAs in their ACRs and audit opinions. The Commission’s verification should take full account of the information available on system audits and audits of operations undertaken by the AAs; |
| --- | --- |

—

Recommendation 5: rigorously verifies the accuracy and completeness of information disclosed by AAs in their ACRs and audit opinions. The Commission’s verification should take full account of the information available on system audits and audits of operations undertaken by the AAs;

The ACRs are one of the main elements on which the Commission builds its assurance. As such, full account is taken of the information provided therein. Further guidance has been provided on the treatment of error rates for the ACR 2011.

As explained in DG EMPL's 2011 AAR, a thorough review of all ACRs is conducted every year; it constitutes the basis for the formulation of reservations in view of ensuring their reliability and consistency with the abovementioned guidance.

| — | Recommendation 6: encourages the use by Member States of the simplified cost options permitted in the regulations in order to reduce the scope for error. |
| --- | --- |

—

Recommendation 6: encourages the use by Member States of the simplified cost options permitted in the regulations in order to reduce the scope for error.

The Commission continues its efforts to provide advice, training and guidance to Member States so that this possibility offered by the regulations leads to real simplification for all stakeholders.

Some 70 % of the OPs use at least one of the simplified cost options. Among the different options, flat rate for indirect costs and standard scale of unit costs are the most used.

---

(1)  The Court calculates its estimate of error from a representative statistical sample. The figure quoted is the best estimate (known as the MLE). The Court has 95 % confidence that the rate of error in the population lies between LEL 0,9 % and UEL 3,4 % (the lower and upper error limits respectively).

(2)  Article 58(c) of Council Regulation (EC) No 1083/2006 (OJ L 210, 31.7.2006, p. 25).

(3)  http://eca.europa.eu

(4)  The audit of administrative expenditure is reported in Chapter 9.

Source: 2011 annual accounts of the European Union.

ANNEX 6.1

RESULTS OF TRANSACTION TESTING FOR EMPLOYMENT AND SOCIAL AFFAIRS

| | 2011 | 2010 | 2009 | 2008 |
| --- | --- | --- | --- | --- |
| ESF | IPA | Other social matters | Total |
| SIZE AND STRUCTURE OF THE SAMPLE |
| Total transactions (of which): | 160 | 6 | 14 | 180 | 66 | 44 | 49 |
| Advances | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Interim/Final payments | 160 | 6 | 14 | 180 | 66 | 44 | 49 |
| RESULTS OF TESTING
   (1)
   (2) |
| Proportion (number) of transactions tested found to be: |
| Free of error | 56 % | (90) | 100 % | (6) | 86 % | (12) | 60 % | (108) | 73 % | 75 % | 82 % |
| Affected by one or more errors | 44 % | (70) | 0 % | (0) | 14 % | (2) | 40 % | (72) | 27 % | 25 % | 18 % |
| Analysis of transactions affected by error |
| Analysis by type of error |
| Non-Quantifiable errors: | 59 % | (41) | 0 % | (0) | 50 % | (1) | 58 % | (42) | 39 % | 0 % | 56 % |
| Quantifiable errors: | 41 % | (29) | 0 % | (0) | 50 % | (1) | 42 % | (30) | 61 % | 100 % | 44 % |
| Eligibility | 79 % | (23) | 0 % | (0) | 0 % | (0) | 77 % | (23) | 91 % | 64 % | 50 % |
| Occurrence | 4 % | (1) | 0 % | (0) | 0 % | (0) | 3 % | (1) | 9 % | 0 % | 0 % |
| Accuracy | 17 % | (5) | 0 % | (0) | 100 % | (1) | 20 % | (6) | 0 % | 36 % | 50 % |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| Most likely error rate | 2,2 % | | | |
| Upper error limit (UEL) | 3,4 % | | | |
| Lower error limit (LEL) | 0,9 % | | | |

2011

2010

2009

2008

ESF

IPA

Other social matters

Total

SIZE AND STRUCTURE OF THE SAMPLE

Total transactions (of which):

160

6

14

180

66

44

49

Advances

0

0

0

0

0

0

0

Interim/Final payments

160

6

14

180

66

44

49

RESULTS OF TESTING
   (1)
   (2)

Proportion (number) of transactions tested found to be:

Free of error

56 %

(90)

100 %

(6)

86 %

(12)

60 %

(108)

73 %

75 %

82 %

Affected by one or more errors

44 %

(70)

0 %

(0)

14 %

(2)

40 %

(72)

27 %

25 %

18 %

Analysis of transactions affected by error

Analysis by type of error

Non-Quantifiable errors:

59 %

(41)

0 %

(0)

50 %

(1)

58 %

(42)

39 %

0 %

56 %

Quantifiable errors:

41 %

(29)

0 %

(0)

50 %

(1)

42 %

(30)

61 %

100 %

44 %

Eligibility

79 %

(23)

0 %

(0)

0 %

(0)

77 %

(23)

91 %

64 %

50 %

Occurrence

4 %

(1)

0 %

(0)

0 %

(0)

3 %

(1)

9 %

0 %

0 %

Accuracy

17 %

(5)

0 %

(0)

100 %

(1)

20 %

(6)

0 %

36 %

50 %

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Most likely error rate

2,2 %

Upper error limit (UEL)

3,4 %

Lower error limit (LEL)

0,9 %

---

(1)  To improve insight into areas with different risk profiles within the policy group, the sample was split up into segments.

(2)  Numbers quoted in brackets represent the actual number of transactions.

ANNEX 6.2

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR COHESION

| Year | Court recommendation | Court's analysis of the progress made | Commission reply |
| --- | --- | --- | --- |
| 2009 | Cohesion:

  The Commission should monitor compliance with the eligibility requirements for EU funding, including the correct application of the EU and national public procurement rules
  (see the 2009 Annual Report, paragraph 4.38) | The Commission issues guidance to Member States' managing and audit authorities. In May 2011, the Commission published a working document on the main audit findings regarding the application of public procurement rules, in view of launching a discussion with Member States on reducing the number of public procurement errors in Structural Funds projects. The Commission's overall evaluation of the impact and effectiveness of EU public procurement legislation was published in June 2011. | The Commission has explained in the Staff Working Document (SEC(2011) 1179 dated 5.10.2011) the specific actions undertaken in order to mitigate the risks identified, which include in particular preventive and corrective measures, such as guidance, training, and interruptions of payments. |
| Cohesion:

  The Commission should ensure that the substitution of ineligible with new expenditure (withdrawal) does not result in new irregular expenditure being declared by Member States.
  (see the 2009 Annual Report, paragraph 4.37(b)). | The Commission is following up this risk during the closure of the 2000-2006 programmes. The Commission's proposal for the 2014-2020 regulatory framework provides that, where irregularities affecting annual accounts are detected by EU audits, the resulting correction reduces funding to the OP, which would limit withdrawal and replacement of expenditure to the ongoing financial year. | The Commission proposal for the 2014-2020 regulatory framework provides, within a logic of annual closure, that ‘where irregularities affecting annual accounts sent to the Commission are detected by the Commission or the Court, the resulting financial correction shall reduce support from funds to the operational programme’. The proposal thereby limits the possibilities of withdrawal/replacement. |
| 2009 and 2008 | Cohesion:

  The Commission should ensure, through its supervision, an effective functioning of the national management and control systems
  (see the 2009 Annual Report, paragraph 4.37(c); the 2008 Annual Report, paragraphs 6.37(a) and (c)) | The Commission performs compliance assessments of the national management and control systems at the beginning of the programming period and carries out audits throughout the programming period. In addition, for the 2007-2013 programming period, the Commission increasingly relies on national audit authorities (AAs) to seek to obtain assurance on the effective functioning of the systems. In 2011, the Commission has continued its examination of the work of the AAs for 2007-2013 OPs, including in-depth enquiries of AAs (see paragraphs 5.35 to 5.37 and 5.44 to 5.51). As a whole, the management and control systems are partially effective in ensuring the regularity of transactions: payments for ERDF, CF and ESF remain subject to material error. | The Commission has strengthened its supervisory role since the adoption of the 2008 Action Plan and continues to implement a strict policy of suspensions and interruptions of payments as soon as deficiencies are identified. Those persistent actions have improved the effective functioning of the management and control systems in Member States and the lower error rates reported by the Court for the DAS 2011 confirm this positive development.


  As explained in the reply to paragraph 5.44, the Commission reliance on audit authorities is based on extensive audit work. The Commission welcomes the Court's assessment that it notified the Member States about the corrective action to be taken in all cases where specific weaknesses were identified (see paragraph 5.47). On the basis of this audit work, the Commission is as from July 2012 formally relying on the work of 13 audit authorities for ERDF/CF and 9 audit authorities for ESF. |
| 2009 and 2008 | Cohesion:

  The Commission should encourage national authorities to rigorously apply the corrective mechanisms prior to certification of the expenditure to the Commission
  (see the 2009 Annual Report, paragraph 4.37(a); the 2008 Annual Report, paragraphs 6.37(b) and (d)) | The Commission has continued its policy of interruption or suspension of payments in case of serious irregularities or systems deficiencies. Member States are requested to send information on financial corrections to the Commission by 31 March each year. The Commission may impose financial corrections where the Member State fails to take appropriate corrective measures. In 2011, for 2007-2013 programmes, the Commission has decided financial corrections of 217,6 million euro for ESF and 2,7 million euro for ERDF. However, the certified statements of expenditure submitted by Member States to the Commission continue to be affected by material error. | An audit of the Member States' systems has been launched beginning 2011 with the objective to improve the reporting of national financial corrections to the Commission, and ensure completeness, accuracy and timeliness of reporting. The results showed improvements in MSs systems to apply financial corrections and report on them. Moreover, the multiannual nature of the expenditure and control cycle allows financial corrections at various stages of implementation, including at closure where final checks are performed on the legality and regularity of expenditure and final corrections are made where necessary. |

Year

Court recommendation

Court's analysis of the progress made

Commission reply

2009

Cohesion:

The Commission should monitor compliance with the eligibility requirements for EU funding, including the correct application of the EU and national public procurement rules

(see the 2009 Annual Report, paragraph 4.38)

The Commission issues guidance to Member States' managing and audit authorities. In May 2011, the Commission published a working document on the main audit findings regarding the application of public procurement rules, in view of launching a discussion with Member States on reducing the number of public procurement errors in Structural Funds projects. The Commission's overall evaluation of the impact and effectiveness of EU public procurement legislation was published in June 2011.

The Commission has explained in the Staff Working Document (SEC(2011) 1179 dated 5.10.2011) the specific actions undertaken in order to mitigate the risks identified, which include in particular preventive and corrective measures, such as guidance, training, and interruptions of payments.

Cohesion:

The Commission should ensure that the substitution of ineligible with new expenditure (withdrawal) does not result in new irregular expenditure being declared by Member States.

(see the 2009 Annual Report, paragraph 4.37(b)).

The Commission is following up this risk during the closure of the 2000-2006 programmes. The Commission's proposal for the 2014-2020 regulatory framework provides that, where irregularities affecting annual accounts are detected by EU audits, the resulting correction reduces funding to the OP, which would limit withdrawal and replacement of expenditure to the ongoing financial year.

The Commission proposal for the 2014-2020 regulatory framework provides, within a logic of annual closure, that ‘where irregularities affecting annual accounts sent to the Commission are detected by the Commission or the Court, the resulting financial correction shall reduce support from funds to the operational programme’. The proposal thereby limits the possibilities of withdrawal/replacement.

2009 and 2008

Cohesion:

The Commission should ensure, through its supervision, an effective functioning of the national management and control systems

(see the 2009 Annual Report, paragraph 4.37(c); the 2008 Annual Report, paragraphs 6.37(a) and (c))

The Commission performs compliance assessments of the national management and control systems at the beginning of the programming period and carries out audits throughout the programming period. In addition, for the 2007-2013 programming period, the Commission increasingly relies on national audit authorities (AAs) to seek to obtain assurance on the effective functioning of the systems. In 2011, the Commission has continued its examination of the work of the AAs for 2007-2013 OPs, including in-depth enquiries of AAs (see paragraphs 5.35 to 5.37 and 5.44 to 5.51). As a whole, the management and control systems are partially effective in ensuring the regularity of transactions: payments for ERDF, CF and ESF remain subject to material error.

The Commission has strengthened its supervisory role since the adoption of the 2008 Action Plan and continues to implement a strict policy of suspensions and interruptions of payments as soon as deficiencies are identified. Those persistent actions have improved the effective functioning of the management and control systems in Member States and the lower error rates reported by the Court for the DAS 2011 confirm this positive development.

As explained in the reply to paragraph 5.44, the Commission reliance on audit authorities is based on extensive audit work. The Commission welcomes the Court's assessment that it notified the Member States about the corrective action to be taken in all cases where specific weaknesses were identified (see paragraph 5.47). On the basis of this audit work, the Commission is as from July 2012 formally relying on the work of 13 audit authorities for ERDF/CF and 9 audit authorities for ESF.

2009 and 2008

Cohesion:

The Commission should encourage national authorities to rigorously apply the corrective mechanisms prior to certification of the expenditure to the Commission

(see the 2009 Annual Report, paragraph 4.37(a); the 2008 Annual Report, paragraphs 6.37(b) and (d))

The Commission has continued its policy of interruption or suspension of payments in case of serious irregularities or systems deficiencies. Member States are requested to send information on financial corrections to the Commission by 31 March each year. The Commission may impose financial corrections where the Member State fails to take appropriate corrective measures. In 2011, for 2007-2013 programmes, the Commission has decided financial corrections of 217,6 million euro for ESF and 2,7 million euro for ERDF. However, the certified statements of expenditure submitted by Member States to the Commission continue to be affected by material error.

An audit of the Member States' systems has been launched beginning 2011 with the objective to improve the reporting of national financial corrections to the Commission, and ensure completeness, accuracy and timeliness of reporting. The results showed improvements in MSs systems to apply financial corrections and report on them. Moreover, the multiannual nature of the expenditure and control cycle allows financial corrections at various stages of implementation, including at closure where final checks are performed on the legality and regularity of expenditure and final corrections are made where necessary.

---

CHAPTER 7

External relations, aid and enlargement

TABLE OF CONTENTS

Introduction

Specific characteristics of the policy group

Risks characteristics

Budget support

Eligibility for co-financed actions

Audit scope and approach

Regularity of transactions

Effectiveness of systems

DG ECHO

FPI

Commission’s management representations

Conclusions and recommendations

Conclusions

Recommendations

| THE COURT’S OBSERVATIONS | THE COMMISSION’S REPLIES |
| --- | --- |
| INTRODUCTION |
| 7.1. | This Chapter presents the Court’s specific assessment of external relations, aid and enlargement, which comprises policy areas: 19 — External relations, 21 — Development and relations with African, Caribbean and Pacific (APC) States (1), 22 — Enlargement, and 23 — Humanitarian aid. Key information on the activities covered and the spending in 2011 is provided in
  Table 7.1. |

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

7.1.

This Chapter presents the Court’s specific assessment of external relations, aid and enlargement, which comprises policy areas: 19 — External relations, 21 — Development and relations with African, Caribbean and Pacific (APC) States (1), 22 — Enlargement, and 23 — Humanitarian aid. Key information on the activities covered and the spending in 2011 is provided in
  Table 7.1.

Table 7.1 —   External relations, aid and enlargement — Key information 2011

| (million euro) |
| --- |
| Budget Title | Policy area | Description | Payments | Management mode |
| 19 | External relations | Administrative expenditure | 157 | Centralised direct |
| Cooperation with third countries in the area of migration and asylum | 39 | Centralised direct |
| Common foreign and security policy (CFSP) | 308 | Centralised indirect/joint |
| European instrument for democracy and human rights (EIDHR) | 123 | Centralised direct |
| Relation and cooperation with industrialised non-member countries | 20 | Centralised direct |
| Crisis response and global threats to security | 238 | Centralised direct/joint |
| European neighbourhood policy and relations with Russia | 1 448 | Centralised direct/decentralised |
| Relations with Latin America | 282 | Centralised direct/decentralised |
| Relations with Asia, Central Asia and Middle Eastern countries | 670 | Centralised direct/decentralised/joint |
| Policy strategy and coordination | 28 | Centralised direct |
| | 3 313 | |
| 21 | Development and relations with ACP States | Administrative expenditure | 338 | Centralised direct |
| Food security | 320 | Centralised direct |
| Non-State actors in development | 202 | Centralised direct |
| Environment and sustainable management of natural resources, including energy | 136 | Centralised direct |
| Human and social development | 172 | Centralised direct/joint |
| Geographical cooperation with African, Caribbean and Pacific (ACP) States | 300 | Centralised direct/decentralised/joint |
| Development cooperation actions and ad hoc programmes | 30 | Centralised direct |
| Policy strategy and coordination | 15 | Centralised direct |
| | 1 513 | |
| 22 | Enlargement | Administrative expenditure | 93 | Centralised direct |
| Enlargement process and strategy | 835 | Centralised direct/indirect/decentralised |
| | 928 | |
| 23 | Humanitarian aid | Administrative expenditure | 33 | Centralised direct |
| Humanitarian aid | 1 008 | Centralised direct/joint |
| Civil Protection Financial Instrument | 27 | Centralised direct |
| | 1 068 | |
| Total administrative expenditure (27) | 621 | |
| Total operational expenditure | 6 201 | |
| Of which: | — | advances |

(million euro)

Budget Title

Policy area

Description

Payments

Management mode

19

External relations

Administrative expenditure

157

Centralised direct

Cooperation with third countries in the area of migration and asylum

39

Centralised direct

Common foreign and security policy (CFSP)

308

Centralised indirect/joint

European instrument for democracy and human rights (EIDHR)

123

Centralised direct

Relation and cooperation with industrialised non-member countries

20

Centralised direct

Crisis response and global threats to security

238

Centralised direct/joint

European neighbourhood policy and relations with Russia

1 448

Centralised direct/decentralised

Relations with Latin America

282

Centralised direct/decentralised

Relations with Asia, Central Asia and Middle Eastern countries

670

Centralised direct/decentralised/joint

Policy strategy and coordination

28

Centralised direct

3 313

21

Development and relations with ACP States

Administrative expenditure

338

Centralised direct

Food security

320

Centralised direct

Non-State actors in development

202

Centralised direct

Environment and sustainable management of natural resources, including energy

136

Centralised direct

Human and social development

172

Centralised direct/joint

Geographical cooperation with African, Caribbean and Pacific (ACP) States

300

Centralised direct/decentralised/joint

Development cooperation actions and ad hoc programmes

30

Centralised direct

Policy strategy and coordination

15

Centralised direct

1 513

22

Enlargement

Administrative expenditure

93

Centralised direct

Enlargement process and strategy

835

Centralised direct/indirect/decentralised

928

23

Humanitarian aid

Administrative expenditure

33

Centralised direct

Humanitarian aid

1 008

Centralised direct/joint

Civil Protection Financial Instrument

27

Centralised direct

1 068

Total administrative expenditure (27)

621

Total operational expenditure

6 201

Of which:

—

4 080

| — | interim/final payments |
| --- | --- |

—

2 121

Total payments for the year

6 822

Total commitments for the year

8 285

Source: 2011 annual accounts of the European Union.

Specific characteristics of the policy group

| 7.2. | The external relations and development budget was implemented in 2011 by the DG for Development and Cooperation — EuropeAid and also by the Service for Foreign Policy Instruments (FPI). |
| --- | --- |

7.2.

The external relations and development budget was implemented in 2011 by the DG for Development and Cooperation — EuropeAid and also by the Service for Foreign Policy Instruments (FPI).

| 7.3. | The budget (around 3 840 million euro (2)) implemented by EuropeAid covers:






  (a) | development assistance to, and economic cooperation with, countries in Asia, Latin America and ACP States; |
| --- | --- | --- |

7.3.

The budget (around 3 840 million euro (2)) implemented by EuropeAid covers:

(a)

development assistance to, and economic cooperation with, countries in Asia, Latin America and ACP States;

| (b) | the European neighbourhood policy, including the strategic partnership with Russia; |
| --- | --- |

(b)

the European neighbourhood policy, including the strategic partnership with Russia;

| (c) | thematic programmes, including food security, non-State actors and local authorities, environment, health and education, democracy and human rights. |
| --- | --- |

(c)

thematic programmes, including food security, non-State actors and local authorities, environment, health and education, democracy and human rights.

| 7.4. | Development projects are dispersed through more than 150 countries, and the implementing organisations vary greatly both in size and experience. To be eligible for EU support, projects are required to comply with complex rules including tendering and contract award procedures. |
| --- | --- |

7.4.

Development projects are dispersed through more than 150 countries, and the implementing organisations vary greatly both in size and experience. To be eligible for EU support, projects are required to comply with complex rules including tendering and contract award procedures.

| 7.5. | The Service for Foreign Policy Instruments is a Commission department established on 1 January 2011, reporting directly to the High Representative of the Union for Foreign Affairs and Security Policy. Expenditure managed by FPI (around 490 million euro (3)) mainly relates to actions implemented under:






  (a) | the common foreign and security policy (CFSP) (indirect centralised management), supporting the preservation of stability in sensitive countries and the non-proliferation of weapons of mass destruction; |
| --- | --- | --- |

7.5.

The Service for Foreign Policy Instruments is a Commission department established on 1 January 2011, reporting directly to the High Representative of the Union for Foreign Affairs and Security Policy. Expenditure managed by FPI (around 490 million euro (3)) mainly relates to actions implemented under:

(a)

the common foreign and security policy (CFSP) (indirect centralised management), supporting the preservation of stability in sensitive countries and the non-proliferation of weapons of mass destruction;

| (b) | the Instrument for Stability (IfS) (direct centralised/joint management), supporting the prevention, management and resolution of conflicts and the peace-building activities; |
| --- | --- |

(b)

the Instrument for Stability (IfS) (direct centralised/joint management), supporting the prevention, management and resolution of conflicts and the peace-building activities;

| (c) | the Election Observation Missions (EOMs) (direct centralised management) aiming at strengthening democratisation, good governance and conflict prevention; and |
| --- | --- |

(c)

the Election Observation Missions (EOMs) (direct centralised management) aiming at strengthening democratisation, good governance and conflict prevention; and

| (d) | the Industrialised Countries Instrument (ICI) (direct centralised management) which is the main vehicle for improving cooperation with industrialised countries. |
| --- | --- |

(d)

the Industrialised Countries Instrument (ICI) (direct centralised management) which is the main vehicle for improving cooperation with industrialised countries.

| 7.6. | The enlargement budget (4) (835 million euro (5)) was implemented by the Directorate-General for Enlargement (DG ELARG) and the humanitarian aid budget (6) by the Directorate-General for Humanitarian Aid and Civil Protection — ECHO (1 008 million euro (7)). DG ECHO is also in charge of the European Civil Protection Mechanism (8) (27 million euro (9)). |
| --- | --- |

7.6.

The enlargement budget (4) (835 million euro (5)) was implemented by the Directorate-General for Enlargement (DG ELARG) and the humanitarian aid budget (6) by the Directorate-General for Humanitarian Aid and Civil Protection — ECHO (1 008 million euro (7)). DG ECHO is also in charge of the European Civil Protection Mechanism (8) (27 million euro (9)).

Risks characteristics

| 7.7. | Most of the budget managed by the DGs/Service is implemented on the basis of advances, which only require compliance with a limited number of conditions. Interim and final payments on the other hand are conditional upon the submission and validation of expenditure actually incurred for the project and is therefore in general subject to greater risk of errors in legality and regularity than advances. |
| --- | --- |

7.7.

Most of the budget managed by the DGs/Service is implemented on the basis of advances, which only require compliance with a limited number of conditions. Interim and final payments on the other hand are conditional upon the submission and validation of expenditure actually incurred for the project and is therefore in general subject to greater risk of errors in legality and regularity than advances.

| 7.8. | The inherent nature of some instruments and payment modalities of the policy area allow the Commission a considerable degree of flexibility in determining the eligibility of expenditure. Therefore these operations are less prone to legality and regularity errors. |
| --- | --- |

7.8.

The inherent nature of some instruments and payment modalities of the policy area allow the Commission a considerable degree of flexibility in determining the eligibility of expenditure. Therefore these operations are less prone to legality and regularity errors.

| 7.8. | The Commission operates in the framework of the legislation in force approved by the European Parliament and the Council. |
| --- | --- |

7.8.

Budget support

| 7.9. | The EU regulations governing cooperation with partner countries (10) stipulate that direct budgetary assistance (11) in support of macroeconomic or sectoral reforms is conditional upon public financial management (PFM) in the recipient countries being sufficiently transparent, accountable and effective. |
| --- | --- |

7.9.

The EU regulations governing cooperation with partner countries (10) stipulate that direct budgetary assistance (11) in support of macroeconomic or sectoral reforms is conditional upon public financial management (PFM) in the recipient countries being sufficiently transparent, accountable and effective.

| 7.10. | These legal provisions offer broad scope for interpretation (12) and what is considered as ‘sufficient’ in terms of transparency, accountability and effectiveness of PFM can vary greatly, depending on the specific situation of the country but also on the direction taken by its government. Under such circumstances, it should be recalled that: |
| --- | --- |

7.10.

These legal provisions offer broad scope for interpretation (12) and what is considered as ‘sufficient’ in terms of transparency, accountability and effectiveness of PFM can vary greatly, depending on the specific situation of the country but also on the direction taken by its government. Under such circumstances, it should be recalled that:

| 7.9-7.10. | The Commission does not fully share the Court's analysis of the operation of budget support.

  Budget support operates in a development context where core government systems such as public financial management can have major weaknesses. Nevertheless eligibility conditions are rigorous. A partner country is eligible for budget support only when the government has a relevant and credible strategy in place to address these weaknesses. The Commission can also require specific short term measures to mitigate risks. New budget support guidelines (24) (which were revised in 2012 following the Commission proposals (25) and Council Conclusions of 14 May 2012 for a new approach to budget support) now include a number of new provisions to further clarify the rules. This includes new eligibility rules on transparency and oversight, a formal risk assessment process and a senior management governance framework. |
| --- | --- |

7.9-7.10.

Budget support operates in a development context where core government systems such as public financial management can have major weaknesses. Nevertheless eligibility conditions are rigorous. A partner country is eligible for budget support only when the government has a relevant and credible strategy in place to address these weaknesses. The Commission can also require specific short term measures to mitigate risks. New budget support guidelines (24) (which were revised in 2012 following the Commission proposals (25) and Council Conclusions of 14 May 2012 for a new approach to budget support) now include a number of new provisions to further clarify the rules. This includes new eligibility rules on transparency and oversight, a formal risk assessment process and a senior management governance framework.

| (a) | budget support is often provided to countries with weak PFM systems. One important risk is that the budget of the recipient country may be affected by fraud and corruption. Given that the funds transferred under budget support operations are merged with other budget resources within the country’s budget (known as ‘fungibility’), they are also exposed to the same PFM weaknesses; |
| --- | --- |

(a)

budget support is often provided to countries with weak PFM systems. One important risk is that the budget of the recipient country may be affected by fraud and corruption. Given that the funds transferred under budget support operations are merged with other budget resources within the country’s budget (known as ‘fungibility’), they are also exposed to the same PFM weaknesses;

| (b) | as budget support operations are implemented through the partner countries’ PFM systems, processes and institutions, the Court’s audit of legality and regularity cannot go beyond the stage where the aid is paid into the partner countries’ budgets; |
| --- | --- |

(b)

as budget support operations are implemented through the partner countries’ PFM systems, processes and institutions, the Court’s audit of legality and regularity cannot go beyond the stage where the aid is paid into the partner countries’ budgets;

| (c) | the Commission has wide flexibility in deciding whether a partner country is eligible for budget support. Due to this broad scope for interpretation, budget support operations carried out by the Commission are less prone to legality and regularity errors. |
| --- | --- |

(c)

the Commission has wide flexibility in deciding whether a partner country is eligible for budget support. Due to this broad scope for interpretation, budget support operations carried out by the Commission are less prone to legality and regularity errors.

Untargeted budget support is designed to reward results rather than finance activities. Therefore it is clear that audit cannot go beyond the stage where funds are transferred following the achievement of agreed conditions. However, the audit of activities which budget support payments may finance is the remit of national audit authorities to which accompanying programmes offer concrete support.

This aid delivery mechanism represents one of the ways in which the Commission has responded to calls by the international development community and EU stakeholders for more effective interventions which focus on results and ownership and are less administratively complex, thereby reducing transaction costs for partner countries.

Eligibility for co-financed actions

| 7.11. | The Commission channels part of its aid through multi-donor actions implemented by international and UN organisations (13). These contributions are fungible by nature. However, in some cases the Commission does not act as a provider of general support but seeks to restrict its contributions by reference to specific spending criteria. Should another donor follow the same approach and apply the same eligibility criteria for its contribution, there is a risk that overall spending does not meet the combined conditionality requirements of the Commission and the second donor(s). |
| --- | --- |

7.11.

The Commission channels part of its aid through multi-donor actions implemented by international and UN organisations (13). These contributions are fungible by nature. However, in some cases the Commission does not act as a provider of general support but seeks to restrict its contributions by reference to specific spending criteria. Should another donor follow the same approach and apply the same eligibility criteria for its contribution, there is a risk that overall spending does not meet the combined conditionality requirements of the Commission and the second donor(s).

| 7.11. | The Commission is not aware of any specific problems with the ‘notional approach’ (which has been developed in recent years to allow the Commission to participate in multi-donor actions including trust funds). This approach guarantees that the legal requirements applicable to EU funding in external actions are met (by ensuring that the amount contributed by other donors is sufficient to pay for any activities which are ineligible under EU rules) while spending EU funds in the most efficient way (through donor coordination), in accordance with the principle of sound financial management.

  The Commission limits this risk by assessing the accounting, audit, internal control and procurement procedures of the partner international organisations in advance of any joint working, the presence of its staff in the field (and participation in steering groups) and the rigorous overall financial reporting required of the international organisation. In addition, during the implementation of external actions, systems are regularly reviewed through the performance of verification missions undertaken by external auditors.


  EuropeAid and ECHO auditors have not to date reported any findings or ‘specific risks’ of this nature, nor is the Commission aware of any other donor with ‘the same eligibility criteria’.


  The Commission believes that these internal control measures which it has put in place together with those of the international organisation concerned limits this theoretical risk to a level where it is indeed negligible. |
| --- | --- |

7.11.

The Commission limits this risk by assessing the accounting, audit, internal control and procurement procedures of the partner international organisations in advance of any joint working, the presence of its staff in the field (and participation in steering groups) and the rigorous overall financial reporting required of the international organisation. In addition, during the implementation of external actions, systems are regularly reviewed through the performance of verification missions undertaken by external auditors.

EuropeAid and ECHO auditors have not to date reported any findings or ‘specific risks’ of this nature, nor is the Commission aware of any other donor with ‘the same eligibility criteria’.

The Commission believes that these internal control measures which it has put in place together with those of the international organisation concerned limits this theoretical risk to a level where it is indeed negligible.

Audit scope and approach

| 7.12. | Annex 1.1, Part 2
  , of Chapter 1 describes the Court’s overall audit approach and methodology. For the audit of external relations, aid and enlargement, the following specific issues should be noted:






  (a) | the audit involved examination of a sample of 150 payments, comprising 30 advances and 120 interim and final payments. The advances audited covered 18 countries. The tested interim/final payments approved by Commission headquarters or EU delegations covered 11 countries (14). In the case of DG ECHO, the audited interim/final payments were made under projects implemented by four DG ECHO partners (15); |
| --- | --- | --- |

7.12.

Annex 1.1, Part 2
  , of Chapter 1 describes the Court’s overall audit approach and methodology. For the audit of external relations, aid and enlargement, the following specific issues should be noted:

(a)

the audit involved examination of a sample of 150 payments, comprising 30 advances and 120 interim and final payments. The advances audited covered 18 countries. The tested interim/final payments approved by Commission headquarters or EU delegations covered 11 countries (14). In the case of DG ECHO, the audited interim/final payments were made under projects implemented by four DG ECHO partners (15);

| (b) | the assessment of systems covered the supervisory and control systems of EuropeAid, DG ECHO and FPI at headquarters as well as at EU delegations, where relevant, including:






  (i) | ex-ante controls; |
| --- | --- | --- |

(b)

the assessment of systems covered the supervisory and control systems of EuropeAid, DG ECHO and FPI at headquarters as well as at EU delegations, where relevant, including:

(i)

ex-ante controls;

| (ii) | monitoring and supervision; |
| --- | --- |

(ii)

monitoring and supervision;

| (iii) | ex-post controls/external audits; |
| --- | --- |

(iii)

ex-post controls/external audits;

| (iv) | internal audit. |
| --- | --- |

(iv)

internal audit.

| 7.13. | These four layers of internal control have been identified by the Court to assess the range of controls that the external actions DGs can use to prevent, detect and correct errors affecting the legality and regularity of the expenditure. |
| --- | --- |

7.13.

These four layers of internal control have been identified by the Court to assess the range of controls that the external actions DGs can use to prevent, detect and correct errors affecting the legality and regularity of the expenditure.

| 7.14. | The Court applies a rotation policy in the assessment of the supervisory and control systems. DG ELARG was not assessed for the year 2011; however a follow-up of previous years’ recommendations was carried out (see
  Annex 7.3
  ). |
| --- | --- |

7.14.

The Court applies a rotation policy in the assessment of the supervisory and control systems. DG ELARG was not assessed for the year 2011; however a follow-up of previous years’ recommendations was carried out (see
  Annex 7.3
  ).

REGULARITY OF TRANSACTIONS

| 7.15. | Annex 7.1
  contains a summary of the results of transaction testing. The Court’s testing of its sample of transactions found 33 % to be affected by error. The most likely error rate estimated by the Court is 1,1 % (16). All the errors have been found in interim or final payments. Furthermore, the Court found a high frequency of non-quantifiable errors. |
| --- | --- |

7.15.

Annex 7.1
  contains a summary of the results of transaction testing. The Court’s testing of its sample of transactions found 33 % to be affected by error. The most likely error rate estimated by the Court is 1,1 % (16). All the errors have been found in interim or final payments. Furthermore, the Court found a high frequency of non-quantifiable errors.

| 7.16. | 22 out of 150 payments were affected by quantifiable errors. Most of these errors (16) were found in final payments. These errors had not been detected by Commission controls. The errors involve ineligible expenditure incurred at final beneficiary level such as: expenditure incurred outside the eligibility period, inclusion of ineligible expenditure (e.g. VAT, staff costs and unjustified overheads) charged in the project cost claims and expenditure without adequate supporting documents. Examples of errors are provided below (see example 7.1). |
| --- | --- |

7.16.

22 out of 150 payments were affected by quantifiable errors. Most of these errors (16) were found in final payments. These errors had not been detected by Commission controls. The errors involve ineligible expenditure incurred at final beneficiary level such as: expenditure incurred outside the eligibility period, inclusion of ineligible expenditure (e.g. VAT, staff costs and unjustified overheads) charged in the project cost claims and expenditure without adequate supporting documents. Examples of errors are provided below (see example 7.1).

| 7.16. | The Commission's checks are designed in such a way that the detection and correction of errors, through ex-post audits — after final payments — is still possible. An extensive programme of ex-post audits is managed by the external aid DGs on an annual basis, based on a formal risk assessment process.


  The Commission considers that it operates in countries where it is often difficult if not impossible to prevent or correct a number of errors observed by the Court. For example, this is the case for contractors (often NGOs) who have difficulties getting mandatory VAT payments reimbursed by the State. |
| --- | --- |

7.16.

The Commission's checks are designed in such a way that the detection and correction of errors, through ex-post audits — after final payments — is still possible. An extensive programme of ex-post audits is managed by the external aid DGs on an annual basis, based on a formal risk assessment process.

The Commission considers that it operates in countries where it is often difficult if not impossible to prevent or correct a number of errors observed by the Court. For example, this is the case for contractors (often NGOs) who have difficulties getting mandatory VAT payments reimbursed by the State.

| 7.17. | The fact that ineligible expenditure declared by final beneficiaries of grants or service providers has been paid by the Commission, shows that the preventive and detective controls applied by the Commission are not fully effective (e.g. insufficient number and limited scope of on-the-spot visits and direct testing of expenditure declared; insufficient quality of the expenditure verifications subcontracted by the beneficiaries). |
| --- | --- |

7.17.

The fact that ineligible expenditure declared by final beneficiaries of grants or service providers has been paid by the Commission, shows that the preventive and detective controls applied by the Commission are not fully effective (e.g. insufficient number and limited scope of on-the-spot visits and direct testing of expenditure declared; insufficient quality of the expenditure verifications subcontracted by the beneficiaries).

| 7.17. | The Commission believes that detective and corrective measures prior to final payments (e.g. accreditation of beneficiaries, submission of reports, external audits, expenditure verifications and transactional checks by Commission staff) are effective (26). In addition, potential irregularities can still be corrected ex-post through the launching of ex-post audits and appropriate recoveries. Nevertheless, the risk of financial error cannot be realistically reduced to zero. |
| --- | --- |

7.17.

The Commission believes that detective and corrective measures prior to final payments (e.g. accreditation of beneficiaries, submission of reports, external audits, expenditure verifications and transactional checks by Commission staff) are effective (26). In addition, potential irregularities can still be corrected ex-post through the launching of ex-post audits and appropriate recoveries. Nevertheless, the risk of financial error cannot be realistically reduced to zero.

| — |
| --- |

—

| — |
| --- |

—

EuropeAid — Cameroon

A final payment for a project providing assistance for banana suppliers in Cameroon was affected by serious eligibility errors (17). There were irregularities in the tendering procedures carried out by the beneficiary. In addition, the beneficiary did not respect the Rule of Origin (18) when purchasing equipment.

EuropeAid — Cameroon

The legislation in force does specifically allow for formal derogations to the restricted origin of goods rules, where duly justified. It is currently almost impossible to avoid sourcing goods from ‘non-eligible’ countries when implementing these kinds of projects in Africa. The beneficiary should have requested derogation to the Commission which would have been given if duly justified, as it was in this case as (due to the specialised nature of the tender) the (Columbian) bid was the only one received.

An ECHO partner

A final payment under a grant agreement for promoting and supporting the welfare of displaced populations in Darfur was affected by several irregularities (e.g. costs incurred outside the eligibility period, incorrect allocation of shared costs and expenditure without adequate supporting documents) (19).

An ECHO partner

In the example given, ECHO insists on the fact that this humanitarian action was delivered in Darfur, which is one of the most difficult environments in the world characterised by unpredictability, volatility, insecurity and problematic access to affected people, which represents a major management challenge. Although some contractual requirements were not fully respected in this case, the Partner ensured that results were achieved. It is also worth noting that the two other transactions audited by the Court on the same partner, and implemented in different countries, were not affected by any errors. Nevertheless, ECHO reminded the Partner of its contractual duties and of the need to further improve its internal control systems.

| 7.18. | 27 transactions out of 150 were affected by 51 non-quantifiable errors, including 31 errors in contracting procedures carried out or endorsed by the Commission, 8 linked to budget support payments, and 11 relating to non-compliance with legal or contractual obligations. |
| --- | --- |

7.18.

27 transactions out of 150 were affected by 51 non-quantifiable errors, including 31 errors in contracting procedures carried out or endorsed by the Commission, 8 linked to budget support payments, and 11 relating to non-compliance with legal or contractual obligations.

| 7.19. | The 31 errors in contracting procedures were detected in 22 of the 85 payments subject to a competitive awarding procedure. These procurement errors include: |
| --- | --- |

7.19.

The 31 errors in contracting procedures were detected in 22 of the 85 payments subject to a competitive awarding procedure. These procurement errors include:

7.19.

| (a) | unclear selection criteria or the use of a wrong type of procurement procedure (16); |
| --- | --- |

(a)

unclear selection criteria or the use of a wrong type of procurement procedure (16);

| (b) | insufficient documentation of the evaluation procedures and unequal treatment of candidates (9); |
| --- | --- |

(b)

insufficient documentation of the evaluation procedures and unequal treatment of candidates (9);

| (c) | contracts amended after the implementation period (3). |
| --- | --- |

(c)

contracts amended after the implementation period (3).

An example is provided hereafter (see example 7.2).

| — |
| --- |

—

| — |
| --- |

—

DG ELARG HQ

A tendering procedure for TAIEX (20) concerning three interim payments was found to be irregular. The Commission awarded the contract to a company that did not comply with the clause on expert availability, where others did. Indeed, according to the Terms of Reference provided to the tenderers, the starting date on which the experts had to be available was 1 April 2008. The experts proposed by the successful tenderer were only available as of 21 May 2008. The contract was nevertheless awarded to that company. This has been treated as non-quantifiable error.

DG ELARG HQ

The Commission’s interpretation of the clause on expert availability did not confer any competitive advantages to the successful tenderer. It was obvious that the experts proposed by the tenderer would not be called to work in parallel under two different contracts with the Commission.

| 7.20. | In the case of 4 budget support transactions out of 8 audited, the Court found 8 non-quantifiable errors. This result from the fact that the Commission did not compare the PFM achievements of the recipient countries with the objectives set for the period under review and did not ensure that the recipient country applied the correct exchange rate. |
| --- | --- |

7.20.

In the case of 4 budget support transactions out of 8 audited, the Court found 8 non-quantifiable errors. This result from the fact that the Commission did not compare the PFM achievements of the recipient countries with the objectives set for the period under review and did not ensure that the recipient country applied the correct exchange rate.

EFFECTIVENESS OF SYSTEMS

| 7.21. | Annex 7.2
  contains a summary of the results of the Court’s examination of supervisory and control systems. The Court found that the systems of EuropeAid, DG ECHO and FPI were partially effective. The detailed results of the assessment of EuropeAid systems are presented in the Court’s Annual Report on the eighth, ninth and 10th European Development Funds. |
| --- | --- |

7.21.

Annex 7.2
  contains a summary of the results of the Court’s examination of supervisory and control systems. The Court found that the systems of EuropeAid, DG ECHO and FPI were partially effective. The detailed results of the assessment of EuropeAid systems are presented in the Court’s Annual Report on the eighth, ninth and 10th European Development Funds.

| 7.21. | For EuropeAid please see reply to the 2011 Annual Report on the EDFs, paragraph 56. |
| --- | --- |

7.21.

DG ECHO

| 7.22. | In recent years, DG ECHO has continued to improve all the components of its supervisory and control systems. However, due to the frequency of quantifiable errors found in the final payments (10 out of 16) the ex-ante control procedures are considered partially effective (see paragraphs 7.16 and 7.17). |
| --- | --- |

7.22.

In recent years, DG ECHO has continued to improve all the components of its supervisory and control systems. However, due to the frequency of quantifiable errors found in the final payments (10 out of 16) the ex-ante control procedures are considered partially effective (see paragraphs 7.16 and 7.17).

| 7.22. | DG ECHO considers that indeed it has improved its control systems which reached a satisfactory level of effectiveness. The final residual risk is limited and evidenced, and any further development would not be cost-efficient.

  DG ECHO considers that certain errors observed by the Court are of very low value both in relative or absolute terms. DG ECHO estimates its residual error rate to be below 1 % in 2011.


  In addition, ECHO underlines the fact that ex-ante controls have to be considered within the context of the overall control system. The supervisory and control systems in place could have still detected the errors through the implementation of ex-post controls, as the actions audited by the Court were not audited after the final steps of the ECHO control chain. |
| --- | --- |

7.22.

DG ECHO considers that certain errors observed by the Court are of very low value both in relative or absolute terms. DG ECHO estimates its residual error rate to be below 1 % in 2011.

In addition, ECHO underlines the fact that ex-ante controls have to be considered within the context of the overall control system. The supervisory and control systems in place could have still detected the errors through the implementation of ex-post controls, as the actions audited by the Court were not audited after the final steps of the ECHO control chain.

FPI

| 7.23. | The main instruments managed by FPI are IfS and CFSP, which represent 87 % of the operational budget of FPI. The Court assessed these two instruments’ supervisory and control systems separately given their widely differing characteristics and found that overall they were partially effective. |
| --- | --- |

7.23.

The main instruments managed by FPI are IfS and CFSP, which represent 87 % of the operational budget of FPI. The Court assessed these two instruments’ supervisory and control systems separately given their widely differing characteristics and found that overall they were partially effective.

| 7.24. | The main weaknesses identified relate to: |
| --- | --- |

7.24.

The main weaknesses identified relate to:

7.24.

| (a) | the absence of an effective Internal Audit Capability; |
| --- | --- |

(a)

the absence of an effective Internal Audit Capability;

| (a) | This was due to factors outside the influence of FPI. For the same reasons, the IAC of EuropeAid was not in a position to carry out any audits on FPI activities in 2011.

  In the absence of an Internal Audit Capability the Commission considers that a service can rely on the other building blocks for its assurance, as identified in its AAR including the work of the Internal Audit Service. FPI’s internal audit needs are included in the 2012 work plan of the EuropeAid IAC, (one new audit and one follow up audit agreed on FPI activities). |
| --- | --- |

(a)

In the absence of an Internal Audit Capability the Commission considers that a service can rely on the other building blocks for its assurance, as identified in its AAR including the work of the Internal Audit Service. FPI’s internal audit needs are included in the 2012 work plan of the EuropeAid IAC, (one new audit and one follow up audit agreed on FPI activities).

| (b) | insufficient risk assessment for selecting the contracts to submit to ex-post control procedures (CFSP) and insufficiently developed contract selection criteria used for risk assessment (IfS); |
| --- | --- |

(b)

insufficient risk assessment for selecting the contracts to submit to ex-post control procedures (CFSP) and insufficiently developed contract selection criteria used for risk assessment (IfS);

| (b) | The selection of CFSP and IfS projects for ex-post controls (EPC) and the EPC plans of the two operational units concerned were based on objective criteria (such as value of contracts managed, date of the last ex-post control, and incidence of potential fraud or suspicions of fraud). The Commission acknowledges that the risk assessment made by FPI can be improved. Efforts are being made in 2012 to improve the risk assessment methodology for all instruments managed by FPI, including CFSP. |
| --- | --- |

(b)

The selection of CFSP and IfS projects for ex-post controls (EPC) and the EPC plans of the two operational units concerned were based on objective criteria (such as value of contracts managed, date of the last ex-post control, and incidence of potential fraud or suspicions of fraud). The Commission acknowledges that the risk assessment made by FPI can be improved. Efforts are being made in 2012 to improve the risk assessment methodology for all instruments managed by FPI, including CFSP.

| (c) | the ex-ante control procedures which did not prevent some of the errors to occur (IfS); |
| --- | --- |

(c)

the ex-ante control procedures which did not prevent some of the errors to occur (IfS);

| (c) | Where the Commission accepts that errors occurred, it notes at the same time that its ex-ante control procedures detected them in nearly all of the cases identified by the Court and also that management took appropriate follow-up action. |
| --- | --- |

(c)

Where the Commission accepts that errors occurred, it notes at the same time that its ex-ante control procedures detected them in nearly all of the cases identified by the Court and also that management took appropriate follow-up action.

| (d) | the prior fulfilment of conditions for the CFSP missions (21); |
| --- | --- |

(d)

the prior fulfilment of conditions for the CFSP missions (21);

| (d) | The Commission recalls that in accordance with the principle of sound financial management, CFSP operations have to prove that they are effective in the use of the EU budget. Since the CSDP missions are established from scratch, and need to be operational from scratch, they cannot immediately comply with the requirements of Article 56 of the Financial Regulation. However, the Commission is still obliged to ensure that the operations it finances are effective in accordance with the afore-mentioned principle. The mitigating controls reported in the AAR provide an adequate basis for an assurance to be given even if formally the conditions for Article 56 compliance are not met.

  FPI will continue carrying out 6-pillar assessments at the rate of two per year which means that the most significant missions in financial terms should be assessed by the end of 2013. |
| --- | --- |

(d)

FPI will continue carrying out 6-pillar assessments at the rate of two per year which means that the most significant missions in financial terms should be assessed by the end of 2013.

| (e) | the backlog of CFSP contracts to be closed. |
| --- | --- |

(e)

the backlog of CFSP contracts to be closed.

| (e) | FPI will continue its efforts in closing old CFSP contracts and has set up an action plan for this purpose. It is also reviewing procedures for closing CFSP operations in future in a more streamlined way. |
| --- | --- |

(e)

Commission’s management representations

| 7.25. | The Directors-General of EuropeAid and DG ECHO and the Director of FPI declare that they have obtained reasonable assurance that the control procedures put in place give the necessary guarantees concerning the regularity of underlying transactions (22). However: |
| --- | --- |

7.25.

The Directors-General of EuropeAid and DG ECHO and the Director of FPI declare that they have obtained reasonable assurance that the control procedures put in place give the necessary guarantees concerning the regularity of underlying transactions (22). However:

7.25.

| (a) | FPI does not present a residual error rate (23) in its Annual Activity Report on which to base its conclusion; |
| --- | --- |

(a)

FPI does not present a residual error rate (23) in its Annual Activity Report on which to base its conclusion;

| (a) | As indicated in its 2011 Annual Activity Report, FPI will aim to have a residual error rate in place, based on a similar methodology to that of EuropeAid but adapted for the control environment of FPI, for the 2012 Annual Activity Report. |
| --- | --- |

(a)

| (b) | DG ECHO uses a specific method to calculate the residual error rate, which is not sufficiently explained in its Annual Activity Report. |
| --- | --- |

(b)

DG ECHO uses a specific method to calculate the residual error rate, which is not sufficiently explained in its Annual Activity Report.

| (b) | The residual error rate calculated by DG ECHO is built up on the implementation of the DG ECHO's audit strategy. |
| --- | --- |

(b)

DG ECHO considers that this methodology adequately reflects the risk exposure of its operational budget since:

| — | audited population is highly representative, |
| --- | --- |

—

audited population is highly representative,

| — | systemic errors are identified and the related impact fully scrutinised, |
| --- | --- |

—

systemic errors are identified and the related impact fully scrutinised,

| — | audited budget is ‘cleaned’ thanks to the recovery of ineligible items. |
| --- | --- |

—

audited budget is ‘cleaned’ thanks to the recovery of ineligible items.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

| 7.26. | Based on its audit work, the Court concludes that the payments for external relations, aid and enlargement for the year ended on 31 December 2011 were free from material error. However, interim and final payments (about one third of the amount paid in 2011) were affected by material error. |
| --- | --- |

7.26.

Based on its audit work, the Court concludes that the payments for external relations, aid and enlargement for the year ended on 31 December 2011 were free from material error. However, interim and final payments (about one third of the amount paid in 2011) were affected by material error.

| 7.26. | The Commission welcomes the Court’s conclusion that transactions in the policy group External Aid Development and Enlargement were free from material error in 2011. |
| --- | --- |

7.26.

| 7.27. | Based on its audit work, the Court found that the examined supervisory and control systems for external relations, aid and enlargement were partially effective. |
| --- | --- |

7.27.

Based on its audit work, the Court found that the examined supervisory and control systems for external relations, aid and enlargement were partially effective.

| 7.27. | The Commission has designed its controls to cover the full lifecycle of its multi-annual projects. It believes that these supervisory and control systems are effective and have significantly improved year on year, covering both the operation of the EDFs and activities financed by the EU Budget. Despite the challenges of a high risk external aid environment, the Court's most likely estimated annual error rate for external aid under the EU Budget has been below materiality for 2010 and 2011, and was below materiality for the EDFs in 2009. |
| --- | --- |

7.27.

Recommendations

| 7.28. | Annex 7.3
  shows the result of the Court’s review of the Commission’s progress in addressing recommendations made in the previous annual reports. All recommendations were addressed by the Commission and four of them have now been implemented. The recommendations regarding EuropeAid supervisory and control systems are included in the Court’s Annual Report on the eighth, ninth and 10th EDFs. Following this review and the findings and conclusions for 2011, the Court recommends that: |
| --- | --- |

7.28.

Annex 7.3
  shows the result of the Court’s review of the Commission’s progress in addressing recommendations made in the previous annual reports. All recommendations were addressed by the Commission and four of them have now been implemented. The recommendations regarding EuropeAid supervisory and control systems are included in the Court’s Annual Report on the eighth, ninth and 10th EDFs. Following this review and the findings and conclusions for 2011, the Court recommends that:

| 7.28. | See joint reply to paragraphs 1.12 and 1.13. |
| --- | --- |

7.28.

| — | Recommendation 1: EuropeAid, DG ECHO and FPI improve the supervision of grant contracts, making better use of on-the-spot visits to prevent and detect ineligible expenditure declared and/or increase the coverage of the audits contracted by the Commission. |
| --- | --- |

—

Recommendation 1: EuropeAid, DG ECHO and FPI improve the supervision of grant contracts, making better use of on-the-spot visits to prevent and detect ineligible expenditure declared and/or increase the coverage of the audits contracted by the Commission.

Different Commission services have different practices as regards the nature and purpose of ‘on-the-spot controls’ in the framework of their overall control systems, as well as the use they do or do not make of them for the purposes of assurance. Therefore — taking into account cost-effectiveness aspects — the Commission cannot accept a general recommendation that improving on-the-spot controls would significantly improve the financial management of grant agreements regarding the eligibility of expenditure.

As regards the coverage of contracted audits the Commission considers that the audit coverage in relation to grants is substantial and sufficient. Taking into account the Court’s own error rate established for this chapter, the Commission can only partially accept this recommendation in terms of continuing its constant efforts to improve existing arrangements.

| — | Recommendation 2: FPI should: |
| --- | --- |

—

Recommendation 2: FPI should:

| — | ensure that the Internal Audit Capability becomes operational, |
| --- | --- |

—

ensure that the Internal Audit Capability becomes operational,

| — | FPI will fully cooperate with the Internal Audit Capability of EuropeAid, in its role as auditee, |
| --- | --- |

—

| — | make explicit the criteria used for the risk assessments when selecting contracts to be audited under IfS and CFSP, |
| --- | --- |

—

make explicit the criteria used for the risk assessments when selecting contracts to be audited under IfS and CFSP,

| — | FPI is already undertaking efforts to improve its risk assessments linked to the ex-post controls it performs including a better identification of the criteria for selecting the contracts / projects for audit, |
| --- | --- |

—

FPI is already undertaking efforts to improve its risk assessments linked to the ex-post controls it performs including a better identification of the criteria for selecting the contracts / projects for audit,

| — | ensure that all CFSP missions are accredited in accordance with the ‘six-pillar assessments’, |
| --- | --- |

—

ensure that all CFSP missions are accredited in accordance with the ‘six-pillar assessments’,

| — | FPI has developed a schedule for the accreditation of its CFSP missions and will continue its efforts in this area. According to this schedule, all significant missions in financial terms should be accredited by the end of 2013, |
| --- | --- |

—

| — | accelerate the closure of old CFSP contracts. |
| --- | --- |

—

accelerate the closure of old CFSP contracts.

| — | FPI will increase its efforts in closing old CFSP contracts and has set up an action plan for this purpose. |
| --- | --- |

—

---

(1)  Aid provided through the European Development Funds is reported separately as it is not financed from the general budget.

(2)  Under budget Titles 19 and 21, as set out in
  Table 7.1
  .

(3)  Under budget Title 19.

(4)  Mainly under the Instrument for Pre-Accession Assistance, the Phare programme including post-accession aid, CARDS, and pre-accession financial assistance for Turkey.

(5)  Under budget Title 22.

(6)  Approximately half of the budget is provided to non-governmental organisations (NGOs) and the other half to UN or other international organisations. Funding agreements are only concluded with NGOs that have signed the Framework Partnership Agreement or UN organisations that have signed the Financial Administrative Framework Agreement.

(7)  Under budget Title 23.

(8)  Is aimed at supporting the efforts of the Member States, EFTA, candidate countries and third countries concerning response, preparedness and prevention actions with regard to natural and man-made disasters, acts of terrorism and technological, radiological or environmental accidents.

(9)  Under budget Title 23.

(10)  Article 25(b) of Regulation (EC) No 1905/2006 of the European Parliament and of the Council of 18 December 2006 establishing a financing instrument for development cooperation (OJ L 378, 27.12.2006, p. 41), Article 15(1) of Council Regulation (EC) No 1085/2006 of 17 July 2006 establishing an Instrument for Pre-Accession Assistance (IPA) (OJ L 210, 31.7.2006, p. 82), Article 15(2)(e) of Regulation (EC) No 1638/2006 of the European Parliament and of the Council of 24 October 2006 laying down general provisions establishing a European Neighbourhood and Partnership Instrument (OJ L 310, 9.11.2006, p. 1) and Article 11(1)(b) of Regulation (EC) No 1717/2006 of the European Parliament and of the Council of 15 November 2006 establishing an Instrument for Stability (OJ L 327, 24.11.2006, p. 1).

(11)  The budget support payments made in 2011 from the general budget are 1 billion euro.

(12)  See paragraph 46 the Court’s Annual Report on the activities of the sixth, seventh, eighth and ninth European Development Funds (EDFs) for the financial year 2003 (OJ C 293, 30.11.2004, p. 315).

(13)  The value of the contracts is estimated at 1,5 billion euro.

(14)  Cameroon, Georgia, Malawi, Palestine, Philippines, Russia, Tunisia and Vietnam (EuropeAid) and Albania, Montenegro and Serbia (DG ELARG).

(15)  Two based in Switzerland, one in France and another one in Ireland (payments made under 16 humanitarian aid projects implemented in 11 countries were audited).

(16)  The Court calculates its estimate of error from a representative statistical sample. The figure quoted is the best estimate (known as MLE). The Court has 95 % confidence that the rate of error in the population lies between LEL 0 % and UEL 2,4 % (the lower and upper error limits respectively).

(17)  The audited amount of the project is 1,6 million euro with an error rate of 81,7 %.

(18)  The supplier and the goods have to originate from an ACP country or a Member State.

(19)  The audited amount of the grant agreement is 0,42 million euro with an error rate of 13,2 %.

(20)  TAIEX — Technical Assistance and Information Exchange Instrument.

(21)  Article 56 of the Financial Regulation provides the conditions required before entrusting an entity with the implementation of EU budget. This provision is not suitable for CFSP missions, as it is not possible for the Commission to obtain evidence of the fulfilment of these conditions before their setting up. Therefore, the objective of FPI is to accredit the missions as soon as possible after their start. Mitigating controls have been introduced to limit the risks during this intermediary period. However, by the end of 2011 only one (EULEX Kosovo) out of nine on-going CFSP missions had received its accreditation.

(22)  The detailed results on EuropeAid AAR are presented in the Court’s Annual Report of the eighth, ninth and 10th European Development Funds. As noted in paragraph 7.14, the supervisory and control systems of DG ELARG were not assessed for the year 2011.

(23)  See paragraphs 1.21 to 1.23.

(24)  See http://ec.europa.eu/europeaid/what/economic-support/documents/guidelines_budget_support_en.pdf

(25)  See the Commission's Communication on The Future Approach to EU Budget Support to Third Countries (COM(2011) 638 final).

(26)  On the basis of the conclusions of the annual activity reports.

(27)  The audit of administrative expenditure is reported in Chapter 9.

ANNEX 7.1

RESULTS OF TRANSACTION TESTING FOR EXTERNAL RELATIONS, AID AND ENLARGEMENT

| | 2011 | 2010 | 2009 | 2008 |
| --- | --- | --- | --- | --- |
| EuropeAid
   (3) | FPI | ELARG | ECHO | Total |
| SIZE AND STRUCTURE OF THE SAMPLE |
| Total transactions (of which): | 81 | 8 | 38 | 23 | 150 | 165 | 180 | 180 |
| Advances | 17 | 2 | 4 | 7 | 30 | 75 | 83 | 71 |
| Interim/Final payments | 64 | 6 | 34 | 16 | 120 | 90 | 97 | 109 |
| RESULTS OF TESTING
   (1)
   (2) |
| Proportion (number) of transactions tested found to be: |
| Free of error | 73 % | (59) | 50 % | (4) | 68 % | (26) | 52 % | (12) | 67 % | (101) | 77 % | 87 % | 73 % |
| Affected by one or more errors | 27 % | (22) | 50 % | (4) | 32 % | (12) | 48 % | (11) | 33 % | (49) | 23 % | 13 % | 27 % |
| Analysis of transactions affected by error |
| Analysis by type of expenditure |
| Advances | 0 % | — | 0 % | — | 0 % | — | 0 % | — | 0 % | — | 11 % | 17 % | 19 % |
| Interim/Final payments | 100 % | (22) | 100 % | (4) | 100 % | (12) | 100 % | (11) | 100 % | (49) | 89 % | 83 % | 81 % |
| Analysis by type of error |
| Non-Quantifiable errors: | 59 % | (13) | 50 % | (2) | 92 % | (11) | 9 % | (1) | 55 % | (27) | 53 % | 74 % | 60 % |
| Quantifiable errors: | 41 % | (9) | 50 % | (2) | 8 % | (1) | 91 % | (10) | 45 % | (22) | 47 % | 26 % | 40 % |
| Eligibility | 67 % | (6) | 100 % | (2) | 100 % | (1) | 100 % | (10) | 86 % | (19) | 72 % | 100 % | 79 % |
| Occurrence | 0 % | — | 0 % | — | 0 % | — | 0 % | — | 0 % | — | 17 % | 0 % | 21 % |
| Accuracy | 33 % | (3) | 0 % | — | 0 % | — | 0 % | — | 14 % | (3) | 11 % | 0 % | 0 % |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| Most likely error rate | 1,1 % | | | |
| Upper Error Limit (UEL) | 2,4 % | | | |
| Lower Error Limit (LEL) | 0,0 % | | | |

2011

2010

2009

2008

EuropeAid
   (3)

FPI

ELARG

ECHO

Total

SIZE AND STRUCTURE OF THE SAMPLE

Total transactions (of which):

81

8

38

23

150

165

180

180

Advances

17

2

4

7

30

75

83

71

Interim/Final payments

64

6

34

16

120

90

97

109

RESULTS OF TESTING
   (1)
   (2)

Proportion (number) of transactions tested found to be:

Free of error

73 %

(59)

50 %

(4)

68 %

(26)

52 %

(12)

67 %

(101)

77 %

87 %

73 %

Affected by one or more errors

27 %

(22)

50 %

(4)

32 %

(12)

48 %

(11)

33 %

(49)

23 %

13 %

27 %

Analysis of transactions affected by error

Analysis by type of expenditure

Advances

0 %

—

0 %

—

0 %

—

0 %

—

0 %

—

11 %

17 %

19 %

Interim/Final payments

100 %

(22)

100 %

(4)

100 %

(12)

100 %

(11)

100 %

(49)

89 %

83 %

81 %

Analysis by type of error

Non-Quantifiable errors:

59 %

(13)

50 %

(2)

92 %

(11)

9 %

(1)

55 %

(27)

53 %

74 %

60 %

Quantifiable errors:

41 %

(9)

50 %

(2)

8 %

(1)

91 %

(10)

45 %

(22)

47 %

26 %

40 %

Eligibility

67 %

(6)

100 %

(2)

100 %

(1)

100 %

(10)

86 %

(19)

72 %

100 %

79 %

Occurrence

0 %

—

0 %

—

0 %

—

0 %

—

0 %

—

17 %

0 %

21 %

Accuracy

33 %

(3)

0 %

—

0 %

—

0 %

—

14 %

(3)

11 %

0 %

0 %

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Most likely error rate

1,1 %

Upper Error Limit (UEL)

2,4 %

Lower Error Limit (LEL)

0,0 %

---

(1)  To improve insight into areas with different risk profiles within the policy group, the sample was split up into segments.

(2)  Numbers quoted in brackets represent the actual number of transactions.

(3)  Includes two transactions of EACEA.

ANNEX 7.2

RESULTS OF EXAMINATION OF SYSTEMS FOR EXTERNAL RELATIONS, AID AND ENLARGEMENT

Assessment of the selected supervisory and control systems of EuropeAid

| | Ex-ante controls | Monitoring and supervision | External audits | Internal audit | Overall assessment |
| --- | --- | --- | --- | --- | --- |
| Central Systems | Partially effective | Effective | Effective | Partially effective | Partially effective |
| Delegations | Partially effective | Partially effective | Partially effective | N/A | Partially effective |

Ex-ante controls

Monitoring and supervision

External audits

Internal audit

Overall assessment

Central Systems

Partially effective

Effective

Effective

Partially effective

Partially effective

Delegations

Partially effective

Partially effective

Partially effective

N/A

Partially effective

Assessment of the selected supervisory and control systems of DG ECHO

| | Ex-ante controls | Monitoring and supervision | Ex-post controls | Internal audit | Overall assessment |
| --- | --- | --- | --- | --- | --- |
| Central Systems | Partially effective | Effective | Effective | Effective | Partially effective |

Ex-ante controls

Monitoring and supervision

Ex-post controls

Internal audit

Overall assessment

Central Systems

Partially effective

Effective

Effective

Effective

Partially effective

Assessment of the selected supervisory and control systems of FPI

| | Ex-ante controls | Monitoring and supervision | Ex-post controls | Internal audit | Overall assessment |
| --- | --- | --- | --- | --- | --- |
| IfS | Partially effective | Effective | Effective | Not effective | Partially effective |
| CFSP | Partially effective | Partially effective | Partially effective | Partially effective |

Ex-ante controls

Monitoring and supervision

Ex-post controls

Internal audit

Overall assessment

IfS

Partially effective

Effective

Effective

Not effective

Partially effective

CFSP

Partially effective

Partially effective

Partially effective

Partially effective

ANNEX 7.3

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR EXTERNAL RELATIONS, AID AND ENLARGEMENT

| Year | Court recommendation | Court's analysis of the progress made | Commission reply |
| --- | --- | --- | --- |
| 2009 | DG ECHO should improve the documentation of assessments of proposals for humanitarian aid actions (e.g. the introduction of standardised evaluation reports). | DG ECHO has improved the documentation of proposals for humanitarian aid actions. | DG ECHO agrees with the Court's analysis. |
| DG ECHO should define and put in place a mechanism for collecting and analysing the data concerning the use of ‘Humanitarian Procurement Centres’ (HPCs) by its partners. | DG ECHO implemented in 2011 an interim solution to collect as much information possible directly from the HPCs pending the introduction of an automated mechanism for the collection of this information from the partners themselves. | DG ECHO agrees with the Court's analysis. |
| DG RELEX should devote sufficient resources to the analysis and closure of the old RRM and the CFSP contracts for which the implementation deadlines have already expired. | FPI has taken appropriate actions for the closure of RRM and IfS contracts. However for CFSP still more efforts are needed to fulfil the Court's recommendation. | The Commission acknowledges that more efforts are necessary regarding the closure of old CFSP contracts, therefore an action plan has been prepared with the aim of improving the situation by the end of 2012. |
| DG ELARG should review its internal control checklists in order to document all the checks carried out. | New checklists have been developed, circulated to the relevant staff and uploaded on the ELARG Intranet.
  The DAS 2010 and 2011 audit work confirms that up-to-date checklists are currently used by the EU delegations. | |
| DG ELARG should continue to devote sufficient resources to the analysis of the outstanding final declarations submitted under Phare and the Transition Facility in the new Member States. | The backlog of final declarations has been further reduced during the exercise. However, out of 401 programmes, 88 final declarations remain pending at the end of 2011 and further effort is still needed to implement this recommendation. | DG ELARG is committed to make the necessary efforts to further reduce the left backlog. DG ELARG will continue to make all the necessary efforts to clear the accounts for Phare/Transition Facility EU-12. |
| 2009 | DG ELARG defines in more detail the criteria for lifting ex-ante control and suspending the ‘conferral of management’ to decentralised countries and tests the performance of the systems used by national authorities

  (This is the 2010 follow up/update of a 2009 recommendation) | In 2011 DG ELARG started the analysis of the possible options to define in more detail criteria and benchmarks for the conferral of management powers and for the waiver of ex-ante controls. Four subsystems audits were carried out in 2011. These cover the actual functioning of some key aspects of the national systems in Croatia and Turkey.
  The relevant EU delegations implemented their audit and on-the-spot mission plans, gaining in this way additional assurance on the performance of the national systems. | This analysis will be deepened in the framework of the renewed Instrument for Pre-Accession. The regular monitoring of the national systems by HQ and delegations continues, whereby the subsystem audits are one of the tools used. |
| DG ELARG continues to improve the quality of the data entered in its management information system.

  (This is the 2010 follow up/update of a 2009 recommendation) | DG ELARG approved a new guideline document to ensure the quality of CRIS data. The new Decentralised implementing System payment checklists provide for checks on iPerseus contract data. The effectiveness of the new procedures still needs to be assessed in future. | |
| DG ELARG should develop a tool to facilitate the consolidation of the visit outcomes related to legality and regularity issues

  (This is the 2010 follow up/update of a 2009 recommendation) | Some EU delegations started to develop their own consolidation tools but further efforts are necessary in order to establish a common baseline, harmonise the different approaches, and verify their effective implementation. | In the execution of its supervision activities, ELARG HQ will encourage and monitor the implementation of the measures. |
| DG ELARG increases ex-post reviews of transactions for centralised management.

  (This is the 2010 follow up/update of a 2009 recommendation) | The ex-post controls were substantially increased in 2011. Four out of six ‘centralised’ delegations were visited by the ex-post controllers. | The efforts are being pursued in 2012, one more country has been visited and the initial work programme will be completed by the end of the year. |
| 2008 | DG RELEX should consolidate its ex-post control methodology and promptly address the recommendations made by the internal auditor in that respect. (Included also in the 2008 Annual Report) | FPI consolidated its ex-post control methodology for CFSP and IfS. However these guidelines are still incomplete and the criteria for the risk assessments should be better defined. | FPI has already completed its methodological guidance and will continue to improve it throughout the year, based on feedback from controls carried out. The criteria for the risk assessments are being refined in 2012 in order to ensure enhanced clarity regarding the selection of projects to be controlled in 2013. All recommendations made by the internal auditor to DG RELEX in relation to ex-post controls have been implemented. |

Year

Court recommendation

Court's analysis of the progress made

Commission reply

2009

DG ECHO should improve the documentation of assessments of proposals for humanitarian aid actions (e.g. the introduction of standardised evaluation reports).

DG ECHO has improved the documentation of proposals for humanitarian aid actions.

DG ECHO agrees with the Court's analysis.

DG ECHO should define and put in place a mechanism for collecting and analysing the data concerning the use of ‘Humanitarian Procurement Centres’ (HPCs) by its partners.

DG ECHO implemented in 2011 an interim solution to collect as much information possible directly from the HPCs pending the introduction of an automated mechanism for the collection of this information from the partners themselves.

DG ECHO agrees with the Court's analysis.

DG RELEX should devote sufficient resources to the analysis and closure of the old RRM and the CFSP contracts for which the implementation deadlines have already expired.

FPI has taken appropriate actions for the closure of RRM and IfS contracts. However for CFSP still more efforts are needed to fulfil the Court's recommendation.

The Commission acknowledges that more efforts are necessary regarding the closure of old CFSP contracts, therefore an action plan has been prepared with the aim of improving the situation by the end of 2012.

DG ELARG should review its internal control checklists in order to document all the checks carried out.

New checklists have been developed, circulated to the relevant staff and uploaded on the ELARG Intranet.

The DAS 2010 and 2011 audit work confirms that up-to-date checklists are currently used by the EU delegations.

DG ELARG should continue to devote sufficient resources to the analysis of the outstanding final declarations submitted under Phare and the Transition Facility in the new Member States.

The backlog of final declarations has been further reduced during the exercise. However, out of 401 programmes, 88 final declarations remain pending at the end of 2011 and further effort is still needed to implement this recommendation.

DG ELARG is committed to make the necessary efforts to further reduce the left backlog. DG ELARG will continue to make all the necessary efforts to clear the accounts for Phare/Transition Facility EU-12.

2009

DG ELARG defines in more detail the criteria for lifting ex-ante control and suspending the ‘conferral of management’ to decentralised countries and tests the performance of the systems used by national authorities

(This is the 2010 follow up/update of a 2009 recommendation)

In 2011 DG ELARG started the analysis of the possible options to define in more detail criteria and benchmarks for the conferral of management powers and for the waiver of ex-ante controls. Four subsystems audits were carried out in 2011. These cover the actual functioning of some key aspects of the national systems in Croatia and Turkey.

The relevant EU delegations implemented their audit and on-the-spot mission plans, gaining in this way additional assurance on the performance of the national systems.

This analysis will be deepened in the framework of the renewed Instrument for Pre-Accession. The regular monitoring of the national systems by HQ and delegations continues, whereby the subsystem audits are one of the tools used.

DG ELARG continues to improve the quality of the data entered in its management information system.

(This is the 2010 follow up/update of a 2009 recommendation)

DG ELARG approved a new guideline document to ensure the quality of CRIS data. The new Decentralised implementing System payment checklists provide for checks on iPerseus contract data. The effectiveness of the new procedures still needs to be assessed in future.

DG ELARG should develop a tool to facilitate the consolidation of the visit outcomes related to legality and regularity issues

(This is the 2010 follow up/update of a 2009 recommendation)

Some EU delegations started to develop their own consolidation tools but further efforts are necessary in order to establish a common baseline, harmonise the different approaches, and verify their effective implementation.

In the execution of its supervision activities, ELARG HQ will encourage and monitor the implementation of the measures.

DG ELARG increases ex-post reviews of transactions for centralised management.

(This is the 2010 follow up/update of a 2009 recommendation)

The ex-post controls were substantially increased in 2011. Four out of six ‘centralised’ delegations were visited by the ex-post controllers.

The efforts are being pursued in 2012, one more country has been visited and the initial work programme will be completed by the end of the year.

2008

DG RELEX should consolidate its ex-post control methodology and promptly address the recommendations made by the internal auditor in that respect. (Included also in the 2008 Annual Report)

FPI consolidated its ex-post control methodology for CFSP and IfS. However these guidelines are still incomplete and the criteria for the risk assessments should be better defined.

FPI has already completed its methodological guidance and will continue to improve it throughout the year, based on feedback from controls carried out. The criteria for the risk assessments are being refined in 2012 in order to ensure enhanced clarity regarding the selection of projects to be controlled in 2013. All recommendations made by the internal auditor to DG RELEX in relation to ex-post controls have been implemented.

---

CHAPTER 8

Research and other internal policies

TABLE OF CONTENTS

Introduction

Specific characteristics of the policy group

Research Framework Programmes

Competitiveness and Innovation Framework Programme (CIP)

Audit scope and approach

Regularity of transactions

Effectiveness of systems

Research Framework Programmes

Ex-ante desk checks

Audit certification of cost claims

The Commission’s ex-post financial audits

Competitiveness and Innovation Framework Programme (CIP) — ICT Policy Support Programme (ICT-PSP)

Ex-ante desk checks

Audit certification of cost claims

The Commission’s ex-post financial audits

Reliability of Commission management representations

Conclusions and recommendations

Conclusions

Recommendations

Results of the audit of the Guarantee Fund for external actions

| THE COURT’S OBSERVATIONS | THE COMMISSION’S REPLIES |
| --- | --- |
| INTRODUCTION |
| 8.1. | This Chapter presents the Court’s specific assessment of research and other internal policies, which comprises policy areas 01 — Economic and financial affairs, 02 — Enterprise, 03 — Competition, 08 — Research, 09 — Information society and media, 10 — Direct research, 12 — Internal market, 15 — Education and culture, 16 — Communication, 18 — Area of freedom, security and justice and 20 — Trade as well as the Court’s recurrent audit of the Guarantee Fund for External Actions (1). Key information on the activities covered and spending in 2011 is provided in
  Table 8.1
  . |

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

8.1.

This Chapter presents the Court’s specific assessment of research and other internal policies, which comprises policy areas 01 — Economic and financial affairs, 02 — Enterprise, 03 — Competition, 08 — Research, 09 — Information society and media, 10 — Direct research, 12 — Internal market, 15 — Education and culture, 16 — Communication, 18 — Area of freedom, security and justice and 20 — Trade as well as the Court’s recurrent audit of the Guarantee Fund for External Actions (1). Key information on the activities covered and spending in 2011 is provided in
  Table 8.1
  .

Table 8.1 —   Research and other internal policies — Key information 2011

| (million euro) |
| --- |
| Budget Title | Policy area | Description | Payments | Management mode |
| 08 | Research | Administrative expenditure | 321 | Centralised direct |
| FP7 | 3 494 | Centralised direct |
| FP7 Euratom | 271 | Centralised indirect |
| Completion of previous framework programmes (FPs) | 518 | Centralised direct |
| | 4 604 | |
| 15 | Education and culture | Administrative expenditure | 131 | Centralised direct |
| Lifelong learning, including multilingualism | 1 376 | Centralised indirect |
| Developing cultural cooperation in Europe | 167 | Centralised indirect |
| Encouraging and promoting cooperation in the field of youth and sports | 156 | Centralised indirect |
| People — Programme for the mobility of researchers | 584 | Centralised indirect |
| | 2 414 | |
| 09 | Information society and media | Administrative expenditure | 132 | Centralised direct |
| FP7 | 1 218 | Centralised direct |
| Other | 139 | Centralised direct |
| | 1 489 | |
| 02 | Enterprise | Administrative expenditure | 123 | Centralised direct |
| Competitiveness, industrial policy, innovation and entrepreneurship | 187 | Centralised direct/centralised indirect via EACI |
| Internal market for goods and sectoral policies | 33 | Centralised direct |
| FP7 — Cooperation — Space and security | 423 | Centralised direct |
| EU satellite navigation programmes (EGNOS and Galileo) | 570 | Centralised direct |
| | 1 336 | |
| 18 | Freedom, security and justice | Administrative expenditure | 76 | Centralised direct |
| Solidarity — External borders, visa policy and free movement of people | 445 | Shared/Centralised direct |
| Migration flows — Common immigration and asylum policies | 159 | Shared/Centralised direct |
| Fundamental rights and citizenship | 48 | Centralised direct |
| Security and safeguarding liberties | 133 | Centralised direct |
| Justice in criminal and civil matters | 62 | Centralised direct |
| Drugs prevention and information | 18 | Centralised direct |
| Policy strategy and coordination | 3 | Centralised direct |
| | 944 | |
| 10 | Direct research | Staff, running costs and investments | 352 | Centralised direct |
| FP7 | 41 | Centralised direct |
| Historical liabilities resulting from nuclear activities | 24 | Centralised direct |
| Completion of previous framework programmes (FPs) | 24 | Centralised direct |
| | 441 | |
| 01 | Economic and financial affairs | Administrative expenditure | 70 | Centralised direct |
| Economic and monetary union | 12 | Centralised direct |
| International economic and financial affairs | 55 | Centralised direct |
| Financial operations and instruments | 252 | Centralised direct/Joint management with EIF/centralised indirect via EIF |
| | 389 | |
| 16 | Communication | Administrative expenditure | 125 | Centralised direct |
| Communication and the media | 35 | Centralised direct |
| Going Local communication | 37 | Centralised direct |
| Analysis and communication tools | 26 | Centralised direct |
| Fostering European citizenship | 36 | Centralised direct |
| | 259 | |
| 20 | Trade | Administrative expenditure | 93 | Centralised direct |
| Trade policy | 11 | Centralised direct/Joint management with IO |
| | 104 | |
| 12 | Internal Market | Administrative expenditure | 61 | Centralised direct |
| Policy strategy and coordination for the Directorate-General for the Internal Market | 34 | Centralised direct |
| | 95 | |
| 03 | Competition | Administrative expenditure | 94 | Centralised direct |
| Cartels, anti-trust and liberalisation | 0 | Centralised direct |
| | 94 | |
| Total administrative expenditure (26) | 1 578 | |
| Framework programmes (FPs) | 5 965 | |
| Lifelong learning, including multilingualism (LLP) | 1 376 | |
| Other operational expenditure | 3 250 | |
| Total operational expenditure | 10 591 | |
| Of which: | — | advances
   (27) |

(million euro)

Budget Title

Policy area

Description

Payments

Management mode

08

Research

Administrative expenditure

321

Centralised direct

FP7

3 494

Centralised direct

FP7 Euratom

271

Centralised indirect

Completion of previous framework programmes (FPs)

518

Centralised direct

4 604

15

Education and culture

Administrative expenditure

131

Centralised direct

Lifelong learning, including multilingualism

1 376

Centralised indirect

Developing cultural cooperation in Europe

167

Centralised indirect

Encouraging and promoting cooperation in the field of youth and sports

156

Centralised indirect

People — Programme for the mobility of researchers

584

Centralised indirect

2 414

09

Information society and media

Administrative expenditure

132

Centralised direct

FP7

1 218

Centralised direct

Other

139

Centralised direct

1 489

02

Enterprise

Administrative expenditure

123

Centralised direct

Competitiveness, industrial policy, innovation and entrepreneurship

187

Centralised direct/centralised indirect via EACI

Internal market for goods and sectoral policies

33

Centralised direct

FP7 — Cooperation — Space and security

423

Centralised direct

EU satellite navigation programmes (EGNOS and Galileo)

570

Centralised direct

1 336

18

Freedom, security and justice

Administrative expenditure

76

Centralised direct

Solidarity — External borders, visa policy and free movement of people

445

Shared/Centralised direct

Migration flows — Common immigration and asylum policies

159

Shared/Centralised direct

Fundamental rights and citizenship

48

Centralised direct

Security and safeguarding liberties

133

Centralised direct

Justice in criminal and civil matters

62

Centralised direct

Drugs prevention and information

18

Centralised direct

Policy strategy and coordination

3

Centralised direct

944

10

Direct research

Staff, running costs and investments

352

Centralised direct

FP7

41

Centralised direct

Historical liabilities resulting from nuclear activities

24

Centralised direct

Completion of previous framework programmes (FPs)

24

Centralised direct

441

01

Economic and financial affairs

Administrative expenditure

70

Centralised direct

Economic and monetary union

12

Centralised direct

International economic and financial affairs

55

Centralised direct

Financial operations and instruments

252

Centralised direct/Joint management with EIF/centralised indirect via EIF

389

16

Communication

Administrative expenditure

125

Centralised direct

Communication and the media

35

Centralised direct

Going Local communication

37

Centralised direct

Analysis and communication tools

26

Centralised direct

Fostering European citizenship

36

Centralised direct

259

20

Trade

Administrative expenditure

93

Centralised direct

Trade policy

11

Centralised direct/Joint management with IO

104

12

Internal Market

Administrative expenditure

61

Centralised direct

Policy strategy and coordination for the Directorate-General for the Internal Market

34

Centralised direct

95

03

Competition

Administrative expenditure

94

Centralised direct

Cartels, anti-trust and liberalisation

0

Centralised direct

94

Total administrative expenditure (26)

1 578

Framework programmes (FPs)

5 965

Lifelong learning, including multilingualism (LLP)

1 376

Other operational expenditure

3 250

Total operational expenditure

10 591

Of which:

—

6 911

| — | interim/final payments
   (28) |
| --- | --- |

—

3 680

Total payments for the year

12 169

Total commitments for the year

13 968

Source: 2011 annual accounts of the European Union.

Specific characteristics of the policy group

| 8.2. | The main components of this policy group are the framework programmes for research and technological development (FPs), accounting for 56 % of total operational expenditure (or 5 965 million euro). Other internal policies include the Lifelong Learning Programme, accounting for 11 % of total operational expenditure (or 1 376 million euro), the ‘Solidarity and management of migration flows’ (SOLID) general programme for 4 % (or 445 million euro) and the Competitiveness and Innovation Framework Programme (CIP) for 2 % (or 258 million euro). |
| --- | --- |

8.2.

The main components of this policy group are the framework programmes for research and technological development (FPs), accounting for 56 % of total operational expenditure (or 5 965 million euro). Other internal policies include the Lifelong Learning Programme, accounting for 11 % of total operational expenditure (or 1 376 million euro), the ‘Solidarity and management of migration flows’ (SOLID) general programme for 4 % (or 445 million euro) and the Competitiveness and Innovation Framework Programme (CIP) for 2 % (or 258 million euro).

Research Framework Programmes

| 8.3. | The Sixth and Seventh Framework Programmes for Research and Technological Development (FP6 and FP7) are the European Union's main instruments for supporting research and innovation. Both FPs are designed with the aim to support the Lisbon and Europe 2020 strategies and the European Research Area (2). |
| --- | --- |

8.3.

The Sixth and Seventh Framework Programmes for Research and Technological Development (FP6 and FP7) are the European Union's main instruments for supporting research and innovation. Both FPs are designed with the aim to support the Lisbon and Europe 2020 strategies and the European Research Area (2).

| 8.4. | The FPs are implemented under centralised direct and centralised indirect management involving six Directorates-General and two executive agencies (3). Part of the budget is also implemented under indirect centralised management by different bodies such as the Joint Undertakings (4) and the European Investment Bank. |
| --- | --- |

8.4.

The FPs are implemented under centralised direct and centralised indirect management involving six Directorates-General and two executive agencies (3). Part of the budget is also implemented under indirect centralised management by different bodies such as the Joint Undertakings (4) and the European Investment Bank.

| 8.5. | Both FPs are primarily project-based competitive funding programmes in which potential beneficiaries must compete for the funding by presenting their project. Grant agreements are signed between the successful applicants and the Commission. Once the grant agreement has been signed, a first advance payment is disbursed followed by interim and final payments which are triggered by the cost claims submitted by the beneficiaries. |
| --- | --- |

8.5.

Both FPs are primarily project-based competitive funding programmes in which potential beneficiaries must compete for the funding by presenting their project. Grant agreements are signed between the successful applicants and the Commission. Once the grant agreement has been signed, a first advance payment is disbursed followed by interim and final payments which are triggered by the cost claims submitted by the beneficiaries.

| 8.6. | The principal risk of irregularity is that beneficiaries may overstate eligible costs in their cost claims, and that this may not be detected and subsequently corrected by the Commission’s supervisory and control systems. This risk is exacerbated by the complexity of the rules for calculating eligible costs and in certain areas the implementing bodies (see paragraph 8.4) apply the rules differently. |
| --- | --- |

8.6.

The principal risk of irregularity is that beneficiaries may overstate eligible costs in their cost claims, and that this may not be detected and subsequently corrected by the Commission’s supervisory and control systems. This risk is exacerbated by the complexity of the rules for calculating eligible costs and in certain areas the implementing bodies (see paragraph 8.4) apply the rules differently.

| 8.7. | On 24 January 2011 the Commission took the three following measures with the aim of simplifying the rules applicable to FP7:






  (a) | a widening of acceptance of beneficiaries' methodologies for calculating average personnel costs; |
| --- | --- | --- |

8.7.

On 24 January 2011 the Commission took the three following measures with the aim of simplifying the rules applicable to FP7:

(a)

a widening of acceptance of beneficiaries' methodologies for calculating average personnel costs;

| (b) | the introduction of flat-rate financing for SME owners; |
| --- | --- |

(b)

the introduction of flat-rate financing for SME owners;

| (c) | the creation of a Research Clearing Committee in order to achieve a uniform interpretation and application of the rules. |
| --- | --- |

(c)

the creation of a Research Clearing Committee in order to achieve a uniform interpretation and application of the rules.

It is too early to assess the impact of these measures on the level of ineligible costs.

| 8.8. | In this policy area, the European Commission is also responsible for the implementation of two major space programmes: the Galileo programme and the global monitoring for environment and security programme (GMES). These tasks are either delegated to or carried out in cooperation with the European Space Agency (ESA). Total payments made by the Commission to ESA in 2011 amounted to 660 million euro (133,6 million euro for GMES and 526,4 million euro for Galileo). |
| --- | --- |

8.8.

In this policy area, the European Commission is also responsible for the implementation of two major space programmes: the Galileo programme and the global monitoring for environment and security programme (GMES). These tasks are either delegated to or carried out in cooperation with the European Space Agency (ESA). Total payments made by the Commission to ESA in 2011 amounted to 660 million euro (133,6 million euro for GMES and 526,4 million euro for Galileo).

| 8.8. | The payments made to ESA in 2011 as annual contribution from the EU budget to the jointly managed GMES programme and the amounts determined for the implementation of the Galileo programme are pre-financing payments. The final amount of funds used by ESA is determined by the Commission only at the end of the two programmes. |
| --- | --- |

8.8.

Competitiveness and Innovation Framework Programme (CIP)

| 8.9. | The CIP programme (the area of other internal policies, which the Court selected for systems audit following a rotational approach) covers three sub-programmes managed by three DGs (in 2011, DG ECFIN (5): 29 million euro, DG ENTR (6): 114 million euro and DG INFSO: 115 million euro). DG INFSO manages the information and communications technology (ICT) policy support programme (ICT-PSP) which aims to stimulate innovation and competitiveness through the wider uptake and best use of ICT by citizens, governments and businesses, particularly SMEs. |
| --- | --- |

8.9.

The CIP programme (the area of other internal policies, which the Court selected for systems audit following a rotational approach) covers three sub-programmes managed by three DGs (in 2011, DG ECFIN (5): 29 million euro, DG ENTR (6): 114 million euro and DG INFSO: 115 million euro). DG INFSO manages the information and communications technology (ICT) policy support programme (ICT-PSP) which aims to stimulate innovation and competitiveness through the wider uptake and best use of ICT by citizens, governments and businesses, particularly SMEs.

| 8.10. | The programme is implemented through direct centralised management of grants, with direct financial contributions through co-financed grant agreements which the Commission signs with beneficiaries forming a consortium. The main risk of irregularity in the case of PSP research projects, is that beneficiaries may include ineligible costs in their claims, which may not be detected and corrected by the Commission’s supervisory and control systems before reimbursement. |
| --- | --- |

8.10.

The programme is implemented through direct centralised management of grants, with direct financial contributions through co-financed grant agreements which the Commission signs with beneficiaries forming a consortium. The main risk of irregularity in the case of PSP research projects, is that beneficiaries may include ineligible costs in their claims, which may not be detected and corrected by the Commission’s supervisory and control systems before reimbursement.

Audit scope and approach

| 8.11. | Annex 1.1, Part 2
  , of Chapter 1 describes the Court’s overall audit approach and methodology. For the audit of research and other internal policies, the following specific issues should be noted:






  (a) | the audit involved an examination of a sample of 150 payments, comprising 25 advances for research FPs, 39 advances covering other measures in this policy group, 60 interim or final payments for research FPs and 26 interim or final payments covering other measures in this policy group; |
| --- | --- | --- |

8.11.

Annex 1.1, Part 2
  , of Chapter 1 describes the Court’s overall audit approach and methodology. For the audit of research and other internal policies, the following specific issues should be noted:

(a)

the audit involved an examination of a sample of 150 payments, comprising 25 advances for research FPs, 39 advances covering other measures in this policy group, 60 interim or final payments for research FPs and 26 interim or final payments covering other measures in this policy group;

| (b) | the assessment of systems covered:






  — | ex-ante desk checks at the Commission (7); |
| --- | --- | --- |

(b)

the assessment of systems covered:

—

ex-ante desk checks at the Commission (7);

| — | audit certificates of project cost claims provided by independent auditors (8); |
| --- | --- |

—

audit certificates of project cost claims provided by independent auditors (8);

| — | ex-post financial audits of projects (9); |
| --- | --- |

—

ex-post financial audits of projects (9);

| — | Commission management representations (10); |
| --- | --- |

—

Commission management representations (10);

| (c) | the audit of the Guarantee Fund focused on compliance with the agreement between the Commission and the EIB for the management of the Fund’s assets as well as the Commission’s monitoring procedures. The work performed by a private firm of auditors was also reviewed. |
| --- | --- |

(c)

the audit of the Guarantee Fund focused on compliance with the agreement between the Commission and the EIB for the management of the Fund’s assets as well as the Commission’s monitoring procedures. The work performed by a private firm of auditors was also reviewed.

REGULARITY OF TRANSACTIONS

| 8.12. | Annex 8.1
  contains a summary of the results of transaction testing. The Court’s testing of its sample of transactions found 49 % to be affected by error. The most likely error estimated by the Court is 3,0 % (11). |
| --- | --- |

8.12.

Annex 8.1
  contains a summary of the results of transaction testing. The Court’s testing of its sample of transactions found 49 % to be affected by error. The most likely error estimated by the Court is 3,0 % (11).

| 8.13. | In total, the Court found that 74 of the sample of 150 transactions were affected by error. The main source of error is the over-declaration of costs by beneficiaries for projects funded by the research FPs. This is consistent with the errors detected by the Commission’s ex-post financial audits (12) (see paragraphs 8.25 to 8.30). As noted by the Court in previous years (13), errors are found in all cost categories: personnel costs and other direct costs and indirect costs. |
| --- | --- |

8.13.

In total, the Court found that 74 of the sample of 150 transactions were affected by error. The main source of error is the over-declaration of costs by beneficiaries for projects funded by the research FPs. This is consistent with the errors detected by the Commission’s ex-post financial audits (12) (see paragraphs 8.25 to 8.30). As noted by the Court in previous years (13), errors are found in all cost categories: personnel costs and other direct costs and indirect costs.

| 8.14. | Personnel costs: the calculation of actual personnel costs should be based on a reliable time recording system. The Court’s audits revealed: discrepancies between the time-sheets and other personnel records (e.g. absence and holiday records), cases of staff fully declared on a project while the time-sheets showed that they were working on several projects and cases of unpaid overtime charged to the Commission (see example 8.1). |
| --- | --- |

8.14.

Personnel costs: the calculation of actual personnel costs should be based on a reliable time recording system. The Court’s audits revealed: discrepancies between the time-sheets and other personnel records (e.g. absence and holiday records), cases of staff fully declared on a project while the time-sheets showed that they were working on several projects and cases of unpaid overtime charged to the Commission (see example 8.1).

| 8.14. | Errors identified in a cost claim may have no financial impact on the EU funds. |
| --- | --- |

8.14.

Example 8.1 —   Error identified in a cost claim relating to personnel costs

A beneficiary involved in a FP7 project declared 308 000 euro of personnel costs. The Court’s audit revealed that the beneficiary:

| — | underestimated the productive hours worked by its employees; |
| --- | --- |

—

underestimated the productive hours worked by its employees;

| — | over-charged hours for several employees involved in the audited project. |
| --- | --- |

—

over-charged hours for several employees involved in the audited project.

In total these findings resulted in the over-declaration of 45 000 euro of personnel costs.

Example 8.1
  —   
  Error identified in a cost claim relating to personnel costs

In the case quoted by the Court the amount unduly claimed has already been offset against the following payment.

| 8.15. | Other direct costs: in order for other direct costs to be eligible, they must be actual, supported by adequate evidence (such as invoices and proof of payment) and a clear link with the project and the reporting period should exist. During its audits, the Court often found that beneficiaries included invoices for consumables either ordered or delivered after the end of the project as well as invoices for external services which should have been classified as subcontracting. Beneficiaries also failed to provide invoices in support of the costs or the proof of payment. As regards equipment, cases were found where the purchase cost was fully charged to the research project instead of being depreciated according to the beneficiary’s usual accounting practices. |
| --- | --- |

8.15.

Other direct costs: in order for other direct costs to be eligible, they must be actual, supported by adequate evidence (such as invoices and proof of payment) and a clear link with the project and the reporting period should exist. During its audits, the Court often found that beneficiaries included invoices for consumables either ordered or delivered after the end of the project as well as invoices for external services which should have been classified as subcontracting. Beneficiaries also failed to provide invoices in support of the costs or the proof of payment. As regards equipment, cases were found where the purchase cost was fully charged to the research project instead of being depreciated according to the beneficiary’s usual accounting practices.

| 8.16. | Indirect costs: for beneficiaries using actual indirect costs, these must be related to the project. Beneficiaries often failed to exclude ineligible costs linked to commercial activities, provisions or costs directly charged to the project (see example 8.2). |
| --- | --- |

8.16.

Indirect costs: for beneficiaries using actual indirect costs, these must be related to the project. Beneficiaries often failed to exclude ineligible costs linked to commercial activities, provisions or costs directly charged to the project (see example 8.2).

8.16.

Example 8.2 —   Error identified in a cost claim relating to other indirect costs

A beneficiary declared overheads amounting to 366 891 euro and included the indirect costs of all its departments while only considering the research personnel as an allocation key when charging these costs to research projects. This resulted in non-related related costs being charged, leading to an over-claim of 180 670 euro.

Example 8.2
  —   
  Error identified in a cost claim relating to other indirect costs

The Commission has carried out the contradictory procedure with the beneficiary. Following complementary information and explanations supplied by the beneficiary, the Commission has concluded that the over-claim for indirect costs for this project amounts to 39 735 euro which has been fully recovered in 2012. In addition, the Commission has informed the beneficiary that this systemic error should be corrected also in the other projects in which he participates, what he has accepted to do.

The problem of the calculation of indirect costs is well known to the Commission. The proposal for Horizon 2020, if adopted, would avoid the problem by paying indirect costs as a flat rate percentage of direct costs.

| 8.17. | 19 out of 65 transactions (29 %) relating to other internal policies were affected by errors. These included errors related to reimbursement of non-eligible costs similar to the errors found in FP6 and FP7. |
| --- | --- |

8.17.

19 out of 65 transactions (29 %) relating to other internal policies were affected by errors. These included errors related to reimbursement of non-eligible costs similar to the errors found in FP6 and FP7.

| 8.18. | The Court’s audit found errors such as advances which should have been claimed in the following reporting period and ineligible provisions in the financial report provided by ESA (see also paragraph 8.36) as well as weaknesses in the procurement procedures carried out when implementing the two space programmes (see paragraph 8.8). |
| --- | --- |

8.18.

The Court’s audit found errors such as advances which should have been claimed in the following reporting period and ineligible provisions in the financial report provided by ESA (see also paragraph 8.36) as well as weaknesses in the procurement procedures carried out when implementing the two space programmes (see paragraph 8.8).

| 8.18. | The Commission performs on-the-spot audits for each financial report submitted by ESA. Any identified errors are corrected. The inclusion in the 2010 reporting of advances, which should have been claimed in the following reporting period, does not have a financial impact on the programme. The provision identified by the Court was already corrected by ESA in the next reporting period. In the Commission’s view the procurement issues identified by the Court do not lead to waste of EU funds. The Commission considers that the procurement procedures as amended following the Court’s audits are adequate and aligned with the particular nature of the Space procurement activities. |
| --- | --- |

8.18.

EFFECTIVENESS OF SYSTEMS

| 8.19. | Annex 8.2
  contains a summary of the results of the Court’s examination of supervisory and control systems. The Court found that the systems were partially effective in ensuring the regularity of transactions for both research and ICT-PSP. |
| --- | --- |

8.19.

Annex 8.2
  contains a summary of the results of the Court’s examination of supervisory and control systems. The Court found that the systems were partially effective in ensuring the regularity of transactions for both research and ICT-PSP.

Research Framework Programmes

Ex-ante desk checks

| 8.20. | Before a payment is made all relevant operational and financial aspects are subject to desk checks to verify the regularity of the payments and to ensure compliance with contracts. As a result of the Commission's efforts to simplify as far as possible its ex-ante control procedures, these controls are often limited to a desk review of the cost claims and related deliverables provided by the beneficiaries. |
| --- | --- |

8.20.

Before a payment is made all relevant operational and financial aspects are subject to desk checks to verify the regularity of the payments and to ensure compliance with contracts. As a result of the Commission's efforts to simplify as far as possible its ex-ante control procedures, these controls are often limited to a desk review of the cost claims and related deliverables provided by the beneficiaries.

| 8.20. | The Commission is of the view that the control system has to be considered in its entirety including ex-ante and ex-post checks. |
| --- | --- |

8.20.

The Commission is of the view that the control system has to be considered in its entirety including ex-ante and ex-post checks.

| 8.21. | The audit of 108 payments (14) out of the sample of 150 (see paragraph 8.11) revealed 51 cases affected by weaknesses in the ex-ante desk checks which the Court, however, does not consider as substantial such as the retroactivity of the project start-date (without a prior written request from the beneficiary), payment delays and inconsistencies in the authorisation procedure. As a result, this control procedure is considered to be partially effective. |
| --- | --- |

8.21.

The audit of 108 payments (14) out of the sample of 150 (see paragraph 8.11) revealed 51 cases affected by weaknesses in the ex-ante desk checks which the Court, however, does not consider as substantial such as the retroactivity of the project start-date (without a prior written request from the beneficiary), payment delays and inconsistencies in the authorisation procedure. As a result, this control procedure is considered to be partially effective.

Audit certification of cost claims

| 8.22. | Grant agreements set out the conditions under which the beneficiaries' cost claims should be accompanied by an audit certificate (FP6) or a certificate on the financial statements (FP7) (15) issued by an independent auditor. The purpose of these certificates is to provide the Commission with relevant information so that it can assess whether the costs claimed by beneficiaries are eligible and all receipts and interest generated by pre-financing have been declared. |
| --- | --- |

8.22.

Grant agreements set out the conditions under which the beneficiaries' cost claims should be accompanied by an audit certificate (FP6) or a certificate on the financial statements (FP7) (15) issued by an independent auditor. The purpose of these certificates is to provide the Commission with relevant information so that it can assess whether the costs claimed by beneficiaries are eligible and all receipts and interest generated by pre-financing have been declared.

| 8.23. | For the beneficiary cost claims for which a certificate had been provided (31 out of the 60 interim and final payments), the Court compared the results of its own audit with the conclusion of the certificate. In 25 cases where the independent auditor had issued an unqualified opinion the Court detected errors. In 14 of the cases the errors had a financial impact above 2 %. |
| --- | --- |

8.23.

For the beneficiary cost claims for which a certificate had been provided (31 out of the 60 interim and final payments), the Court compared the results of its own audit with the conclusion of the certificate. In 25 cases where the independent auditor had issued an unqualified opinion the Court detected errors. In 14 of the cases the errors had a financial impact above 2 %.

| 8.24. | In line with the findings for previous years and despite the Commission’s efforts to raise awareness among beneficiaries and auditors (see
  Annex 8.3
  ), this control procedure is still only partially effective as there are still ineligible items not being identified by the independent auditors. |
| --- | --- |

8.24.

In line with the findings for previous years and despite the Commission’s efforts to raise awareness among beneficiaries and auditors (see
  Annex 8.3
  ), this control procedure is still only partially effective as there are still ineligible items not being identified by the independent auditors.

| 8.24. | The Commission is aware that the CFS does not entirely avoid errors, but nevertheless they reduce error levels substantially. They are therefore an important contributor to the overall level of assurance of the Commission. |
| --- | --- |

8.24.

The Commission’s ex-post financial audits

| 8.25. | For both FPs the research family DGs have common ex-post audit strategies. The main objectives are:






  (a) | to assess the legality and regularity of cost claims and thus provide input to the Annual Declaration of Assurance of the Authorising Officers (AO) by delegation; and |
| --- | --- | --- |

8.25.

For both FPs the research family DGs have common ex-post audit strategies. The main objectives are:

(a)

to assess the legality and regularity of cost claims and thus provide input to the Annual Declaration of Assurance of the Authorising Officers (AO) by delegation; and

| (b) | to provide the basis for the recovery of unduly paid EU funds. |
| --- | --- |

(b)

to provide the basis for the recovery of unduly paid EU funds.

| 8.26. | Overall, the system of ex-post audits put in place by the Commission was assessed as effective. |
| --- | --- |

8.26.

Overall, the system of ex-post audits put in place by the Commission was assessed as effective.

Reliance on the work of external auditors

| 8.27. | The majority of the representative audits (16) of the Commission are performed by external audit firms under its responsibility and control. |
| --- | --- |

8.27.

The majority of the representative audits (16) of the Commission are performed by external audit firms under its responsibility and control.

| 8.28. | The Court performed a detailed review of 30 ex-post audit files, focusing on the quality of audit documentation, consistency of the methodology applied and reporting to the Commission. While the Court identified weaknesses in the area of audit documentation and the audit methodology (17) applied by external auditors, it assessed reporting as satisfactory overall. |
| --- | --- |

8.28.

The Court performed a detailed review of 30 ex-post audit files, focusing on the quality of audit documentation, consistency of the methodology applied and reporting to the Commission. While the Court identified weaknesses in the area of audit documentation and the audit methodology (17) applied by external auditors, it assessed reporting as satisfactory overall.

| 8.28. | The Commission considers that the weaknesses identified by the Court had a low financial impact. Nevertheless, it will intensify its efforts to ensure that the external audit firms meet the specific requirements set out in the framework contract for every audit assignment. |
| --- | --- |

8.28.

Systems related to the recovery of unduly paid EU funds

| 8.29. | As a result of errors identified during the Commission’s ex-post financial audits, unduly paid EU funds need to be recovered (either through a recovery order or a set-off against a future payment). Consolidated data for DG RTD and DG INFSO show that the recovery is a lengthy process. As at year-end 2011, 81 % and 33 % of the audits (18) closed in 2010 and in 2011 respectively were considered as implemented. |
| --- | --- |

8.29.

As a result of errors identified during the Commission’s ex-post financial audits, unduly paid EU funds need to be recovered (either through a recovery order or a set-off against a future payment). Consolidated data for DG RTD and DG INFSO show that the recovery is a lengthy process. As at year-end 2011, 81 % and 33 % of the audits (18) closed in 2010 and in 2011 respectively were considered as implemented.

| 8.29-8.30. | For the correction of errors in multiannual FP projects, offsetting against the next payment is the usual practice. In many cases the next payments are requested 1 or 11⁄2 years later, which influences significantly the level of implementation of audits closed in 2010 and 2011. As the extrapolation process requires the recalculation and resubmission of cost claims by the beneficiaries, corrections via extrapolation of audit results indeed take even more time than the implementation of audit results referred to in paragraph 8.29. |
| --- | --- |

8.29-8.30.

| 8.30. | In addition, extrapolation of identified systematic errors to non-audited projects of audited beneficiaries is an even longer process. The implementation rate of systematic errors (19) for DG RTD for both FP6 and FP7 programmes was 44,8 % at the end of 2011. |
| --- | --- |

8.30.

In addition, extrapolation of identified systematic errors to non-audited projects of audited beneficiaries is an even longer process. The implementation rate of systematic errors (19) for DG RTD for both FP6 and FP7 programmes was 44,8 % at the end of 2011.

Competitiveness and Innovation Framework Programme (CIP) — ICT Policy Support Programme (ICT-PSP)

Ex-ante desk checks

| 8.31. | The Court’s audit compared the evidence of ex-ante checks in the ABAC Accounting system with that of DG INFSO’s local system. In 23 out of 30 cases the persons authorising the transaction in ABAC were not the same as those authorising them in the local system. For the ICT-PSP programme the ABAC system does not reliably identify the persons performing the actual checks. As a consequence, this control procedure is considered to be only partially effective. |
| --- | --- |

8.31.

The Court’s audit compared the evidence of ex-ante checks in the ABAC Accounting system with that of DG INFSO’s local system. In 23 out of 30 cases the persons authorising the transaction in ABAC were not the same as those authorising them in the local system. For the ICT-PSP programme the ABAC system does not reliably identify the persons performing the actual checks. As a consequence, this control procedure is considered to be only partially effective.

| 8.31. | The local system in place in DG INFSO records the visa of all the actors involved in the validation of the transactions. This system is automatic and secure and offers therefore a 100 % certainty as to who has done what, based on the electronic visas recorded in this system.

  The names of the persons indicated in ABAC may be different as they correspond to people who have been actually involved in the transactions, but with a different role in the case of interim and final payments. This results from a deliberate decision taken by DG INFSO to limit the access in ABAC to experienced people in order to limit the risk of errors. This principle is properly documented in the description of DG INFSO financial circuits.


  In order to resolve the issue identified by the Court, DG INFSO intends to develop during 2013 a technical solution to address the issue of visas in ABAC in the framework of the next generation of programmes (Horizon 2020). |
| --- | --- |

8.31.

The names of the persons indicated in ABAC may be different as they correspond to people who have been actually involved in the transactions, but with a different role in the case of interim and final payments. This results from a deliberate decision taken by DG INFSO to limit the access in ABAC to experienced people in order to limit the risk of errors. This principle is properly documented in the description of DG INFSO financial circuits.

In order to resolve the issue identified by the Court, DG INFSO intends to develop during 2013 a technical solution to address the issue of visas in ABAC in the framework of the next generation of programmes (Horizon 2020).

Audit certification of cost claims

| 8.32. | For the 30 transactions audited for ex-ante checks, three required audit certificates. These were provided and their conclusions taken into account when establishing the amount due. |
| --- | --- |

8.32.

For the 30 transactions audited for ex-ante checks, three required audit certificates. These were provided and their conclusions taken into account when establishing the amount due.

The Commission’s ex-post financial audits

| 8.33. | In 2011 no formal ex-post audit strategy for the non-research programmes managed by DG INFSO had been approved. As a result no specific audit procedures were in place during 2011 for ex-post audits of the ICT-PSP projects and no specific risk assessment was carried out for the ICT-PSP programme. |
| --- | --- |

8.33.

In 2011 no formal ex-post audit strategy for the non-research programmes managed by DG INFSO had been approved. As a result no specific audit procedures were in place during 2011 for ex-post audits of the ICT-PSP projects and no specific risk assessment was carried out for the ICT-PSP programme.

| 8.33. | The non-research programmes of DG INFSO are subject to regular audits. In 2011 12 ex-post audits, out of which two relate to ICT-PSP, were closed concerning this funding area. The audits performed are selected on the basis of risk considerations and typically are requested by the services in charge of the operational project management.


  In view of the increasing financial importance of this funding area DG INFSO services have designed an audit strategy which is being implemented in 2012. Further, in 2011 DG INFSO services concluded a framework contract for ex-post audit services in the field of this funding area. A first batch of 22 audits, concerning non-research funds, has been launched in the first semester of 2012 on the basis of this framework contract.


  The interim and final payments for non-research programmes represented less than 4 % of the total INFSO payments made in 2011. DG INFSO considers that the measures initiated in 2011 being implemented in 2012 are adequate given the financial importance of the funding activity in question. |
| --- | --- |

8.33.

The non-research programmes of DG INFSO are subject to regular audits. In 2011 12 ex-post audits, out of which two relate to ICT-PSP, were closed concerning this funding area. The audits performed are selected on the basis of risk considerations and typically are requested by the services in charge of the operational project management.

In view of the increasing financial importance of this funding area DG INFSO services have designed an audit strategy which is being implemented in 2012. Further, in 2011 DG INFSO services concluded a framework contract for ex-post audit services in the field of this funding area. A first batch of 22 audits, concerning non-research funds, has been launched in the first semester of 2012 on the basis of this framework contract.

The interim and final payments for non-research programmes represented less than 4 % of the total INFSO payments made in 2011. DG INFSO considers that the measures initiated in 2011 being implemented in 2012 are adequate given the financial importance of the funding activity in question.

| 8.34. | At the time of the Court’s audit only two audits had been carried out by the Commission for ICT-PSP projects (one in 2011 and one in 2010). In both cases the error rates were very high: 96 % and 100 % respectively. Additionally, the Court audited two ICT-PSP projects as part of its substantive testing. The error rates were 99,82 % and 2,86 %. The lack of an ex-post audit strategy for the ICT-PSP programme represents a significant weakness in the supervisory and control systems, particularly considering the high error rates found. This control is considered to be not effective. |
| --- | --- |

8.34.

At the time of the Court’s audit only two audits had been carried out by the Commission for ICT-PSP projects (one in 2011 and one in 2010). In both cases the error rates were very high: 96 % and 100 % respectively. Additionally, the Court audited two ICT-PSP projects as part of its substantive testing. The error rates were 99,82 % and 2,86 %. The lack of an ex-post audit strategy for the ICT-PSP programme represents a significant weakness in the supervisory and control systems, particularly considering the high error rates found. This control is considered to be not effective.

| 8.34. | The two audits carried out by the Commission in 2010 and 2011 for ICT-PSP, which is one of the non-research programme managed by DG INFSO, were selected on the basis of risk considerations; for these audits, the error rate found is often very high and is not representative of the population as a whole.

  One of the purposes of the audit strategy being implemented in 2012 for non-research programmes is to define sampling approaches which allows determining a meaningful error rate whilst maximising the audit economy by concentrating on large and risk prone beneficiaries. |
| --- | --- |

8.34.

One of the purposes of the audit strategy being implemented in 2012 for non-research programmes is to define sampling approaches which allows determining a meaningful error rate whilst maximising the audit economy by concentrating on large and risk prone beneficiaries.

Reliability of Commission management representations

| 8.35. | The AARs that were audited provide a fair assessment of financial management as regards the legality and regularity of underlying transactions. The information that was provided corroborates the Court’s observations and conclusions. |
| --- | --- |

8.35.

The AARs that were audited provide a fair assessment of financial management as regards the legality and regularity of underlying transactions. The information that was provided corroborates the Court’s observations and conclusions.

| 8.36. | Three DGs (20) issued a reservation concerning the residual errors affecting the accuracy of cost claims in FP7 and two DGs (21) maintained the reservation relating to the cost claims in FP6. DG ENTR also expressed a reservation concerning the reliability of ESA’s financial reporting (see paragraph 8.18). |
| --- | --- |

8.36.

Three DGs (20) issued a reservation concerning the residual errors affecting the accuracy of cost claims in FP7 and two DGs (21) maintained the reservation relating to the cost claims in FP6. DG ENTR also expressed a reservation concerning the reliability of ESA’s financial reporting (see paragraph 8.18).

| 8.36. | The Commission will continue auditing the financial reports provided by ESA and will encourage and support ESA in implementing its actions towards further improving the quality of financial reporting to the Commission. Given the actions currently under way, the Commission expects the issues to be corrected soon which will enable reducing and finally lifting this reservation. |
| --- | --- |

8.36.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

| 8.37. | Based on its audit work, the Court concludes that the payments for the year ended 31 December 2011 for research and other internal policies were affected by material error (22). |
| --- | --- |

8.37.

Based on its audit work, the Court concludes that the payments for the year ended 31 December 2011 for research and other internal policies were affected by material error (22).

| 8.38. | Based on its audit work, the Court found that the examined supervisory and control systems for research and other internal policies were partially effective. |
| --- | --- |

8.38.

Based on its audit work, the Court found that the examined supervisory and control systems for research and other internal policies were partially effective.

| 8.38. | The Commission considers that seen from a management perspective — i.e. when balancing the objectives in terms of legality and regularity with considerations on risk-proportionality and cost-effectiveness of controls — its management and control systems provide reasonable assurance, subject to the reservations issued by the AODs as mentioned in paragraph 8.36. |
| --- | --- |

8.38.

Recommendations

| 8.39. | Annex 8.3
  shows the result of the Court’s review of progress in addressing recommendations made in previous annual reports (2008 to 2009). The following points should be noted: |
| --- | --- |

8.39.

Annex 8.3
  shows the result of the Court’s review of progress in addressing recommendations made in previous annual reports (2008 to 2009). The following points should be noted:

8.39.

| (a) | Where ex-post audits detect large discrepancies between certified and audited amounts, as at the end of 2011, there was no direct feedback process in place to make certifying auditors aware of the Commission's audit findings. |
| --- | --- |

(a)

Where ex-post audits detect large discrepancies between certified and audited amounts, as at the end of 2011, there was no direct feedback process in place to make certifying auditors aware of the Commission's audit findings.

| (a) | The Commission services have in place a process to provide feedback to the certifying auditors where the Commission's ex-post audits identified material differences between the certified cost statements and its own findings. This is achieved either by writing to the beneficiaries inviting them to communicate the feedback to the certifying auditor or by directly addressing the certifying auditors. |
| --- | --- |

(a)

The Commission services have in place a process to provide feedback to the certifying auditors where the Commission's ex-post audits identified material differences between the certified cost statements and its own findings. This is achieved either by writing to the beneficiaries inviting them to communicate the feedback to the certifying auditor or by directly addressing the certifying auditors.

| (b) | The Commission continued with its efforts to implement audit results (by adjusting the costs claims or by issuing recovery orders) when participants had been found to have overstated expenditure in their cost claims. It was however noted that in practice, especially for extrapolation, the recovery is a lengthy process (see paragraphs 8.29 and 8.30). |
| --- | --- |

(b)

The Commission continued with its efforts to implement audit results (by adjusting the costs claims or by issuing recovery orders) when participants had been found to have overstated expenditure in their cost claims. It was however noted that in practice, especially for extrapolation, the recovery is a lengthy process (see paragraphs 8.29 and 8.30).

| (b) | The Commission has already addressed the Court's finding. For the correction of errors in multiannual FP projects, offsetting against the next payment is the usual practice. In many cases the next payments are requested 1 or 11⁄2 years later, which influences significantly the level of implementation of audits closed in 2010 and 2011. |
| --- | --- |

(b)

| 8.40. | Following this review and the findings and conclusions for 2011, the Court recommends that the Commission should: |
| --- | --- |

8.40.

Following this review and the findings and conclusions for 2011, the Court recommends that the Commission should:

| 8.40. | See joint reply to paragraphs 1.12 and 1.13. |
| --- | --- |

8.40.

| — | in the area of the research FPs: |
| --- | --- |

—

in the area of the research FPs:

| — | Recommendation 1: intensify its efforts to address the errors found in interim and final payments, |
| --- | --- |

—

Recommendation 1: intensify its efforts to address the errors found in interim and final payments,

| — | The possibilities to simplify the FP7 rules have been exhausted. The Commission will however continue to address errors through the following actions:






  — | reinforced on-going efforts to provide guidance and feedback to participants and certifying auditors, |
| --- | --- | --- |

—

—

reinforced on-going efforts to provide guidance and feedback to participants and certifying auditors,

| — | reviewing ex-ante control procedures without however unduly increasing time to payment, |
| --- | --- |

—

reviewing ex-ante control procedures without however unduly increasing time to payment,

| — | continuing its audit work and recovery actions, |
| --- | --- |

—

continuing its audit work and recovery actions,

| — | monitoring the financial impact of the errors identified, which may well be lower than the error, over the multiannual period. |
| --- | --- |

—

monitoring the financial impact of the errors identified, which may well be lower than the error, over the multiannual period.

Further simplification has been proposed in Horizon 2020 which, if adopted, will lead to a reduced error rate.

| — | Recommendation 2: enhance its initiatives to make beneficiaries and independent auditors aware of the errors detected during the Court’s and the Commission’s ex-post audits, |
| --- | --- |

—

Recommendation 2: enhance its initiatives to make beneficiaries and independent auditors aware of the errors detected during the Court’s and the Commission’s ex-post audits,

| — | The Commission services have in place a process to provide feedback to the certifying auditors where the Commission's ex-post audits identified material differences between the certified cost statements and its own findings. This is achieved either by writing to the beneficiaries inviting them to communicate the feedback to the certifying auditor or by directly addressing the certifying auditors. |
| --- | --- |

—

The Commission services have in place a process to provide feedback to the certifying auditors where the Commission's ex-post audits identified material differences between the certified cost statements and its own findings. This is achieved either by writing to the beneficiaries inviting them to communicate the feedback to the certifying auditor or by directly addressing the certifying auditors.

| — | Recommendation 3: ensure that the external audit firms conducting audits on its behalf align their procedures with the Commission’s guidelines and standard practice and in particular enhance the quality of their audit documentation, |
| --- | --- |

—

Recommendation 3: ensure that the external audit firms conducting audits on its behalf align their procedures with the Commission’s guidelines and standard practice and in particular enhance the quality of their audit documentation,

| — | The Commission will intensify its efforts to ensure that the external audit firms meet all the specific requirements set out in the framework contract for every audit assignment. In this context, reviews of the working papers retained by the external audit firms will be performed to ensure these are in line with requirements of the framework contract. The first such reviews will take place before the end of 2012. |
| --- | --- |

—

| — | in the area of the other internal policies: |
| --- | --- |

—

in the area of the other internal policies:

| — | Recommendation 4: introduce as soon as possible an ex-post audit strategy for the ICT-PSP programme, drawing on the lessons learnt by DG INFSO’s risk-based ex-post audit strategy for framework programmes projects. |
| --- | --- |

—

Recommendation 4: introduce as soon as possible an ex-post audit strategy for the ICT-PSP programme, drawing on the lessons learnt by DG INFSO’s risk-based ex-post audit strategy for framework programmes projects.

| — | DG INFSO has designed an audit strategy for non-research programmes, covering among others the ICT-PSP programme which is being implemented in 2012. |
| --- | --- |

—

RESULTS OF THE AUDIT OF THE GUARANTEE FUND FOR EXTERNAL ACTIONS

| 8.41. | The purpose of the Guarantee Fund for External Actions (23) (the Fund), which guarantees loans to third countries, is to reimburse the EU’s creditors (24) in the event of a beneficiary’s defaulting on a loan and to avoid direct calls on the EU budget. The administrative management of the fund is carried out by the Directorate-General for Economic and Financial Affairs (DG ECFIN) while the European Investment Bank (EIB) is responsible for its treasury management. |
| --- | --- |

8.41.

The purpose of the Guarantee Fund for External Actions (23) (the Fund), which guarantees loans to third countries, is to reimburse the EU’s creditors (24) in the event of a beneficiary’s defaulting on a loan and to avoid direct calls on the EU budget. The administrative management of the fund is carried out by the Directorate-General for Economic and Financial Affairs (DG ECFIN) while the European Investment Bank (EIB) is responsible for its treasury management.

| 8.42. | At 31 December 2011, as shown in the 2011 consolidated accounts of EU, the Fund’s net assets were 1 475 million euro, compared with 1 346 million euro at 31 December 2010 (25). No guarantee calls were made on the Fund in the year under review. |
| --- | --- |

8.42.

At 31 December 2011, as shown in the 2011 consolidated accounts of EU, the Fund’s net assets were 1 475 million euro, compared with 1 346 million euro at 31 December 2010 (25). No guarantee calls were made on the Fund in the year under review.

| 8.43. | The EIB and the Commission use a benchmark index to review the Fund’s annual performance. The return on the Fund’s portfolio in 2011 amounted to 0,72 %, representing an underperformance of 139 basis points in comparison to its benchmark. |
| --- | --- |

8.43.

The EIB and the Commission use a benchmark index to review the Fund’s annual performance. The return on the Fund’s portfolio in 2011 amounted to 0,72 %, representing an underperformance of 139 basis points in comparison to its benchmark.

---

(1)  Council Regulation (EC, Euratom) No 480/2009 of 25 May 2009 establishing a Guarantee Fund for external actions (OJ L 145, 10.6.2009, p. 10) stipulates in its recitals that the financial management of the Guarantee Fund should be subject to audit by the Court of Auditors in accordance with the procedures agreed upon by the Court of Auditors, the Commission and the European Investment Bank.

(2)  The European Research Area is composed of all research and development activities, programmes and policies in Europe which involve a transnational dimension. Together, they provide greatly enhanced opportunities for researchers, research institutions and businesses to circulate, compete and cooperate across borders.

(3)  The six Directorates-General are: DG Research and Innovation (RTD), DG Information Society and Media (INFSO), DG Education and Culture (EAC), DG Enterprise and Industry (ENTR), DG Mobility and Transport (MOVE) and DG Energy (ENER). The two executive agencies are: (i) the Research Executive Agency (REA) and (ii) the European Research Council Executive Agency (ERCEA).

(4)  The European Union Research Joint Undertakings (JUs) are: the European JU for ITER and the Development of Fusion Energy; the Clean Sky JU; the ARTEMIS JU; the Innovative Medicines Initiative JU; the ENIAC JU; and the Fuel Cells and Hydrogen JU.

(5)  DG ECFIN supports small and medium-sized enterprises (SMEs) with access to equity, venture capital and loan finance, through Union financial instruments operated on behalf of the Commission by the European Investment Fund (EIF).

(6)  DG ENTR manages the sub-programme related to entrepreneurship and innovation through CIP-grants managed via the Executive Agency for Competitiveness and Innovation (EACI).

(7)  For research, this assessment was based on the sample of the 85 payments relating to the FPs. For other internal policies, this assessment, and the assessment of ex-post financial audits of projects, was based on an additional sample of 30 payments relating to the CIP programme managed by DG INFSO, i.e. the ICT-PSP.

(8)  This was based on a sample of 31 beneficiary cost claims for which a certificate had been provided.

(9)  This was primarily based on the review of 30 ex-post audit files.

(10)  The annual activity reports of the Directors-General of DG RTD, DG INFSO, DG ENTR and DG EAC and two executive agencies: ERCEA and REA were reviewed.

(11)  The Court calculates its estimate of error on the basis of a representative statistical sample. The figure quoted is the best estimate (known as the MLE). The Court has 95 % confidence that the rate of error in the population lies between LEL 1,1 % and UEL 4,9 % (the lower and upper error limits respectively).

(12)  This was also confirmed by the Commission in the note for beneficiaries dated 19 March 2012‘How to avoid common errors identified in costs claims’ which states that most errors arise from misinterpreting the rules or from the beneficiaries not giving due consideration to the provisions of the grant agreement and the financial guidelines.

(13)  See paragraph 6.13 of the 2010 Annual Report, paragraphs 5.19 to 5.20 and 8.11 to 8.12 of the 2009 Annual Report, paragraphs 7.12 to 7.15 and 10.12 to 10.13 of the 2008 Annual Report.

(14)  This consists of: 60 FPs interim or final payments, 25 FPs advances, 21 payments linked with the contributions to the Research Joint Undertakings, the Risk Sharing Finance Facility, the EGNOS and Galileo programmes and 2 advances for the Research Fund for Coal and Steel.

(15)  FP7 beneficiaries are required to provide a certificate if the EU contribution exceeds 375 000 euro. It is estimated by the Commission that 80 % of them will remain under this threshold.

(16)  Audits selected on a random basis and designed to establish an error rate representative of the whole population.

(17)  The weaknesses detected mainly concerned the wrong acceptance of ineligible costs, sampling not representative of the population and the validation of incorrect indirect costs.

(18)  Audits covering both FP6 and FP7.

(19)  An error is considered as being ‘implemented’ when the beneficiary accepts the flat rate correction proposed by the Commission or submits revised cost claims for the projects affected by the extrapolation.

(20)  DG ENTR, DG INFSO and DG RTD.

(21)  DG ENTR and DG RTD.

(22)  See paragraphs 8.12 and 8.13.

(23)  Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 establishing a Guarantee Fund for external actions (OJ L 293, 12.11.1994, p. 1), as last amended by Regulation (EC, Euratom) No 89/2007 (OJ L 22, 31.1.2007, p. 1).

(24)  Principally the EIB, but also Euratom external lending and EC macro financial assistance (MFA) loans to third countries.

(25)  The stand alone net assets of the fund before consolidation amounted to 1 495 million euro.

(26)  The audit of administrative expenditure is reported in Chapter 9.

(27)  Advances under the Seventh Framework Programme (2007-2013) and under the Lifelong Learning Programme amounted to 3 837 million euro and 1 208 million euro respectively.

(28)  Interim/Final payments under the Seventh Framework Programme (2007-2013) and the Lifelong Learning Programme amounted to 2 128 million euro and 168 million euro respectively.

Source: 2011 annual accounts of the European Union.

ANNEX 8.1

RESULTS OF TRANSACTION TESTING FOR RESEARCH AND OTHER INTERNAL POLICIES

| | 2011 | 2010 | 2009 | 2008 |
| --- | --- | --- | --- | --- |
| FP6 | FP7 | LLP | Other | Total |
| SIZE AND STRUCTURE OF THE SAMPLE |
| Total transactions (of which): | 17 | 68 | 10 | 55 | 150 | 150 | 351 | 361 |
| Advances | 2 | 23 | 9 | 30 | 64 | 77 | 125 | 237 |
| Interim/Final payments | 15 | 45 | 1 | 25 | 86 | 73 | 226 | 124 |
| RESULTS OF TESTING
   (1)
   (2) |
| Proportion of transactions tested found to be: |
| Free of error | 47 % | (8) | 32 % | (22) | 100 % | (10) | 65 % | (36) | 51 % | (76) | 61 % | 72 % | 86 % |
| Affected by one or more errors | 53 % | (9) | 68 % | (46) | 0 % | (0) | 35 % | (19) | 49 % | (74) | 39 % | 28 % | 14 % |
| Analysis of transactions affected by error |
| Analysis by type of expenditure |
| Advances | 0 % | (0) | 11 % | (5) | 0 % | (0) | 63 % | (12) | 23 % | (17) | 12 % | 9 % | 19 % |
| Interim/Final payments | 100 % | (9) | 89 % | (41) | 0 % | (0) | 37 % | (7) | 77 % | (57) | 88 % | 91 % | 81 % |
| Analysis by type of error |
| Non-quantifiable errors: | 0 % | (0) | 39 % | (18) | 0 % | (0) | 53 % | (10) | 38 % | (28) | 33 % | 35 % | 34 % |
| Quantifiable errors: | 100 % | (9) | 61 % | (28) | 0 % | (0) | 47 % | (9) | 62 % | (46) | 67 % | 65 % | 66 % |
| Eligibility | 100 % | (9) | 96 % | (27) | 0 % | (0) | 100 % | (9) | 98 % | (45) | 97 % | 55 % | 65 % |
| Occurrence | 0 % | (0) | 0 % | (0) | 0 % | (0) | 0 % | (0) | 0 % | (0) | 0 % | 6 % | 3 % |
| Accuracy | 0 % | (0) | 4 % | (1) | 0 % | (0) | 0 % | (0) | 2 % | (1) | 3 % | 39 % | 32 % |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| Most likely error rate | 3,0 % | | | |
| Upper error limit | 4,9 % | | | |
| Lower error limit | 1,1 % | | | |

2011

2010

2009

2008

FP6

FP7

LLP

Other

Total

SIZE AND STRUCTURE OF THE SAMPLE

Total transactions (of which):

17

68

10

55

150

150

351

361

Advances

2

23

9

30

64

77

125

237

Interim/Final payments

15

45

1

25

86

73

226

124

RESULTS OF TESTING
   (1)
   (2)

Proportion of transactions tested found to be:

Free of error

47 %

(8)

32 %

(22)

100 %

(10)

65 %

(36)

51 %

(76)

61 %

72 %

86 %

Affected by one or more errors

53 %

(9)

68 %

(46)

0 %

(0)

35 %

(19)

49 %

(74)

39 %

28 %

14 %

Analysis of transactions affected by error

Analysis by type of expenditure

Advances

0 %

(0)

11 %

(5)

0 %

(0)

63 %

(12)

23 %

(17)

12 %

9 %

19 %

Interim/Final payments

100 %

(9)

89 %

(41)

0 %

(0)

37 %

(7)

77 %

(57)

88 %

91 %

81 %

Analysis by type of error

Non-quantifiable errors:

0 %

(0)

39 %

(18)

0 %

(0)

53 %

(10)

38 %

(28)

33 %

35 %

34 %

Quantifiable errors:

100 %

(9)

61 %

(28)

0 %

(0)

47 %

(9)

62 %

(46)

67 %

65 %

66 %

Eligibility

100 %

(9)

96 %

(27)

0 %

(0)

100 %

(9)

98 %

(45)

97 %

55 %

65 %

Occurrence

0 %

(0)

0 %

(0)

0 %

(0)

0 %

(0)

0 %

(0)

0 %

6 %

3 %

Accuracy

0 %

(0)

4 %

(1)

0 %

(0)

0 %

(0)

2 %

(1)

3 %

39 %

32 %

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Most likely error rate

3,0 %

Upper error limit

4,9 %

Lower error limit

1,1 %

---

(1)  To improve insight into areas with different risk profiles within the policy group, the sample was split up into segments.

(2)  Numbers quoted in brackets represent the actual number of transactions.

ANNEX 8.2

RESULTS OF EXAMINATION OF SYSTEMS FOR RESEARCH AND OTHER INTERNAL POLICIES

Assessment of the systems examined

| System concerned | Ex-ante desk checks | Audit certification | Ex-post financial audits | Overall assessment |
| --- | --- | --- | --- | --- |
| Research framework programmes | Partially effective | Partially effective | Effective | Partially effective |
| Competitiveness and Innovation Framework programme — ICT Policy Support Programme | Partially effective | N/A | Not effective | Partially effective |

System concerned

Ex-ante desk checks

Audit certification

Ex-post financial audits

Overall assessment

Research framework programmes

Partially effective

Partially effective

Effective

Partially effective

Competitiveness and Innovation Framework programme — ICT Policy Support Programme

Partially effective

N/A

Not effective

Partially effective

ANNEX 8.3

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR RESEARCH AND OTHER INTERNAL POLICIES

| Year | Court recommendation | Court's analysis of the progress made | Commission reply |
| --- | --- | --- | --- |
| 2009 | The Commission should raise the certifying auditors’ awareness of the eligibility of expenditure with the aim of improving the reliability of the audit certificates they issue.
  (paragraph 8.32) | Where ex-post audits detect large discrepancies between certified and audited amounts, there is no feedback process in place to make certifying auditors aware of the Commission's audit findings. The Commission intends to put such a practice in place in 2012. In addition, in 2012 the Commission has embarked on a communication campaign targeting beneficiaries and their certifying auditors with the objective of improving the reliability of submitted cost claims and (where relevant) the respective audit certificates. | The Commission services already have in place a process to provide feedback to the certifying auditors where the Commission's ex-post audits identified material differences between the certified cost statements and its own findings. This is achieved either by writing to the beneficiaries inviting them to communicate the feedback to the certifying auditor or by directly addressing the certifying auditors. |
| 2008 | The Commission should ensure rigorous application of the controls, in particular by imposing penalties where appropriate and making recoveries or adjustments in cases of undue reimbursement of claimed costs.
  (paragraph 7.42) | In 2011, the Commission continued with its efforts to implement audit results by adjusting the cost claims or by issuing recovery orders. Moreover, since 2009 the Commission has imposed systematically liquidated damages on participants that have been found to have overstated expenditure and that have therefore received an unjustified financial contribution from the Commission.
  However, it was noted that in practice, especially for extrapolation, more cases are launched than closed. | As the Commission services have to take into account the rights of beneficiaries at all stages, the implementation of audit results, especially relating to extrapolation, is a difficult and lengthy process. Furthermore, some cases can only be implemented when the project is closed. High priority has been given recently to the management of extrapolation cases. As an example, in DG RTD the team in charge of this process has been reinforced and, as result, in 2012 17 extrapolation cases have been closed and 13 opened up to 8 May. |

Year

Court recommendation

Court's analysis of the progress made

Commission reply

2009

The Commission should raise the certifying auditors’ awareness of the eligibility of expenditure with the aim of improving the reliability of the audit certificates they issue.

(paragraph 8.32)

Where ex-post audits detect large discrepancies between certified and audited amounts, there is no feedback process in place to make certifying auditors aware of the Commission's audit findings. The Commission intends to put such a practice in place in 2012. In addition, in 2012 the Commission has embarked on a communication campaign targeting beneficiaries and their certifying auditors with the objective of improving the reliability of submitted cost claims and (where relevant) the respective audit certificates.

The Commission services already have in place a process to provide feedback to the certifying auditors where the Commission's ex-post audits identified material differences between the certified cost statements and its own findings. This is achieved either by writing to the beneficiaries inviting them to communicate the feedback to the certifying auditor or by directly addressing the certifying auditors.

2008

The Commission should ensure rigorous application of the controls, in particular by imposing penalties where appropriate and making recoveries or adjustments in cases of undue reimbursement of claimed costs.

(paragraph 7.42)

In 2011, the Commission continued with its efforts to implement audit results by adjusting the cost claims or by issuing recovery orders. Moreover, since 2009 the Commission has imposed systematically liquidated damages on participants that have been found to have overstated expenditure and that have therefore received an unjustified financial contribution from the Commission.

However, it was noted that in practice, especially for extrapolation, more cases are launched than closed.

As the Commission services have to take into account the rights of beneficiaries at all stages, the implementation of audit results, especially relating to extrapolation, is a difficult and lengthy process. Furthermore, some cases can only be implemented when the project is closed. High priority has been given recently to the management of extrapolation cases. As an example, in DG RTD the team in charge of this process has been reinforced and, as result, in 2012 17 extrapolation cases have been closed and 13 opened up to 8 May.

---

CHAPTER 9

Administrative and other expenditure

TABLE OF CONTENTS

Introduction

Specific characteristics of the policy group

Audit scope and approach

Regularity of transactions

Effectiveness of systems

Observations on specific institutions and bodies

European Parliament

European Council and Council

Commission

Court of Auditors

European Economic and Social Committee

European External Action Service

Other institutions and bodies

Conclusions and recommendations

Conclusions

Recommendations

| THE COURT’S OBSERVATIONS | |
| --- | --- |
| INTRODUCTION |
| 9.1. | This Chapter presents the Court’s specific assessment of the administrative and other expenditure of the institutions and bodies of the European Union. Key information on the institutions and bodies covered, and on the spending in 2011 is provided in
  Table 9.1
  . |

THE COURT’S OBSERVATIONS

INTRODUCTION

9.1.

This Chapter presents the Court’s specific assessment of the administrative and other expenditure of the institutions and bodies of the European Union. Key information on the institutions and bodies covered, and on the spending in 2011 is provided in
  Table 9.1
  .

Table 9.1 —   Administrative and other expenditure — Key information 2011

| (million euro) |
| --- |
| Budget Title | Policy group | Description | Payments | Management mode |
| 14, 24-31 | Administrative and other expenditure | European Parliament | 1 580 | Centralised direct |
| Council | 547 | Centralised direct |
| Commission | 6 264 | Centralised direct |
| Court of Justice | 334 | Centralised direct |
| Court of Auditors | 137 | Centralised direct |
| European Economic and Social Committee | 126 | Centralised direct |
| Committee of the Regions | 91 | Centralised direct |
| European Ombudsman | 9 | Centralised direct |
| European Data Protection Supervisor | 7 | Centralised direct |
| European External Action Service | 682 | Centralised direct |
| Total administrative expenditure | 9 777 | |
| Total operational expenditure | — | |
| Total payments for the year | 9 777 | |
| Total commitments for the year | 11 721 | |
| Source: 2011 annual accounts of the European Union. |

(million euro)

Budget Title

Policy group

Description

Payments

Management mode

14, 24-31

Administrative and other expenditure

European Parliament

1 580

Centralised direct

Council

547

Centralised direct

Commission

6 264

Centralised direct

Court of Justice

334

Centralised direct

Court of Auditors

137

Centralised direct

European Economic and Social Committee

126

Centralised direct

Committee of the Regions

91

Centralised direct

European Ombudsman

9

Centralised direct

European Data Protection Supervisor

7

Centralised direct

European External Action Service

682

Centralised direct

Total administrative expenditure

9 777

Total operational expenditure

—

Total payments for the year

9 777

Total commitments for the year

11 721

Source: 2011 annual accounts of the European Union.

| 9.2. | This Chapter also covers expenditure considered in the general budget as operational although its purpose is in most cases the functioning of the Commission’s administration rather than policy delivery. This expenditure includes the following titles of the general budget: Title 14 — Taxation and customs union, Title 24 — Fight against fraud, Title 25 — Commission’s policy coordination and legal advice, Title 26 — Commission’s administration, Title 27 — Budget and Title 29 — Statistics. |
| --- | --- |

9.2.

This Chapter also covers expenditure considered in the general budget as operational although its purpose is in most cases the functioning of the Commission’s administration rather than policy delivery. This expenditure includes the following titles of the general budget: Title 14 — Taxation and customs union, Title 24 — Fight against fraud, Title 25 — Commission’s policy coordination and legal advice, Title 26 — Commission’s administration, Title 27 — Budget and Title 29 — Statistics.

| 9.3. | The Court reports separately on the EU agencies and executive agencies and on the European Schools (1). The Court’s mandate does not cover the financial audit of the European Central Bank. |
| --- | --- |

9.3.

The Court reports separately on the EU agencies and executive agencies and on the European Schools (1). The Court’s mandate does not cover the financial audit of the European Central Bank.

Specific characteristics of the policy group

| 9.4. | Administrative and other expenditure comprises expenditure on human resources (salaries, allowances and pensions), which accounts for 60 % of total administrative and other expenditure, and expenditure on buildings, equipment, energy, communications, and information technology. |
| --- | --- |

9.4.

Administrative and other expenditure comprises expenditure on human resources (salaries, allowances and pensions), which accounts for 60 % of total administrative and other expenditure, and expenditure on buildings, equipment, energy, communications, and information technology.

| 9.5. | The main risks regarding administrative and other expenditure are non-compliance with the procedures for procurement, for the implementation of contracts, for recruitment and for the calculation of salaries and allowances. |
| --- | --- |

9.5.

The main risks regarding administrative and other expenditure are non-compliance with the procedures for procurement, for the implementation of contracts, for recruitment and for the calculation of salaries and allowances.

Audit scope and approach

| 9.6. | Annex 1.1, Part 2
  , of Chapter 1 describes the Court’s overall approach and methodology. For the audit of administrative and other expenditure, the following specific issues should be noted:






  — | the audit involved the examination of a sample of 56 transactions, comprising three advances and 53 final payments, |
| --- | --- | --- |

9.6.

Annex 1.1, Part 2
  , of Chapter 1 describes the Court’s overall approach and methodology. For the audit of administrative and other expenditure, the following specific issues should be noted:

—

the audit involved the examination of a sample of 56 transactions, comprising three advances and 53 final payments,

| — | the assessment of systems covered the compliance of the supervisory and control systems (2) applied by each institution and body with the requirements of the Financial Regulation, |
| --- | --- |

—

the assessment of systems covered the compliance of the supervisory and control systems (2) applied by each institution and body with the requirements of the Financial Regulation,

| — | the review of Commission management representations covered the annual activity reports of four of the Commission’s directorates-general and offices primarily responsible for administrative expenditure (3). |
| --- | --- |

—

the review of Commission management representations covered the annual activity reports of four of the Commission’s directorates-general and offices primarily responsible for administrative expenditure (3).

| 9.7. | The Court also audited the following selected topics in all institutions and bodies (4):






  (a) | eligibility criteria, calculation and payment of social allowances to staff (household allowance, allowance for a dependent child or person treated as such and education allowances, including the deduction of allowances of like nature paid from other sources); |
| --- | --- | --- |

9.7.

The Court also audited the following selected topics in all institutions and bodies (4):

(a)

eligibility criteria, calculation and payment of social allowances to staff (household allowance, allowance for a dependent child or person treated as such and education allowances, including the deduction of allowances of like nature paid from other sources);

| (b) | procedures for extending and modifying the contracts of temporary and contract staff; |
| --- | --- |

(b)

procedures for extending and modifying the contracts of temporary and contract staff;

| (c) | open, restricted and negotiated procurement procedures. |
| --- | --- |

(c)

open, restricted and negotiated procurement procedures.

| 9.8. | The Court of Auditors is audited by an external audit firm (5) which issued an audit report on the financial statements for the financial year from 1 January 2011 to 31 December 2011 and an assurance report concerning the regularity of the use of the Court's resources, and the control procedures in place from 1 January 2011 to 31 December 2011 (see paragraph 9.22). |
| --- | --- |

9.8.

The Court of Auditors is audited by an external audit firm (5) which issued an audit report on the financial statements for the financial year from 1 January 2011 to 31 December 2011 and an assurance report concerning the regularity of the use of the Court's resources, and the control procedures in place from 1 January 2011 to 31 December 2011 (see paragraph 9.22).

REGULARITY OF TRANSACTIONS

| 9.9. | Annex 9.1
  contains a summary of the results of the transaction testing. The Court’s testing of its sample of transactions found 7 % to be affected by error. The most likely error (MLE) estimated by the Court is 0,1 % (6). |
| --- | --- |

9.9.

Annex 9.1
  contains a summary of the results of the transaction testing. The Court’s testing of its sample of transactions found 7 % to be affected by error. The most likely error (MLE) estimated by the Court is 0,1 % (6).

EFFECTIVENESS OF SYSTEMS

| 9.10. | Annex 9.2
  contains a summary of the results of the Court’s examination of supervisory and control systems. |
| --- | --- |

9.10.

Annex 9.2
  contains a summary of the results of the Court’s examination of supervisory and control systems.

OBSERVATIONS ON SPECIFIC INSTITUTIONS AND BODIES

| 9.11. | The specific observations that follow are presented by institution or body of the European Union and do not affect the assessments referred to in paragraphs 9.9 and 9.10. Whilst they are not material to administrative expenditure as a whole, they are significant in the context of the individual institution or body concerned. |
| --- | --- |

9.11.

The specific observations that follow are presented by institution or body of the European Union and do not affect the assessments referred to in paragraphs 9.9 and 9.10. Whilst they are not material to administrative expenditure as a whole, they are significant in the context of the individual institution or body concerned.

European Parliament

Payment of social allowances and benefits to staff members

REPLY OF THE EUROPEAN PARLIAMENT

| 9.12. | In two cases out of five audited, information available to the European Parliament’s services on the personal and family situation of staff members was either not up-to-date or not properly processed. In one of these cases, it led to overpayments. |
| --- | --- |

9.12.

In two cases out of five audited, information available to the European Parliament’s services on the personal and family situation of staff members was either not up-to-date or not properly processed. In one of these cases, it led to overpayments.

| 9.12. | Recovery of overpayments began in November 2011, and deductions were made from the pay of the staff member concerned. Measures have also been taken to ensure that information on staff members’ personal and family situation is up-to-date and properly processed, involving ongoing efforts to enhance the control environment and personalised reminders, via management channels, about the annual process of confirming or updating personal data in order to ensure that all staff members reply. These personalised reminders are a preliminary to any more coercive action which may be taken where staff fail to reply. |
| --- | --- |

9.12.

Employment of accredited parliamentary assistants (APAs)

REPLY OF THE EUROPEAN PARLIAMENT

| 9.13. | Under the Internal Rules (7) for the employment of accredited parliamentary assistants (APAs), the latter are allowed to submit the medical certificate and other documents required for the conclusion of contracts within three months after the date on which the contract for their initial recruitment takes effect. This derogation conflicts with the provision laid down in Articles 128 and 129 of the Conditions of Employment of Other Servants of the European Communities (CEOS) (8), by which all requirements for recruitment must be satisfied before the contract is concluded. This is illustrated by the fact that, in five out of the 10 cases audited, the APAs submitted the required medical certificates between three and seven months after the conclusion of the contract. As regards compliance with the requirement concerning the knowledge of languages (9), in none of the 10 cases audited were there documents on file evidencing that checks had been performed. |
| --- | --- |

9.13.

Under the Internal Rules (7) for the employment of accredited parliamentary assistants (APAs), the latter are allowed to submit the medical certificate and other documents required for the conclusion of contracts within three months after the date on which the contract for their initial recruitment takes effect. This derogation conflicts with the provision laid down in Articles 128 and 129 of the Conditions of Employment of Other Servants of the European Communities (CEOS) (8), by which all requirements for recruitment must be satisfied before the contract is concluded. This is illustrated by the fact that, in five out of the 10 cases audited, the APAs submitted the required medical certificates between three and seven months after the conclusion of the contract. As regards compliance with the requirement concerning the knowledge of languages (9), in none of the 10 cases audited were there documents on file evidencing that checks had been performed.

| 9.13. | Parliament notes the Court’s position that the provisions of Articles 15(2) and 16(3) of the Implementing Measures are not entirely in line with the requirements of Article 128 of Regulation (EC) No 160/2009. Parliament notes that, as regards checks on physical fitness, the legislative authority had decided not to adopt arrangements identical to those applicable to officials and temporary staff and, accordingly, had not expressly stated that the medical examination had to be carried out before recruitment took place, as stipulated, for example, in Article 33 of the Staff Regulations of Officials.

  Since February 2012 the recruitment form contains a field in which a Member declares on his or her honour that the APA whom he or she wishes to recruit possesses the requisite language knowledge. |
| --- | --- |

9.13.

Since February 2012 the recruitment form contains a field in which a Member declares on his or her honour that the APA whom he or she wishes to recruit possesses the requisite language knowledge.

Performance of the ex-ante verification of recruitment procedures

REPLY OF THE EUROPEAN PARLIAMENT

| 9.14. | Articles 47 and 48 of the implementing rules of the Financial Regulation provide that every act implementing the budget must be subject to an ex-ante verification. In 9 out of the 10 procedures for recruiting APAs audited, there were no documents on file evidencing the ex-ante checks of recruitment documents performed. Best practice is to ensure that all formal documentation is duly filled in and archived for internal control purposes. |
| --- | --- |

9.14.

Articles 47 and 48 of the implementing rules of the Financial Regulation provide that every act implementing the budget must be subject to an ex-ante verification. In 9 out of the 10 procedures for recruiting APAs audited, there were no documents on file evidencing the ex-ante checks of recruitment documents performed. Best practice is to ensure that all formal documentation is duly filled in and archived for internal control purposes.

| 9.14. | Substantial improvements are currently being made to the ex-ante verifications carried out by the unit with responsibility for recruitment (thorough revision of checklists and introduction of cross-checking). The underlying documentation for those verifications is now being kept. |
| --- | --- |

9.14.

Substantial improvements are currently being made to the ex-ante verifications carried out by the unit with responsibility for recruitment (thorough revision of checklists and introduction of cross-checking). The underlying documentation for those verifications is now being kept.

Procurement

| 9.15. | The audit examined 10 procurement procedures. In two cases, relating to the maintenance of buildings and to printing services, there were weaknesses in the application of selection and award criteria. |
| --- | --- |

9.15.

The audit examined 10 procurement procedures. In two cases, relating to the maintenance of buildings and to printing services, there were weaknesses in the application of selection and award criteria.

REPLY OF THE EUROPEAN PARLIAMENT

| 9.16. | In the procedure regarding the maintenance of buildings, tenderers did not receive detailed information on the method applied for the evaluation of their bids. For one lot valued at 750 000 euro over four years (out of a total contract value of 23 141 740 euro), the estimated value of materials to use, which amounted to 40 % of the value of the lot, was not disclosed in the tender documentation. Tenderers were only asked to submit a gross profit margin rate on materials and were thus prevented from making a more competitive bid by combining optimally the components of their financial offer. |
| --- | --- |

9.16.

In the procedure regarding the maintenance of buildings, tenderers did not receive detailed information on the method applied for the evaluation of their bids. For one lot valued at 750 000 euro over four years (out of a total contract value of 23 141 740 euro), the estimated value of materials to use, which amounted to 40 % of the value of the lot, was not disclosed in the tender documentation. Tenderers were only asked to submit a gross profit margin rate on materials and were thus prevented from making a more competitive bid by combining optimally the components of their financial offer.

| 9.16. | In this particular lot Parliament has included the materials as an invariable sum in order to individualise and weigh in a transparent way the real cost of the works. |
| --- | --- |

9.16.

REPLY OF THE EUROPEAN PARLIAMENT

| 9.17. | In the case of one negotiated procedure relating to printing services, the specification for the location of the services to be provided was not drafted in a clear and transparent manner. In addition, the potential tenderers consulted were all based in Luxembourg, thereby restricting cross border competition. Out of the 11 potential tenderers consulted, only the previous contractor submitted a bid and was awarded the contract for 60 000 euro over four years. Furthermore, compliance with selection criteria was not checked before entering into the negotiation, in contradiction with the provisions of Article 122(3) of the implementing rules of the Financial Regulation. |
| --- | --- |

9.17.

In the case of one negotiated procedure relating to printing services, the specification for the location of the services to be provided was not drafted in a clear and transparent manner. In addition, the potential tenderers consulted were all based in Luxembourg, thereby restricting cross border competition. Out of the 11 potential tenderers consulted, only the previous contractor submitted a bid and was awarded the contract for 60 000 euro over four years. Furthermore, compliance with selection criteria was not checked before entering into the negotiation, in contradiction with the provisions of Article 122(3) of the implementing rules of the Financial Regulation.

| 9.17. | Parliament agrees with the Court’s observations and will take them into account when preparing the next procedure. However, Parliament underlines that for this particular small value contract the services to be provided were essentially local. |
| --- | --- |

9.17.

European Council and Council

Procurement

REPLY OF THE COUNCIL

| 9.18. | The audit examined five procurement procedures. In two cases relating to cleaning services (contract value of 16 214 000 euro over four years) and to the purchase of service clothing and shoes (contract value of 344 000 euro over four years) if tenderers did not propose a price for certain items of the tender, tender specifications enabled the Council to estimate a price based on the average price submitted for this item by the other tenderers. The Council thus modifies the value of the tender in a way which is not laid down in the Financial Regulation. |
| --- | --- |

9.18.

The audit examined five procurement procedures. In two cases relating to cleaning services (contract value of 16 214 000 euro over four years) and to the purchase of service clothing and shoes (contract value of 344 000 euro over four years) if tenderers did not propose a price for certain items of the tender, tender specifications enabled the Council to estimate a price based on the average price submitted for this item by the other tenderers. The Council thus modifies the value of the tender in a way which is not laid down in the Financial Regulation.

| 9.18. | The Council observes first, that there has been no violation of the Financial Regulation, as Article 148(3) of the Regulation laying down the implementation rules targets contacts that lead to modification of the value of the tender. No such contacts have taken place in the procedures examined by the Court. The Council fully acknowledges that this provision does not allow an institution to ask for prices which have been overlooked by a tenderer.

  In order not to exclude the candidate and to preserve the competition for complex tenders which cover an array of products or services, the tender documents explicitly mention that in the event of a price omission the evaluation committee may apply itself (barring any contact with the tenderers) a theoretical average price. In order to not distort the intention of the tenderer this method is only used to correct a limited number of omissions. It was only used in one of the cases identified by the Court for a minor item which was lacking in a list of 81 prices (corresponding with a financial impact of 0,67 % of the bid).


  The General Secretariat of the Council considers that this approach respects fully the spirit and the principles of the Financial Regulation: transparency, proportionality and non-discrimination. Coupled with a measured and cautious implementation, it represents a safeguard for adequate competition and sound financial management. |
| --- | --- |

9.18.

In order not to exclude the candidate and to preserve the competition for complex tenders which cover an array of products or services, the tender documents explicitly mention that in the event of a price omission the evaluation committee may apply itself (barring any contact with the tenderers) a theoretical average price. In order to not distort the intention of the tenderer this method is only used to correct a limited number of omissions. It was only used in one of the cases identified by the Court for a minor item which was lacking in a list of 81 prices (corresponding with a financial impact of 0,67 % of the bid).

The General Secretariat of the Council considers that this approach respects fully the spirit and the principles of the Financial Regulation: transparency, proportionality and non-discrimination. Coupled with a measured and cautious implementation, it represents a safeguard for adequate competition and sound financial management.

Commission

Calculation and payment of social allowances to staff members

REPLY OF THE COMMISSION

| 9.19. | In 15 cases out of 28 audited, the information available in the Office for Administration and Payment of Individual Entitlements (PMO) on the personal and family situation of the staff members, was not up-to-date. In six of these cases, it led to incorrect payments because the amounts deducted did not reflect the latest applicable value of benefits paid by national authorities (10). |
| --- | --- |

9.19.

In 15 cases out of 28 audited, the information available in the Office for Administration and Payment of Individual Entitlements (PMO) on the personal and family situation of the staff members, was not up-to-date. In six of these cases, it led to incorrect payments because the amounts deducted did not reflect the latest applicable value of benefits paid by national authorities (10).

| 9.19. | An automatic update of the amounts of the allowances of like nature from the Belgian State is being implemented by the Commission in SYSPER2/Rights (the information system for the management of individual entitlements) since April 2012. This automatism will significantly decrease the risk of errors as the update will not be done manually any more. The other Member States will follow.

  Additionaly, a new module will be put in place in the front office of SYSPER2/Rights. Staff will be asked to declare the professional activity of their spouse. The other modules of SYSPER2/Rights being implemented also include sections of allowances of like nature. |
| --- | --- |

9.19.

Additionaly, a new module will be put in place in the front office of SYSPER2/Rights. Staff will be asked to declare the professional activity of their spouse. The other modules of SYSPER2/Rights being implemented also include sections of allowances of like nature.

Procurement

REPLY OF THE COMMISSION

| 9.20. | The audit examined four procurement procedures performed by the Office for Infrastructure and Logistics in Luxembourg (OIL). In three of them for the provision of security services (contract value of 46 000 000 euro over four years), training services (contract value of 860 000 euro over four years) and maintenance services (contract value of 11 000 000 euro over four years), which were concluded under the automatic award procedure, weaknesses were noted: the application of award criteria at the selection stage, the use of similar criteria several times during the evaluation process and inconsistencies in the definition and evaluation of the selection criteria. |
| --- | --- |

9.20.

The audit examined four procurement procedures performed by the Office for Infrastructure and Logistics in Luxembourg (OIL). In three of them for the provision of security services (contract value of 46 000 000 euro over four years), training services (contract value of 860 000 euro over four years) and maintenance services (contract value of 11 000 000 euro over four years), which were concluded under the automatic award procedure, weaknesses were noted: the application of award criteria at the selection stage, the use of similar criteria several times during the evaluation process and inconsistencies in the definition and evaluation of the selection criteria.

| 9.20. | All procurement procedures analysed by the Court were launched at the end of 2010 or the beginning of 2011. In mid-2011, OIL revised its approach with regards to calls for tender procedures with a view to streamlining all aspects of the tender specifications, such as reducing the number of selection and award criteria and defining them more precisely. For all new procurement procedures launched since then, most of the formal weaknesses highlighted by the Court have been resolved (for the ones still existing at the time of the audit of the Court, action has now been taken to eliminate them). |
| --- | --- |

9.20.

REPLY OF THE COMMISSION

| 9.21. | OIL also organised an open procurement procedure to provide assistance and consultancy in technical, architectural and financial fields. The total value of the market amounts to 3 124 000 euro over four years. The type of contract chosen is a multiple framework contract in cascade signed with three companies. This means that, if the company ranked first in the cascade cannot provide the requested service, the company ranked second in the cascade is invited to submit a bid, and so on. The company ranked second in the cascade should have been eliminated at the stage of examination of selection criteria as it did not fulfil the requirement relating to previous experience in the field of the contract. |
| --- | --- |

9.21.

OIL also organised an open procurement procedure to provide assistance and consultancy in technical, architectural and financial fields. The total value of the market amounts to 3 124 000 euro over four years. The type of contract chosen is a multiple framework contract in cascade signed with three companies. This means that, if the company ranked first in the cascade cannot provide the requested service, the company ranked second in the cascade is invited to submit a bid, and so on. The company ranked second in the cascade should have been eliminated at the stage of examination of selection criteria as it did not fulfil the requirement relating to previous experience in the field of the contract.

| 9.21. | In the course of the tender procedure, OIL should have requested from the concerned bidder a more recent justification of experience in the field of the contract. If this information could not be provided, and only then, the bidder should have been eliminated.

  However, it should be noted that since the signature of the contract on the 4 March 2011 and until end of May 2012, OIL signed only one purchase order of a value of 1 116 euro with the concerned company. |
| --- | --- |

9.21.

However, it should be noted that since the signature of the contract on the 4 March 2011 and until end of May 2012, OIL signed only one purchase order of a value of 1 116 euro with the concerned company.

Court of Auditors

| 9.22. | The external auditor’s report (11) states that, in the auditors' opinion, ‘the financial statements give a true and fair view of the financial position of the European Court of Auditors as of 31 December 2011, and of its financial performance and its cash flows for the year then ended in accordance with Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002, Commission Regulation (EC, Euratom) No 2342/2002 of 23 December 2002 laying down detailed rules for the implementation of the said Council Regulation and the Accounting Rules of the European Union’. The report will be published in the Official Journal. |
| --- | --- |

9.22.

The external auditor’s report (11) states that, in the auditors' opinion, ‘the financial statements give a true and fair view of the financial position of the European Court of Auditors as of 31 December 2011, and of its financial performance and its cash flows for the year then ended in accordance with Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002, Commission Regulation (EC, Euratom) No 2342/2002 of 23 December 2002 laying down detailed rules for the implementation of the said Council Regulation and the Accounting Rules of the European Union’. The report will be published in the Official Journal.

European Economic and Social Committee

Conclusion of contracts with temporary and contract staff

REPLY OF THE EESC

| 9.23. | An examination of the procedures for the extension and modification of contracts of temporary and contract staff found that the provisions included in the internal rules and in the guidelines applicable to the selection and grading of these staff did not consistently take into account professional experience acquired by these staff. In addition, one of the guidelines applied had no date of entry into force. These inconsistencies increase the risk of error in the grading of temporary staff employed under the provisions of Article 2(b) of the CEOS. |
| --- | --- |

9.23.

An examination of the procedures for the extension and modification of contracts of temporary and contract staff found that the provisions included in the internal rules and in the guidelines applicable to the selection and grading of these staff did not consistently take into account professional experience acquired by these staff. In addition, one of the guidelines applied had no date of entry into force. These inconsistencies increase the risk of error in the grading of temporary staff employed under the provisions of Article 2(b) of the CEOS.

| 9.23. | The current guidelines for the grading of temporary agents (DRHF 001/08) were adopted 14 January 2008. However, since July 2010, grading for all temporary 2b agents has remained at AD5 level, initially due to a lack of available grades at a higher level, but later applied as a matter of policy. The guidelines have indeed not been updated to reflect this change in policy and the EESC will adjust the provisions of its current regulation/guidelines concerning the grading of temporary staff employed under the provisions of Article 2(b) of the CEOS, in order to ensure a consistent and transparent application. The Court will be informed of the date of implementation of the future decision, which is expected by the end of autumn 2012.

  The undated document referred to was an internal working document intended solely to provide practical guidance for engagement procedures related to both contractual and temporary agents, which will be integrated in the updated guidelines as mentioned above. |
| --- | --- |

9.23.

The undated document referred to was an internal working document intended solely to provide practical guidance for engagement procedures related to both contractual and temporary agents, which will be integrated in the updated guidelines as mentioned above.

REPLY OF THE EESC

| 9.24. | One staff member recruited as a temporary agent under the above mentioned provisions, out of four cases examined, was graded one grade above the basic grade of his career. This staff member was re-graded to the basic grade six months later when it was found that there was a lack of posts for the promotion of permanent staff. This situation shows a weakness in the planning of the allocation of available posts among the various categories of staff. |
| --- | --- |

9.24.

One staff member recruited as a temporary agent under the above mentioned provisions, out of four cases examined, was graded one grade above the basic grade of his career. This staff member was re-graded to the basic grade six months later when it was found that there was a lack of posts for the promotion of permanent staff. This situation shows a weakness in the planning of the allocation of available posts among the various categories of staff.

| 9.24. | In the case referred to by the Court, the staff member was indeed re-graded to the basic grade of his career at the occasion of his contract extension, six months after the initial contract entered into force, due to the unavailability of a post with the initial grade at that moment.

  The Committee makes constant effort to improve the forecast of the utilisation of posts. However, the margins are limited for smaller institutions, as the effect of only a few unforeseen movements in staff can have significant repercussions and therefore be difficult to counterbalance. |
| --- | --- |

9.24.

The Committee makes constant effort to improve the forecast of the utilisation of posts. However, the margins are limited for smaller institutions, as the effect of only a few unforeseen movements in staff can have significant repercussions and therefore be difficult to counterbalance.

European External Action Service

Payment of social allowances and benefits to staff members

REPLY OF THE EEAS

| 9.25. | In six cases out of 17 audited, information available to the services of the European External Action Service (EEAS) on the personal and family situation of the staff members, was not up-to-date. In three of these cases, it led to incorrect payments because the amounts deducted did not reflect the latest applicable value of benefits paid by national authorities. |
| --- | --- |

9.25.

In six cases out of 17 audited, information available to the services of the European External Action Service (EEAS) on the personal and family situation of the staff members, was not up-to-date. In three of these cases, it led to incorrect payments because the amounts deducted did not reflect the latest applicable value of benefits paid by national authorities.

| 9.25. | The EEAS will address its staff regularly, once a year, to request the update of their personal file and remind them of their duty to declare such allowances. This message will be issued in September.

  The IT systems must allow a regular update of the amounts perceived in accordance with national or regional legislation/rules on increases of such allowances. The EEAS understands that PMO has developed an IT tool and recently tested it for allowances perceived from Belgium authorities and will successively extend this IT application for other populations including EEAS staff. The EEAS will ask PMO to be able to benefit from this IT application as soon as possible. |
| --- | --- |

9.25.

The IT systems must allow a regular update of the amounts perceived in accordance with national or regional legislation/rules on increases of such allowances. The EEAS understands that PMO has developed an IT tool and recently tested it for allowances perceived from Belgium authorities and will successively extend this IT application for other populations including EEAS staff. The EEAS will ask PMO to be able to benefit from this IT application as soon as possible.

Conclusion of contracts with temporary staff

REPLY OF THE EEAS

| 9.26. | The analysis of the salary paid to three temporary staff, out of a sample of eight audited, showed that contracts of employment were signed by both parties between three and seven months after the staff members had taken up their duties. This practice creates a situation of legal uncertainty for both parties. |
| --- | --- |

9.26.

The analysis of the salary paid to three temporary staff, out of a sample of eight audited, showed that contracts of employment were signed by both parties between three and seven months after the staff members had taken up their duties. This practice creates a situation of legal uncertainty for both parties.

| 9.26. | During the transitional period when a large number of diplomats from Member States were recruited as temporary agents, some contracts may have been signed only some time after the staff members had taken up their duties. Such cases remained exceptional. All persons were recruited according to standard and regular procedures. The EEAS will take the necessary steps so that such cases are not happening in the future. |
| --- | --- |

9.26.

Management of a contract for the provision of security services

REPLY OF THE EEAS

| 9.27. | The invoice related to the monthly payment of 5 340 euro for the provision of security services to the Delegation to Venezuela was wrongly endorsed as ‘certified correct’ whereas these services had not yet been provided. This practice is contrary to Article 79 of the Financial Regulation. In addition, the related security contract has been in force for 24 years without modification. The audit also noted that the delegation had only obtained informal exemption from paying VAT, although the VAT recovery legislation has been in force in Venezuela since the year 2000. It has not calculated the amount of VAT unrecovered over this period. |
| --- | --- |

9.27.

The invoice related to the monthly payment of 5 340 euro for the provision of security services to the Delegation to Venezuela was wrongly endorsed as ‘certified correct’ whereas these services had not yet been provided. This practice is contrary to Article 79 of the Financial Regulation. In addition, the related security contract has been in force for 24 years without modification. The audit also noted that the delegation had only obtained informal exemption from paying VAT, although the VAT recovery legislation has been in force in Venezuela since the year 2000. It has not calculated the amount of VAT unrecovered over this period.

| 9.27. | The delegation has been instructed to tender a new security contract and to recover the VAT unduly paid since 2000.

  More generally, the delegations have been repeatedly and all levels reminded about the importance of regular new tendering of their services contracts. |
| --- | --- |

9.27.

More generally, the delegations have been repeatedly and all levels reminded about the importance of regular new tendering of their services contracts.

Procurement

REPLY OF THE EEAS

| 9.28. | In three restricted procurement procedures relating to the provision of security services out of five audited, weaknesses were found in the definition and application of award criteria and in the evaluation of tenders, in the drafting of tendering documents, in the definition and application of selection criteria and in the opening and evaluation committees' performance of their respective roles. In one of these cases, the evaluation committee chose to reject without further analysis an offer which included an abnormally low bid although the tenderer confirmed that this resulted from a clerical error. In two other procedures related to the provision of facility management services (contract value of 285 000 euro over four years) and the rental of offices (contract value of 9 000 000 euro over 10 years), key documentation related to the performance of some steps of the procedures could not be provided to the Court. |
| --- | --- |

9.28.

In three restricted procurement procedures relating to the provision of security services out of five audited, weaknesses were found in the definition and application of award criteria and in the evaluation of tenders, in the drafting of tendering documents, in the definition and application of selection criteria and in the opening and evaluation committees' performance of their respective roles. In one of these cases, the evaluation committee chose to reject without further analysis an offer which included an abnormally low bid although the tenderer confirmed that this resulted from a clerical error. In two other procedures related to the provision of facility management services (contract value of 285 000 euro over four years) and the rental of offices (contract value of 9 000 000 euro over 10 years), key documentation related to the performance of some steps of the procedures could not be provided to the Court.

| 9.28. | The preparation of tender documents before April 2011 was done by the former RELEX K8 unit (now MDR-B1). With the creation of the EEAS and the setting up of the contract division (MDR-A2) the quality of the tender documents has improved.

  The facility management services mentioned here relates to a tender done without the input from division MDR-A2 at that time. Regarding the remark on the 9 million euro contract for the rental of offices, the main documents (building report of the delegation and positive opinion of HQ have been sent in the meantime (June 2012) to the Court. |
| --- | --- |

9.28.

The facility management services mentioned here relates to a tender done without the input from division MDR-A2 at that time. Regarding the remark on the 9 million euro contract for the rental of offices, the main documents (building report of the delegation and positive opinion of HQ have been sent in the meantime (June 2012) to the Court.

Other institutions and bodies

| 9.29. | The audit did not identify any significant weakness in respect of the topics audited for the Court of Justice, the Committee of the Regions, the European Ombudsman and the European Data Protection Supervisor. |
| --- | --- |

9.29.

The audit did not identify any significant weakness in respect of the topics audited for the Court of Justice, the Committee of the Regions, the European Ombudsman and the European Data Protection Supervisor.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

REPLY OF THE COMMISSION

| 9.30. | Based on its audit work, the Court concludes that the payments as a whole for the year ended on 31 December 2011 for administrative and other expenditure of the institutions and bodies were free from material error (see paragraph 9.9). |
| --- | --- |

9.30.

Based on its audit work, the Court concludes that the payments as a whole for the year ended on 31 December 2011 for administrative and other expenditure of the institutions and bodies were free from material error (see paragraph 9.9).

| 9.31. | Based on its audit work, the Court found that the examined supervisory and control systems for administrative and other expenditure were effective. |
| --- | --- |

9.31.

Based on its audit work, the Court found that the examined supervisory and control systems for administrative and other expenditure were effective.

| 9.30-9.31. | The Commission notes that for many years in a row now transactions related to administrative expenditure as a whole are free from material errors and the related supervisory and control systems are effective. |
| --- | --- |

9.30-9.31.

| 9.32. | The Court draws attention to the errors and weaknesses which did not affect the Court’s conclusion. The Court examined a sample of procurement procedures (see paragraphs 9.15, 9.16, 9.17, 9.18, 9.20, 9.21 and 9.28) and noted several weaknesses in the application of selection and award criteria, some of which had an impact on the results of the procedure. Other weaknesses related to the organisation of cross border competition, to the management of automatic award procedures and to the respect of provisions as regards the drafting and filing of tendering documents. The Court also detected weaknesses in the examination of a sample of calculations and payments of social allowances (see paragraphs 9.12, 9.19 and 9.25) and of a sample of employment contracts for non-permanent staff (see paragraphs 9.13, 9.23, 9.24 and 9.26). |
| --- | --- |

9.32.

The Court draws attention to the errors and weaknesses which did not affect the Court’s conclusion. The Court examined a sample of procurement procedures (see paragraphs 9.15, 9.16, 9.17, 9.18, 9.20, 9.21 and 9.28) and noted several weaknesses in the application of selection and award criteria, some of which had an impact on the results of the procedure. Other weaknesses related to the organisation of cross border competition, to the management of automatic award procedures and to the respect of provisions as regards the drafting and filing of tendering documents. The Court also detected weaknesses in the examination of a sample of calculations and payments of social allowances (see paragraphs 9.12, 9.19 and 9.25) and of a sample of employment contracts for non-permanent staff (see paragraphs 9.13, 9.23, 9.24 and 9.26).

Recommendations

REPLY OF THE COMMISSION

| 9.33. | Annex 9.3
  shows the result of the Court’s review of progress in addressing recommendations made in the 2009 Annual Report. The following points should be noted: |
| --- | --- |

9.33.

Annex 9.3
  shows the result of the Court’s review of progress in addressing recommendations made in the 2009 Annual Report. The following points should be noted:

9.33.

| (a) | Social allowances: the Court recommended to the European Parliament, the European Commission and the European Data Protection Supervisor (see paragraphs 9.14, 9.19 and 9.26 of the 2009 Annual Report) that they request their staff to deliver at appropriate intervals documents confirming their personal situation and that they implement a system for the timely monitoring of these documents. |
| --- | --- |

(a)

Social allowances: the Court recommended to the European Parliament, the European Commission and the European Data Protection Supervisor (see paragraphs 9.14, 9.19 and 9.26 of the 2009 Annual Report) that they request their staff to deliver at appropriate intervals documents confirming their personal situation and that they implement a system for the timely monitoring of these documents.

| (a) | The Commission will put in place a new module in the front office of SYSPER2/Rights. Staff will be asked to declare the professional activity of their spouse. The other modules of SYSPER2/Rights being implemented also include sections of allowances of like nature. |
| --- | --- |

(a)

| (b) | The audit found that the problems identified in the Court’s 2009 Annual Report persisted, albeit to a lesser extent, in 2011 at the European Parliament and at the EEAS (formerly the Directorate-General for External Relations of the European Commission). The risk of making incorrect or undue payments if the circumstances of the staff member have changed thus remains. As regards the European Data Protection Supervisor, measures implemented as a result of the Court’s audit were effective. |
| --- | --- |

(b)

The audit found that the problems identified in the Court’s 2009 Annual Report persisted, albeit to a lesser extent, in 2011 at the European Parliament and at the EEAS (formerly the Directorate-General for External Relations of the European Commission). The risk of making incorrect or undue payments if the circumstances of the staff member have changed thus remains. As regards the European Data Protection Supervisor, measures implemented as a result of the Court’s audit were effective.

REPLY OF THE EEAS

| 9.33. | The EEAS will address its staff regularly, once a year, to request the update of their personal file and remind them of their duty to declare such allowances. This message will be issued in September.

  The IT systems must allow a regular update of the amounts perceived in accordance with national or regional legislation/rules on increases of such allowances. The EEAS understands that PMO has developed an IT tool and recently tested it for allowances perceived from Belgium authorities and will successively extend this IT application for other populations including EEAS staff. The EEAS will ask PMO to be able to benefit from this IT application as soon as possible. |
| --- | --- |

9.33.

The IT systems must allow a regular update of the amounts perceived in accordance with national or regional legislation/rules on increases of such allowances. The EEAS understands that PMO has developed an IT tool and recently tested it for allowances perceived from Belgium authorities and will successively extend this IT application for other populations including EEAS staff. The EEAS will ask PMO to be able to benefit from this IT application as soon as possible.

REPLY OF THE COMMISSION

| 9.34. | Following this review and the findings and conclusions for 2011, the Court recommends that: |
| --- | --- |

9.34.

Following this review and the findings and conclusions for 2011, the Court recommends that:

9.34.

| — | Recommendation 1: The institutions and bodies concerned (see paragraphs 9.12, 9.19 and 9.25) take steps to ensure that staff deliver at appropriate intervals documents confirming their personal situation and implement a system for the timely monitoring of these documents. The IT systems used to manage these payments should be enhanced to ensure that the allowances paid by national authorities are updated automatically; |
| --- | --- |

—

Recommendation 1: The institutions and bodies concerned (see paragraphs 9.12, 9.19 and 9.25) take steps to ensure that staff deliver at appropriate intervals documents confirming their personal situation and implement a system for the timely monitoring of these documents. The IT systems used to manage these payments should be enhanced to ensure that the allowances paid by national authorities are updated automatically;

An automatic update of the amounts of the allowances of like nature from the Belgian State is being implemented by the Commission in SYSPER2/Rights (the information system for the management of individual entitlements) since April 2012. This automatism will significantly decrease the risk of errors as the update will not be done manually any more. The other Member States will follow.

Additionally, a new module will be put in place in the front office of SYSPER2/Rights. Staff will be asked to declare the professional activity of their spouse. The other modules of SYSPER2/Rights being implemented also include sections of allowances of like nature.

REPLY OF THE EEAS

The EEAS will address its staff regularly, once a year, to request the update of their personal file and remind them of their duty to declare such allowances. This message will be issued in September. The IT systems must allow a regular update of the amounts perceived in accordance with national or regional legislation/rules on increases of such allowances. The EEAS understands that PMO has developed an IT tool and recently tested it for allowances perceived from Belgium authorities and will successively extend this IT application for other populations including EEAS staff. The EEAS will ask PMO to be able to benefit from this IT application as soon as possible.

REPLY OF THE EEAS

| — | Recommendation 2: The institutions and bodies concerned (see paragraphs 9.13, 9.23, 9.24 and 9.26) take steps to ensure that the provisions of the relevant regulations are applied when concluding, extending or modifying employment contracts with non-permanent staff; |
| --- | --- |

—

Recommendation 2: The institutions and bodies concerned (see paragraphs 9.13, 9.23, 9.24 and 9.26) take steps to ensure that the provisions of the relevant regulations are applied when concluding, extending or modifying employment contracts with non-permanent staff;

During the transitional period when a large number of diplomats from Member States were recruited as temporary agents, some contracts may have been signed only some time after the staff members had taken up their duties. Such cases remained exceptional.

All persons were recruited according to standard and regular procedures. The EEAS will take the necessary steps so that such cases are not happening in the future.

REPLY OF THE COMMISSION

| — | Recommendation 3: The institutions and bodies concerned (see paragraphs 9.15, 9.16, 9.17, 9.18, 9.20, 9.21 and 9.28) should ensure that authorising officers improve the design, coordination and performance of procurement procedures through appropriate checks and better guidance. |
| --- | --- |

—

Recommendation 3: The institutions and bodies concerned (see paragraphs 9.15, 9.16, 9.17, 9.18, 9.20, 9.21 and 9.28) should ensure that authorising officers improve the design, coordination and performance of procurement procedures through appropriate checks and better guidance.

OIL has already revised its approach with regards to calls for tender procedures with a view to streamlining all aspects of the tender specifications.

REPLY OF THE EEAS

is being implemented with the creation of the MDR-A2 division and the important work provided in order to improve the quality of procurement procedures. MDR-A2 division has also produced a procurement guide and a template for security contracts in delegation. Other templates are under preparation.

---

(1)  The Court’s Specific Annual Report on the European Schools is submitted to the Board of Governors of the European Schools, and is copied to the European Parliament, the Council and the Commission.

(2)  Ex-ante and ex-post controls, internal audit function, exception reporting and internal control standards.

(3)  The review covered the following Commission directorates-general and offices: the Office for Administration and Payment of Individual Entitlements (PMO), the Office for Infrastructure and Logistics in Brussels (OIB), the Office for Infrastructure and Logistics in Luxembourg (OIL) and the Directorate-General for Informatics (DIGIT).

(4)  Except for the Court of Auditors (see paragraph 9.8).

(5)  PricewaterhouseCoopers, Société à responsabilité limitée, Réviseur d'Entreprises.

(6)  The Court calculates its estimate of error from a representative statistical sample. The figure quoted is the best estimate (known as the Most Likely Error — MLE). The Court has 95 % confidence that the rate of error in the population lies between LEL 0,0 % and UEL 0,3 % (the lower and upper error limits respectively).

(7)  Implementing measures for Title VII of the conditions of employment of other servants of the European Communities (Bureau Decision of 9 March 2009).

(8)  Council Regulation (EC) No 160/2009 of 23 February 2009 amending the Conditions of Employment of Other Servants of the European Communities (OJ L 55, 27.2.2009, p. 1).

(9)  Article 128(2)(e) of the Conditions of Employment of Other Servants of the European Communities requires that the assistant has a thorough knowledge of one of the languages of the Community and a satisfactory knowledge of another Community language to the extent necessary for the performance of his duties.

(10)  Article 67(2) of the Staff Regulations requires allowances of like nature received from other sources to be deducted from those paid by the institutions.

(11)  See the external auditor’s report on the financial statements referred to in paragraph 9.8.

ANNEX 9.1

RESULTS OF TRANSACTION TESTING FOR ADMINISTRATIVE AND OTHER EXPENDITURE

| | 2011 | 2010 | 2009 | 2008 |
| --- | --- | --- | --- | --- |
| Expenses related to staff | Expenses related to buildings | Other expenses | Total |
| SIZE AND STRUCTURE OF THE SAMPLE |
| Total transactions (of which): | 43 | 4 | 9 | 56 | 58 | 57 | 57 |
| advances | 0 | 0 | 3 | 3 | 4 | 2 | 0 |
| Final payments | 43 | 4 | 6 | 53 | 54 | 55 | 57 |
| RESULTS OF TESTING
   (1)
   (2) |
| Proportion of transactions tested found to be: |
| Free of error | 91 % | (39) | 100 % | (4) | 100 % | (9) | 93 % | (52) | 93 % | 93 % | 91 % |
| Affected by one or more errors | 9 % | (4) | 0 % | (0) | 0 % | (0) | 7 % | (4) | 7 % | 7 % | 9 % |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| Most likely error rate | 0,1 % | | | |
| Upper error limit | 0,3 % | | | |
| Lower error limit | 0,0 % | | | |

2011

2010

2009

2008

Expenses related to staff

Expenses related to buildings

Other expenses

Total

SIZE AND STRUCTURE OF THE SAMPLE

Total transactions (of which):

43

4

9

56

58

57

57

advances

0

0

3

3

4

2

0

Final payments

43

4

6

53

54

55

57

RESULTS OF TESTING
   (1)
   (2)

Proportion of transactions tested found to be:

Free of error

91 %

(39)

100 %

(4)

100 %

(9)

93 %

(52)

93 %

93 %

91 %

Affected by one or more errors

9 %

(4)

0 %

(0)

0 %

(0)

7 %

(4)

7 %

7 %

9 %

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Most likely error rate

0,1 %

Upper error limit

0,3 %

Lower error limit

0,0 %

---

(1)  To improve insight into areas with different risk profiles within the policy group, the sample was split up into segments.

(2)  Numbers quoted in brackets represent the actual number of transactions.

ANNEX 9.2

RESULTS OF EXAMINATION OF SYSTEMS FOR ADMINISTRATIVE AND OTHER EXPENDITURE

Assessment of the systems examined

| System concerned | Overall assessment |
| --- | --- |
| All systems | Effective |

System concerned

Overall assessment

All systems

Effective

ANNEX 9.3

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR ADMINISTRATIVE AND OTHER EXPENDITURE

| Year | Court recommendation | Court's analysis of the progress made | Institution reply |
| --- | --- | --- | --- |
| 2009 | Parliament


  Payment of social allowances to staff members

  Staff should be requested to deliver at appropriate intervals documents confirming their personal situation. In addition, the Parliament should implement a system for the timely monitoring and control of these documents. | As mentioned in Annex 7.4 of the 2010 Annual Report the Parliament implemented measures to mitigate the risk: campaign to check eligibility for some allowances; implementation of an automated control tool (‘electronic fiche’) allowing an annual verification of the staff's personal and administrative data; and performance of checks on the establishment of individual entitlements during recruitment procedures or when staff change category. The Court's audit showed, however, that the risk of making incorrect or undue payments remains. | As part of the process of continually enhancing the relevant control environment, and with a view to a marked increase in the staff response rate in connection with the annual exercise to confirm or update personal data, personalised reminders — via management channels — have been introduced. Accordingly, resource directorates have received a list of staff members in their directorates-general who have not replied during the 2012 exercise. This measure is a preliminary to more coercive action where staff fail to reply. |
| Commission — DG RELEX


  Payment of social allowances and benefits to staff members

  Staff should be requested to deliver at appropriate intervals to the Commission’s services documents proving their personal situation. In addition, DG RELEX should implement a system for the timely monitoring and control of these documents. | As mentioned in Annex 7.4 of the 2010 Annual Report the creation of the European External Action Service (EEAS) would be an opportunity to remind staff of the obligations to update files when rights are concerned and to set up adequate controls. The Court's audit showed, however, that the risk of making incorrect or undue payments remains. | Commission



  An automatic update of the amounts of the allowances of like nature from the Belgian State is being implemented by the Commission in SYSPER2/Rights (the Information System for the management of Individual Entitlements) since April 2012. This automatism will significantly decrease the risk of errors as the update will not be done manually any more. The other Member States will follow.


  Additionally, a new module will be put in place in the front office of SYSPER2/Rights. Staff will be asked to declare the professional activity of their spouse. The other modules of SYSPER2/Rights being implemented also include sections of allowances of like nature.



  EEAS



  The Paymaster Office (PMO), which is responsible for the administration of entitlements of EEAS staff in headquarters, will adopt an automatic updating of benefits received from other sources. The automatic updating will be introduced for EEAS staff in Headquarters during the last quarter of 2012. In conformity to Article 67 of the Staff Regulations, also EEAS officials in Delegations will be requested to declare in Sysper 2 their benefits received from other sources. |
| 2009 | European Data Protection Supervisor


  Payment of social allowances to staff members

  Staff should be requested to deliver at appropriate intervals documents proving their personal situation. In this respect, the European Data Protection Supervisor should improve its system for the timely monitoring and control of these documents. | As mentioned in Annex 7.4 of the 2010 Annual Report the EDPS has implemented tools for better management of the allowances (formal contacts within the EDPS' Office and with the Office for Administration and Payment of Individual Entitlements and yearly information fiche). The Court's audit showed that these measures were effective. | The EDPS takes good note of the result of the Court's analysis and intends to continue to improve its system for timely monitoring and control. |

Year

Court recommendation

Court's analysis of the progress made

Institution reply

2009

Parliament

Payment of social allowances to staff members

Staff should be requested to deliver at appropriate intervals documents confirming their personal situation. In addition, the Parliament should implement a system for the timely monitoring and control of these documents.

As mentioned in Annex 7.4 of the 2010 Annual Report the Parliament implemented measures to mitigate the risk: campaign to check eligibility for some allowances; implementation of an automated control tool (‘electronic fiche’) allowing an annual verification of the staff's personal and administrative data; and performance of checks on the establishment of individual entitlements during recruitment procedures or when staff change category. The Court's audit showed, however, that the risk of making incorrect or undue payments remains.

As part of the process of continually enhancing the relevant control environment, and with a view to a marked increase in the staff response rate in connection with the annual exercise to confirm or update personal data, personalised reminders — via management channels — have been introduced. Accordingly, resource directorates have received a list of staff members in their directorates-general who have not replied during the 2012 exercise. This measure is a preliminary to more coercive action where staff fail to reply.

Commission — DG RELEX

Payment of social allowances and benefits to staff members

Staff should be requested to deliver at appropriate intervals to the Commission’s services documents proving their personal situation. In addition, DG RELEX should implement a system for the timely monitoring and control of these documents.

As mentioned in Annex 7.4 of the 2010 Annual Report the creation of the European External Action Service (EEAS) would be an opportunity to remind staff of the obligations to update files when rights are concerned and to set up adequate controls. The Court's audit showed, however, that the risk of making incorrect or undue payments remains.

Commission

An automatic update of the amounts of the allowances of like nature from the Belgian State is being implemented by the Commission in SYSPER2/Rights (the Information System for the management of Individual Entitlements) since April 2012. This automatism will significantly decrease the risk of errors as the update will not be done manually any more. The other Member States will follow.

Additionally, a new module will be put in place in the front office of SYSPER2/Rights. Staff will be asked to declare the professional activity of their spouse. The other modules of SYSPER2/Rights being implemented also include sections of allowances of like nature.

EEAS

The Paymaster Office (PMO), which is responsible for the administration of entitlements of EEAS staff in headquarters, will adopt an automatic updating of benefits received from other sources. The automatic updating will be introduced for EEAS staff in Headquarters during the last quarter of 2012. In conformity to Article 67 of the Staff Regulations, also EEAS officials in Delegations will be requested to declare in Sysper 2 their benefits received from other sources.

2009

European Data Protection Supervisor

Payment of social allowances to staff members

Staff should be requested to deliver at appropriate intervals documents proving their personal situation. In this respect, the European Data Protection Supervisor should improve its system for the timely monitoring and control of these documents.

As mentioned in Annex 7.4 of the 2010 Annual Report the EDPS has implemented tools for better management of the allowances (formal contacts within the EDPS' Office and with the Office for Administration and Payment of Individual Entitlements and yearly information fiche). The Court's audit showed that these measures were effective.

The EDPS takes good note of the result of the Court's analysis and intends to continue to improve its system for timely monitoring and control.

---

CHAPTER 10

Getting results from the EU budget

TABLE OF CONTENTS

Introduction

Evaluation report on the Union’s finances based on results achieved

The Commission's management reporting on the achievements of the year

Introduction

Some welcome changes since last year

Relevance remains an issue in some cases

Comparability suffers from lack of explanations

Consistency of objectives, indicators and targets

Providing explanations for performance achieved

Reliability of data a challenge when received from external sources

Results of the Court’s audits on performance

Introduction

Needs analysis: no robust evidence

Design: insufficiently clear what is to be achieved

EU added value: justification for the EU intervention

Conclusions and recommendations

Conclusions

Recommendations

| THE COURT’S OBSERVATIONS | THE COMMISSION’S REPLIES |
| --- | --- |
| INTRODUCTION |
| 10.1. | This Chapter focuses on performance. An initial, short section covers the Commission’s first evaluation report (1). The remainder of the Chapter presents the Court’s observations on the Commission’s self-assessments on performance as stated in part 1 of the annual activity reports of the Commission’s directors-general (2), and highlights some of the main themes arising from the Court’s 2011 special reports on performance (3). |

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

10.1.

This Chapter focuses on performance. An initial, short section covers the Commission’s first evaluation report (1). The remainder of the Chapter presents the Court’s observations on the Commission’s self-assessments on performance as stated in part 1 of the annual activity reports of the Commission’s directors-general (2), and highlights some of the main themes arising from the Court’s 2011 special reports on performance (3).

| 10.2. | Performance is assessed on the basis of the sound financial management principles (economy, efficiency and effectiveness) (4). Its measurement is key throughout the public intervention process, covering inputs (financial, human, material, organisational or regulatory means needed for the implementation of the programme), outputs (the deliverables of the programme), results (the immediate effects of the programme on direct addressees or recipients) and impacts (long-term changes in society that are, at least partly, attributable to the EU’s action). |
| --- | --- |

10.2.

Performance is assessed on the basis of the sound financial management principles (economy, efficiency and effectiveness) (4). Its measurement is key throughout the public intervention process, covering inputs (financial, human, material, organisational or regulatory means needed for the implementation of the programme), outputs (the deliverables of the programme), results (the immediate effects of the programme on direct addressees or recipients) and impacts (long-term changes in society that are, at least partly, attributable to the EU’s action).

EVALUATION REPORT ON THE UNION’S FINANCES BASED ON RESULTS ACHIEVED

| 10.3. | In February 2012, the Commission published a report to the European Parliament and the Council on the evaluation of the Union’s finances based on the results achieved (the evaluation report) (5). The Treaty requires that the Commission produce such a report, and that the report is part of the evidence on which the Parliament gives a discharge each year to the Commission in respect of the budget (6). |
| --- | --- |

10.3.

In February 2012, the Commission published a report to the European Parliament and the Council on the evaluation of the Union’s finances based on the results achieved (the evaluation report) (5). The Treaty requires that the Commission produce such a report, and that the report is part of the evidence on which the Parliament gives a discharge each year to the Commission in respect of the budget (6).

| 10.4. | In response to an invitation from the Parliament, the Court issued Opinion No 4/2012 on the evaluation report (7) in June 2012. In this Opinion the Court states that the evaluation report is vague, short on substance and consequently adds little value, and that the Parliament, Council and Commission should use the opportunity afforded by the report to discuss and agree on how it might be made useful to the discharge authority. |
| --- | --- |

10.4.

In response to an invitation from the Parliament, the Court issued Opinion No 4/2012 on the evaluation report (7) in June 2012. In this Opinion the Court states that the evaluation report is vague, short on substance and consequently adds little value, and that the Parliament, Council and Commission should use the opportunity afforded by the report to discuss and agree on how it might be made useful to the discharge authority.

| 10.4. | The 2010 Evaluation Report was subject to discussions with the discharge authority in early 2012. Based on these discussions, the Commission has reconsidered the approach used for the first Evaluation Report towards more comprehensive reporting on results of activities financed by the budget, relying on existing reporting material. However, the Commission continues further developing the Evaluation Report as a key contribution to the discharge process in the light of the reactions from the discharge authority. |
| --- | --- |

10.4.

THE COMMISSION’S MANAGEMENT REPORTING ON THE ACHIEVEMENTS OF THE YEAR

Introduction

| 10.5. | The directors-general of the Commission set performance objectives for their directorate-general (DG) in annual management plans, and then report on achievements in annual activity reports. The Court assessed the reporting of three DGs: those for Agriculture and Rural Development (DG AGRI), for Regional Policy (DG REGIO) and for Development and Co-operation — EuropeAid (EuropeAid) (8). Together these three DGs are responsible for around three-quarters of the payments made from the EU budget in 2011 (9). |
| --- | --- |

10.5.

The directors-general of the Commission set performance objectives for their directorate-general (DG) in annual management plans, and then report on achievements in annual activity reports. The Court assessed the reporting of three DGs: those for Agriculture and Rural Development (DG AGRI), for Regional Policy (DG REGIO) and for Development and Co-operation — EuropeAid (EuropeAid) (8). Together these three DGs are responsible for around three-quarters of the payments made from the EU budget in 2011 (9).

| 10.6. | The Court considered the changes made to the Commission’s internal reporting arrangements since the previous year and, for the three DGs referred to above, analysed whether the objectives and performance indicators presented were:






  (a) | relevant — whether they were coherent with the policy objectives and management mode, and linked to quantified targets; |
| --- | --- | --- |

10.6.

The Court considered the changes made to the Commission’s internal reporting arrangements since the previous year and, for the three DGs referred to above, analysed whether the objectives and performance indicators presented were:

(a)

relevant — whether they were coherent with the policy objectives and management mode, and linked to quantified targets;

| (b) | comparable — whether indicators selected at the planning stage were later used for reporting, with any changes explained; and |
| --- | --- |

(b)

comparable — whether indicators selected at the planning stage were later used for reporting, with any changes explained; and

| (c) | reliable — whether the reader can have reasonable assurance that the reported information is accurate (10). |
| --- | --- |

(c)

reliable — whether the reader can have reasonable assurance that the reported information is accurate (10).

Some welcome changes since last year

| 10.7. | In November 2011, the Commission issued revised guidelines to its directors-general for the preparation of the 2011 annual activity reports. The revision addressed, among other things, observations made by the Court in its 2010 Annual Report (11). For example, instructions for reporting on policy achievements in the first part of the annual activity report were clarified, with directors-general required to focus more on the progress towards the achievement of the objectives in terms of the results and impact, as well as to provide a description of the outputs secured. |
| --- | --- |

10.7.

In November 2011, the Commission issued revised guidelines to its directors-general for the preparation of the 2011 annual activity reports. The revision addressed, among other things, observations made by the Court in its 2010 Annual Report (11). For example, instructions for reporting on policy achievements in the first part of the annual activity report were clarified, with directors-general required to focus more on the progress towards the achievement of the objectives in terms of the results and impact, as well as to provide a description of the outputs secured.

Relevance remains an issue in some cases

| 10.8. | At the strategic level, DGs are required to define a limited number of ‘general objectives’, together with a set of ‘impact indicators’ allowing progress against the general objectives to be tracked. The general objectives and impact indicators, taken together, are tools for Commission management — and therefore also for readers of the annual activity report, such as the discharge authority — to assess the extent to which the DG is meeting its high level goals. The Court found a number of problems with the objectives and indicators, limiting their usefulness, as set out in the following paragraphs. |
| --- | --- |

10.8.

At the strategic level, DGs are required to define a limited number of ‘general objectives’, together with a set of ‘impact indicators’ allowing progress against the general objectives to be tracked. The general objectives and impact indicators, taken together, are tools for Commission management — and therefore also for readers of the annual activity report, such as the discharge authority — to assess the extent to which the DG is meeting its high level goals. The Court found a number of problems with the objectives and indicators, limiting their usefulness, as set out in the following paragraphs.

| 10.9. | In some cases there were weaknesses in the internal coherence of the objectives and indicators (see example 10.1). |
| --- | --- |

10.9.

In some cases there were weaknesses in the internal coherence of the objectives and indicators (see example 10.1).

10.9.

DG AGRI: impact indicator does not cover entirety of objective

One general objective in the annual activity report has three aims:

| — | to promote a viable and competitive agricultural sector, |
| --- | --- |

—

to promote a viable and competitive agricultural sector,

| — | which respects high environmental and production standards, |
| --- | --- |

—

which respects high environmental and production standards,

| — | ensuring at the same time a fair standard of living for the agricultural community. |
| --- | --- |

—

ensuring at the same time a fair standard of living for the agricultural community.

The only impact indicator for this objective is ‘farmers’ income developments’. This relates only to the third aim above, meaning that there are no indicators for the first two aims.

EuropeAid: impact indicator formulated as an objective

The impact indicator ‘EU coordinated approach’ corresponding to general objective 4: ‘Promote an international development framework based on enhanced multilateral cooperation and global governance’ and having the target ‘New EU budget support contracts are concluded in coherence with the principles of COM 638’ is formulated as an objective rather than an indicator.

The basic requirements of the internal control standard 5 establish that Management Plans should provide for at least one indicator per objective, both at policy area and at activity level, to monitor and report on achievements. This requirement is reproduced in SG standing instructions and DG AGRI is in compliance with it.

The Commission has made significant efforts to define the objectives and indicators in a coherent and comprehensive way. In certain policy areas it is very difficult and it should be taken into consideration that indicators in the AAR should not be read in isolation.

The Commission considers that the indicator ‘farmer’s income developments’ does cover the entirety of the general objective 1 as it responds not only to the aim of ensuring a fair standard of living for the agricultural community but also to the viability of farms and rural areas. Additionally, as for the receipts of single payments farmers need to maintain the land in good agricultural and environmental conditions, the general objective 1 aim of respecting ‘high environmental and production standards’ is also met.

The Commission will explore alternative ways of defining indicators based on ‘SMART’ objectives.

| 10.10. | Many of the high level objectives and indicators set within the three DGs audited are not well suited to the annual measurement that the annual activity report process involves. This is because some policies are designed to have an impact over a longer term, with a significant delay between investment and benefit. Most indicators and targets related to the entire 2007-2013 period, with no use made of interim indicators or milestones. |
| --- | --- |

10.10.

Many of the high level objectives and indicators set within the three DGs audited are not well suited to the annual measurement that the annual activity report process involves. This is because some policies are designed to have an impact over a longer term, with a significant delay between investment and benefit. Most indicators and targets related to the entire 2007-2013 period, with no use made of interim indicators or milestones.

| 10.10. | The Commission confirms that it is the very nature of multiannual programmes to invest in the longer term with a possibility to evaluate impact only over a significant period of time. For the 2014-2020 period, the Commission has proposed milestones for output indicators which are more directly related to the policy. |
| --- | --- |

10.10.

| 10.11. | Impact indicators should have quantified targets associated with them. However: |
| --- | --- |

10.11.

Impact indicators should have quantified targets associated with them. However:

| 10.11. | Quantified targets are not always feasible, adequate or even appropriate notably because for the impact indicators a number of external factors come into play. In such cases, a trend is sufficient as a benchmark to measure the achievement. |
| --- | --- |

10.11.

| (a) | of the 29 impact indicators in the three annual activity reports examined, 11 did not have quantified targets — and no deadlines — associated with them (12); |
| --- | --- |

(a)

of the 29 impact indicators in the three annual activity reports examined, 11 did not have quantified targets — and no deadlines — associated with them (12);

| (a) | The Commission strives to establish quantified targets wherever possible. However, in some cases, for instance in relation to human rights in third countries, quantified targets may not always be meaningful and appropriate. |
| --- | --- |

(a)

| (b) | for DG REGIO, while all but one of its targets have deadlines, these deadlines are frequently at some point in the medium term future. As a consequence, its Annual Activity Report for 2011 often reports against results achieved in relation to the previous programming period, 2000-2006. |
| --- | --- |

(b)

for DG REGIO, while all but one of its targets have deadlines, these deadlines are frequently at some point in the medium term future. As a consequence, its Annual Activity Report for 2011 often reports against results achieved in relation to the previous programming period, 2000-2006.

| (b) | Section 1.2 of the AAR uses impact indicators based on macroeconomic models and statistical information to relate to the global objectives of the policy, with a baseline set in most cases in 2006. Evolution of the impact indicators reflects the contribution of many factors of which cohesion policy is only one. |
| --- | --- |

(b)

| 10.12. | The Court noted in its 2010 Annual Report that DGs did not set or report on objectives for operational activities relating to economy (the cost of inputs) or efficiency (the relation between inputs, outputs and results). As a separate observation, the Court also reported last year that the description of the policy achievements in part 1 of the annual activity reports provide limited information on results and impacts; they tend to focus more on inputs and outputs, rather than the outcomes of actions. The Court’s examination of management plans and annual activity reports this year did not reveal any significant progress in this area. |
| --- | --- |

10.12.

The Court noted in its 2010 Annual Report that DGs did not set or report on objectives for operational activities relating to economy (the cost of inputs) or efficiency (the relation between inputs, outputs and results). As a separate observation, the Court also reported last year that the description of the policy achievements in part 1 of the annual activity reports provide limited information on results and impacts; they tend to focus more on inputs and outputs, rather than the outcomes of actions. The Court’s examination of management plans and annual activity reports this year did not reveal any significant progress in this area.

| 10.12. | The Commission services complied with the obligations set up in the Financial Regulations and in the instructions for the drafting of the Annual Activity Reports (AARs).

  The Commission strengthened the standing instructions for the 2011 AARs, in terms of economy, efficiency and effectiveness, and requested the directorates-general to add indicators on voluntary basis on sound financial management in Part 3.


  The Commission is confident that AARs as a whole provide sufficient information on results/outcomes. |
| --- | --- |

10.12.

The Commission strengthened the standing instructions for the 2011 AARs, in terms of economy, efficiency and effectiveness, and requested the directorates-general to add indicators on voluntary basis on sound financial management in Part 3.

The Commission is confident that AARs as a whole provide sufficient information on results/outcomes.

Comparability suffers from lack of explanations

| 10.13. | As a principle, as well as reporting on the objectives/targets that have been set, good practice requires that performance information should be consistent from one period to the next, or explain changes made so that users of the information can make comparisons and assess trends. |
| --- | --- |

10.13.

As a principle, as well as reporting on the objectives/targets that have been set, good practice requires that performance information should be consistent from one period to the next, or explain changes made so that users of the information can make comparisons and assess trends.

| 10.13. | The Commission is of the view that performance information should be based on a process of continuous improvement where necessary rather than on consistency. It agrees that changes in this regards should be explained. It is however of the view that sufficient information has been provided in this respect. |
| --- | --- |

10.13.

Consistency of objectives, indicators and targets

| 10.14. | The annual activity reports should report against the objectives, indicators and targets set in the management plan. This was generally the case for DG AGRI, which reclassified some impact indicators as the Court had suggested in its work on the 2010 annual activity reports. However, DG AGRI did not explain the substance of two other changes in either the Management Plan or the Annual Activity Report. And since Member States were able to modify quantified targets at their own discretion, three of the four quantified targets changed between the 2011 Management Plan and the 2011 Annual Activity Report as a result of Member States updating their Rural Development Plans (see example 10.2). |
| --- | --- |

10.14.

The annual activity reports should report against the objectives, indicators and targets set in the management plan. This was generally the case for DG AGRI, which reclassified some impact indicators as the Court had suggested in its work on the 2010 annual activity reports. However, DG AGRI did not explain the substance of two other changes in either the Management Plan or the Annual Activity Report. And since Member States were able to modify quantified targets at their own discretion, three of the four quantified targets changed between the 2011 Management Plan and the 2011 Annual Activity Report as a result of Member States updating their Rural Development Plans (see example 10.2).

| 10.14. | The Commission considers that there is stability over the years as regards indicators and targets. As indicated in this finding, the change in indicators and targets is an exception and it followed the Court’s recommendations to re-assess two impact indicators as result indicators. This is very clearly signalled in the Management Plan 2011 update.

  Indeed, Member States have the possibility to adapt their targets to improve the Rural Development Plan (see reply to Example 10.2). |
| --- | --- |

10.14.

Indeed, Member States have the possibility to adapt their targets to improve the Rural Development Plan (see reply to Example 10.2).

Example 10.2

| Target | 2011 Management Plan | 2011 Annual Activity Report |
| --- | --- | --- |
| Increase in production of renewable energy | 20 500 ktoe (38) | 12 300 ktoe |
| Job creation | 346 000 | 344 000 |
| Utilised agricultural area of High Nature Value | 3 400 000 ha | 3 620 000 ha |

Target

2011 Management Plan

2011 Annual Activity Report

Increase in production of renewable energy

20 500 ktoe (38)

12 300 ktoe

Job creation

346 000

344 000

Utilised agricultural area of High Nature Value

3 400 000 ha

3 620 000 ha

Example 10.2

Member States have the possibility to adapt their targets and the mid-term evaluations were a relevant opportunity to refine data and method and where found necessary — adapt the targets.

As for the significant reduction of the target ‘increase in production of renewable energy’, this is due to a mistake in one Rural Development Plan which has been corrected. In the light of the mid-term evaluations, it has been possible to carry on further quality checks and therefore identify and remedy this mistake.

| 10.15. | In addition to general objectives, DG REGIO also sets ‘multiannual priorities’. Compared to the 2011 Management Plan, the 2012 Plan increases the number of multiannual priorities from four to five, and changes the wording of some of the other priorities. Furthermore, the 2012 Management Plan increases the number of lower level ‘specific operational priorities’ from 28 to 39. The plan provides no explanations for any of these changes. |
| --- | --- |

10.15.

In addition to general objectives, DG REGIO also sets ‘multiannual priorities’. Compared to the 2011 Management Plan, the 2012 Plan increases the number of multiannual priorities from four to five, and changes the wording of some of the other priorities. Furthermore, the 2012 Management Plan increases the number of lower level ‘specific operational priorities’ from 28 to 39. The plan provides no explanations for any of these changes.

| 10.15. | The title and number of multiannual priorities are defined by DG REGIO on the basis of an analysis on how ensuring its mission in the best legal and most efficient manner, as well as the number of specific operational annual priorities.

  The changes noted by the Court reflect the present challenges the European Union is facing with the financial and economic crisis and corresponding adjustments in the definition of the priorities for regional policy and DG REGIO. |
| --- | --- |

10.15.

The changes noted by the Court reflect the present challenges the European Union is facing with the financial and economic crisis and corresponding adjustments in the definition of the priorities for regional policy and DG REGIO.

Providing explanations for performance achieved

| 10.16. | The purpose of reporting on performance is to inform stakeholders. However, even where it would have been possible to provide an adequate explanation for why performance achieved did not meet the relevant objective or target, the annual activity reports did not do so. This was the case for DG AGRI even when performance fell well short of target: for four indicators, performance was less than half the target. In the case of DG REGIO, the Annual Activity Report provides a detailed, point by point, analysis of performance in relation to the multiannual priorities (paragraph 10.15), but there is no equivalent for the general objectives and impact indicators. |
| --- | --- |

10.16.

The purpose of reporting on performance is to inform stakeholders. However, even where it would have been possible to provide an adequate explanation for why performance achieved did not meet the relevant objective or target, the annual activity reports did not do so. This was the case for DG AGRI even when performance fell well short of target: for four indicators, performance was less than half the target. In the case of DG REGIO, the Annual Activity Report provides a detailed, point by point, analysis of performance in relation to the multiannual priorities (paragraph 10.15), but there is no equivalent for the general objectives and impact indicators.

| 10.16. | The Commission is of the view that it has sufficiently provided explanations. Indicators presented in the AAR should not be read in isolation. It is the indicator system in the Management Plan as a whole that allows drawing conclusions on the impact and result of the policy as they are based on macro-economic modelling and statistics relating to the global objectives of the policy evolution. |
| --- | --- |

10.16.

Reliability of data a challenge when received from external sources

| 10.17. | Examining the reliability of all the data in the three annual activity reports was outside the scope of the Court’s audit. On the basis of the limited assessment that it carried out, the Court found that the data relating to EuropeAid was generally reliable, as in most cases the indicators are internationally recognised and independently verifiable. However, it noted a number of problems in the annual activity reports of DG AGRI and DG REGIO — both of which are largely reliant on data from the Member States — set out in example 10.3. |
| --- | --- |

10.17.

Examining the reliability of all the data in the three annual activity reports was outside the scope of the Court’s audit. On the basis of the limited assessment that it carried out, the Court found that the data relating to EuropeAid was generally reliable, as in most cases the indicators are internationally recognised and independently verifiable. However, it noted a number of problems in the annual activity reports of DG AGRI and DG REGIO — both of which are largely reliant on data from the Member States — set out in example 10.3.

10.17.

DG AGRI: reporting of performance achieved based on incomplete data

There are 88 rural development plans in place across the European Union. But the performance reported at EU level for three indicators was based on data from six, nine and 32 respectively of these 88. And one other indicator reported EU performance on the basis of data from only eight of the 27 Member States.

DG AGRI: reporting of performance achieved based on incomplete data

The EU aggregation of the net effect of the Rural Development Plan policy on the impact indicators has been made with the available quantified data submitted by the Member States. Most of the mid-term evaluations did not provide quantified impact stating that the mid-term evaluations were carried out too early in the programming period in order to be able to capture measurable effect and impact. Impacts are dealing with long-term processes.

DG REGIO: internal inconsistencies within Annual Activity Report

The number of jobs created is recorded variously as 200 000 in 25 Member States (page 34) and 165 000 in 21 Member States (Annex 6, page 169) — the footnote to which lists 19 Member States (footnote 126).

The additional population with broadband access is given variously as 900 000 (page 34) and 806 826 (Annex 6, page 172).

New roads built is given variously as 920 km in 12 Member States (page 34), and 805 km in 10 Member States (Annex 6, page 171).

DG REGIO: internal inconsistencies within Annual Activity Report

The Commission points out that there are two approaches to the presentation of information with regard to targets and latest known results. All internal inconsistencies are adequately explained in the text.

| — | In the main part of the AAR, information is on the overall level of achievement of cohesion policy and figures from all Member States reporting are included, whether they have targets or not (having targets is not a requirement). |
| --- | --- |

—

In the main part of the AAR, information is on the overall level of achievement of cohesion policy and figures from all Member States reporting are included, whether they have targets or not (having targets is not a requirement).

| — | In Annex 6, direct comparison is made between targets and achievements. Figures are included only for those Member States that report on both (i.e. Member States who report on achievements without reporting on targets are excluded). This approach is consistent over years and is designed to allow an assessment of relevant progress against target. |
| --- | --- |

—

In Annex 6, direct comparison is made between targets and achievements. Figures are included only for those Member States that report on both (i.e. Member States who report on achievements without reporting on targets are excluded). This approach is consistent over years and is designed to allow an assessment of relevant progress against target.

| 10.18. | The ability of DGs AGRI and REGIO to ensure the quality of data supplied by the Member States is limited. DG REGIO has recommended that Member States should focus on core indicators and has issued guidelines on data input. It has also started an annual verification procedure, which led to it detecting some mistakes in data submitted. The introduction for the next programming period of a ‘performance reserve’ for the Common Strategic Framework (CSF) funds (13) may prove to be one way of providing Member States with an incentive to supply relevant, comparable and reliable performance data. However, the timeliness of this data will remain a challenge. For example, the present deadline for Member States to provide data to DG REGIO is June of the subsequent year, so that the data reported in the 2011 Annual Activity Report, published in 2012, relates to 2010. |
| --- | --- |

10.18.

The ability of DGs AGRI and REGIO to ensure the quality of data supplied by the Member States is limited. DG REGIO has recommended that Member States should focus on core indicators and has issued guidelines on data input. It has also started an annual verification procedure, which led to it detecting some mistakes in data submitted. The introduction for the next programming period of a ‘performance reserve’ for the Common Strategic Framework (CSF) funds (13) may prove to be one way of providing Member States with an incentive to supply relevant, comparable and reliable performance data. However, the timeliness of this data will remain a challenge. For example, the present deadline for Member States to provide data to DG REGIO is June of the subsequent year, so that the data reported in the 2011 Annual Activity Report, published in 2012, relates to 2010.

| 10.18. | The Commission’s quality checking of the data supplied by the Member States for the current programming period will be continued and intensified.

  According to the Commission’s legal proposal for the new period as an incentive for the Member States, 5 % of the funds should remain unallocated at the beginning of the new programming period to provide additional funds for those Member States that had attained their milestones (see COM(2011) 615 final).


  The Commission does not consider the timeliness of the data as challenging. DG REGIO always uses latest available data, but recognises — under the reporting arrangements in the current and proposed future regulations — that data for the previous year will not be available by April of the following year. |
| --- | --- |

10.18.

According to the Commission’s legal proposal for the new period as an incentive for the Member States, 5 % of the funds should remain unallocated at the beginning of the new programming period to provide additional funds for those Member States that had attained their milestones (see COM(2011) 615 final).

The Commission does not consider the timeliness of the data as challenging. DG REGIO always uses latest available data, but recognises — under the reporting arrangements in the current and proposed future regulations — that data for the previous year will not be available by April of the following year.

RESULTS OF THE COURT’S AUDITS ON PERFORMANCE

Introduction

| 10.19. | The Court’s special reports examine whether the principles of sound financial management (paragraph 10.2) are applied to the European Union budget. The Court chooses its topics for special reports — specific budgetary areas or management themes — to have maximum impact, based on a range of criteria, such as the level of income or spending involved (materiality), the risks to sound financial management and the degree of stakeholder interest. |
| --- | --- |

10.19.

The Court’s special reports examine whether the principles of sound financial management (paragraph 10.2) are applied to the European Union budget. The Court chooses its topics for special reports — specific budgetary areas or management themes — to have maximum impact, based on a range of criteria, such as the level of income or spending involved (materiality), the risks to sound financial management and the degree of stakeholder interest.

| 10.20. | In 2011, the Court adopted (14) 16 special reports, as listed in box 10.1: |
| --- | --- |

10.20.

In 2011, the Court adopted (14) 16 special reports, as listed in box 10.1:

Special Reports adopted by the Court of Auditors in 2011
   (15)

| — | No 1/2011 ‘Has the devolution of the Commission’s management of external assistance from its headquarters to its delegations led to improved aid delivery?’. |
| --- | --- |

—

No 1/2011 ‘Has the devolution of the Commission’s management of external assistance from its headquarters to its delegations led to improved aid delivery?’.

| — | No 2/2011 ‘Follow-up of Special Report No 1/2005 concerning the management of the European Anti-Fraud Office?’. |
| --- | --- |

—

No 2/2011 ‘Follow-up of Special Report No 1/2005 concerning the management of the European Anti-Fraud Office?’.

| — | No 3/2011 ‘The efficiency and effectiveness of EU contributions channelled through United Nations organisations in conflict-affected countries’. |
| --- | --- |

—

No 3/2011 ‘The efficiency and effectiveness of EU contributions channelled through United Nations organisations in conflict-affected countries’.

| — | No 4/2011 ‘The audit of the SME Guarantee facility’. |
| --- | --- |

—

No 4/2011 ‘The audit of the SME Guarantee facility’.

| — | No 5/2011 ‘Single Payment Scheme (SPS): issues to be addressed to improve its sound financial management’. |
| --- | --- |

—

No 5/2011 ‘Single Payment Scheme (SPS): issues to be addressed to improve its sound financial management’.

| — | No 6/2011 ‘Were ERDF co-financed tourism projects effective?’. |
| --- | --- |

—

No 6/2011 ‘Were ERDF co-financed tourism projects effective?’.

| — | No 7/2011 ‘Is agri-environment support well designed and managed?’. |
| --- | --- |

—

No 7/2011 ‘Is agri-environment support well designed and managed?’.

| — | No 8/2011 ‘Recovery of undue payments made under the Common Agricultural Policy’. |
| --- | --- |

—

No 8/2011 ‘Recovery of undue payments made under the Common Agricultural Policy’.

| — | No 9/2011 ‘Have the e-Government projects supported by ERDF been effective?’. |
| --- | --- |

—

No 9/2011 ‘Have the e-Government projects supported by ERDF been effective?’.

| — | No 10/2011 ‘Are the School Milk and School Fruit Schemes effective?’. |
| --- | --- |

—

No 10/2011 ‘Are the School Milk and School Fruit Schemes effective?’.

| — | No 11/2011 ‘Do the design and management of the geographical indications scheme allow it to be effective?’. |
| --- | --- |

—

No 11/2011 ‘Do the design and management of the geographical indications scheme allow it to be effective?’.

| — | No 12/2011 ‘Have EU measures contributed to adapting the capacity of the fishing fleets to available fishing opportunities?’. |
| --- | --- |

—

No 12/2011 ‘Have EU measures contributed to adapting the capacity of the fishing fleets to available fishing opportunities?’.

| — | No 13/2011 ‘Does the control of customs procedure 42 prevent and detect VAT evasion?’. |
| --- | --- |

—

No 13/2011 ‘Does the control of customs procedure 42 prevent and detect VAT evasion?’.

| — | No 14/2011 ‘Has EU assistance improved Croatia’s capacity to manage post-accession funding?’. |
| --- | --- |

—

No 14/2011 ‘Has EU assistance improved Croatia’s capacity to manage post-accession funding?’.

| — | No 15/2011 ‘Do the Commission’s procedures ensure effective management of State aid control?’. |
| --- | --- |

—

No 15/2011 ‘Do the Commission’s procedures ensure effective management of State aid control?’.

| — | No 16/2011 ‘EU financial assistance for the decommissioning of nuclear plants in Bulgaria, Lithuania and Slovakia: achievements and future challenges’. |
| --- | --- |

—

No 16/2011 ‘EU financial assistance for the decommissioning of nuclear plants in Bulgaria, Lithuania and Slovakia: achievements and future challenges’.

| 10.21. | In last year’s Annual Report, the Court illustrated how the findings of its 2010 special reports covered the entirety of the typical management lifecycle; from strategic planning and the identification of needs, through to reporting on the performance achieved. The scope of the Court’s special reports in 2011 was similarly wide-ranging. However, as the Union prepares to enter into the new 2014-2020 programming period, the Court examines here the lessons that can be learned from its 2011 special reports for the preparation of new programmes and projects, focusing on three themes: needs analysis, design, and the concept of EU added value. These three themes are also reflected, to varying degrees, in the Court’s recent opinions on the proposed regulations for the Common Strategic Framework and the common agricultural policy (16). |
| --- | --- |

10.21.

In last year’s Annual Report, the Court illustrated how the findings of its 2010 special reports covered the entirety of the typical management lifecycle; from strategic planning and the identification of needs, through to reporting on the performance achieved. The scope of the Court’s special reports in 2011 was similarly wide-ranging. However, as the Union prepares to enter into the new 2014-2020 programming period, the Court examines here the lessons that can be learned from its 2011 special reports for the preparation of new programmes and projects, focusing on three themes: needs analysis, design, and the concept of EU added value. These three themes are also reflected, to varying degrees, in the Court’s recent opinions on the proposed regulations for the Common Strategic Framework and the common agricultural policy (16).

Needs analysis: no robust evidence

| 10.22. | In its 2010 Annual Report, the Court stated that, if good results are to be produced, it is important clearly to identify the needs which the programmes are intended to fulfil (17). The assistance provided to Croatia so that it will be able to manage EU funding after it joins the Union is an example where the Commission generally ensured that key needs were identified (18). |
| --- | --- |

10.22.

In its 2010 Annual Report, the Court stated that, if good results are to be produced, it is important clearly to identify the needs which the programmes are intended to fulfil (17). The assistance provided to Croatia so that it will be able to manage EU funding after it joins the Union is an example where the Commission generally ensured that key needs were identified (18).

| 10.22. | The Commission agrees that a sound needs analysis forms an important part of the programme cycle and is analysing carefully the cases in which the Court found that a needs analysis had not been carried out sufficiently. |
| --- | --- |

10.22.

| 10.23. | In 2011, the Court continued to find and report on cases where sound needs analyses had not been carried out. For example, early strategies for e-Government — where projects may be supported by the European Regional Development Fund (ERDF) — were prepared mainly in response to political declarations rather than rigorous needs assessments, with the result that projects did not address the most important issues (19). And for two out of the three nuclear decommissioning programmes audited by the Court, no needs assessment was carried out in relation to the programmes’ objective to reduce the impact of closing the nuclear plants earlier than originally planned (20). |
| --- | --- |

10.23.

In 2011, the Court continued to find and report on cases where sound needs analyses had not been carried out. For example, early strategies for e-Government — where projects may be supported by the European Regional Development Fund (ERDF) — were prepared mainly in response to political declarations rather than rigorous needs assessments, with the result that projects did not address the most important issues (19). And for two out of the three nuclear decommissioning programmes audited by the Court, no needs assessment was carried out in relation to the programmes’ objective to reduce the impact of closing the nuclear plants earlier than originally planned (20).

| 10.23. | The cost of migrating to e-Government is very high. Priorities are needed and it is reasonable that they are provided by political statements and declarations, which served to raise awareness and as early strategies. However, priority setting has improved significantly in the interim period, and today all Member States have developed more sophisticated e-Government strategies.

  The Accession Treaties or subsequent regulations identified the need for mitigating measures. The EU support scheme is designed to ensure that the measures proposed by the Member States are in accordance with and based on their national energy strategies, which inevitably consider the impact of the nuclear plants’ closure. |
| --- | --- |

10.23.

The Accession Treaties or subsequent regulations identified the need for mitigating measures. The EU support scheme is designed to ensure that the measures proposed by the Member States are in accordance with and based on their national energy strategies, which inevitably consider the impact of the nuclear plants’ closure.

| 10.24. | One consequence of inadequate needs analysis is that it makes it harder to determine which of competing projects are likely to offer the best value for money. This was the case in the audit of e-Government projects referred to above (21), and also in the audit of the EU support for agri-environment. In the latter case, the Court reported that targeting funds at those areas most in need was key to enhancing the environmental effects of agri-environment support; however, Member States had not considered targeting on the basis of an analysis of the costs and benefits involved (22). |
| --- | --- |

10.24.

One consequence of inadequate needs analysis is that it makes it harder to determine which of competing projects are likely to offer the best value for money. This was the case in the audit of e-Government projects referred to above (21), and also in the audit of the EU support for agri-environment. In the latter case, the Court reported that targeting funds at those areas most in need was key to enhancing the environmental effects of agri-environment support; however, Member States had not considered targeting on the basis of an analysis of the costs and benefits involved (22).

| 10.24. | The Commission agrees that needs analysis can help identify the priority projects. However, as regards agri-environment support, some Member States have considered the desirable degree of targeting on the basis of an analysis of the costs and benefits involved. Romania, for example, targets High Nature Value agri-environment payments on a geographical basis, and the eligible areas are established using macro-level data. In view of e-Government projects, following EU policy initiatives, today, all Member States have developed more sophisticated e-Government strategies based on the e-Government Action Plan 2011-2015. |
| --- | --- |

10.24.

Design: insufficiently clear what is to be achieved

| 10.25. | Identifying needs is only the start of the process. Good design both of the programmes and of the individual projects within those programmes is essential for sound financial management, so that funds achieve the maximum impact at the minimum cost. The design of programmes and of individual projects within them should establish a link between the activities funded by the budget and the intended outputs, results and impacts of that spending. |
| --- | --- |

10.25.

Identifying needs is only the start of the process. Good design both of the programmes and of the individual projects within those programmes is essential for sound financial management, so that funds achieve the maximum impact at the minimum cost. The design of programmes and of individual projects within them should establish a link between the activities funded by the budget and the intended outputs, results and impacts of that spending.

| 10.26. | In one case, the Commission took into consideration the design problems of one scheme to improve, at least in part, the design of a similar scheme. As a result, measures to encourage the consumption of fruit in schools do not suffer from problems of unattractiveness to beneficiaries and the deadweight effect (23) that the similar school milk scheme does (24). However, the Court continued to find a number of weaknesses in the design of the funding streams that it audited in 2011, as set out in the following paragraphs. |
| --- | --- |

10.26.

In one case, the Commission took into consideration the design problems of one scheme to improve, at least in part, the design of a similar scheme. As a result, measures to encourage the consumption of fruit in schools do not suffer from problems of unattractiveness to beneficiaries and the deadweight effect (23) that the similar school milk scheme does (24). However, the Court continued to find a number of weaknesses in the design of the funding streams that it audited in 2011, as set out in the following paragraphs.

| 10.26. | The Commission is of the view that the latest revision of the School Milk Scheme (SMS) has addressed to a large extent the observations of the Court with a view to improving the overall efficiency of the system. |
| --- | --- |

10.26.

| 10.27. | The Commission channels some support for conflict-affected countries through United Nations organisations. However, almost all (18 out of 19) contribution agreements audited by the Court had one or more of a number of design weaknesses, such as the absence of baseline criteria, unspecific objectives or missing indicators. As a result, there was a lack of clarity about what was to be achieved, and how success could be assessed (25). |
| --- | --- |

10.27.

The Commission channels some support for conflict-affected countries through United Nations organisations. However, almost all (18 out of 19) contribution agreements audited by the Court had one or more of a number of design weaknesses, such as the absence of baseline criteria, unspecific objectives or missing indicators. As a result, there was a lack of clarity about what was to be achieved, and how success could be assessed (25).

| 10.27. | The Commission acknowledges the importance of project design but considers that only two of the 18 cases cited had weaknesses that could directly influence the project results.

  The Commission has introduced new training and guidance in 2011 to improve project design, which it considers largely meet the concerns of the Court.


  Furthermore, the Court’s special report recognised that, even in extremely difficult circumstances, projects implemented with the UN in conflict-affected countries achieve good results and are reasonably sustainable. |
| --- | --- |

10.27.

The Commission has introduced new training and guidance in 2011 to improve project design, which it considers largely meet the concerns of the Court.

Furthermore, the Court’s special report recognised that, even in extremely difficult circumstances, projects implemented with the UN in conflict-affected countries achieve good results and are reasonably sustainable.

| 10.28. | The Single Payment Scheme of the common agricultural policy (CAP) was designed to encourage farmers to respond to market demand and to promote more environmentally-friendly agricultural practices. However, there is a contradiction in the design of the scheme: while it is intended to support individual income, in practice the way that financial assistance is distributed takes little account of the specific circumstances of the recipient, with the result that the distribution of subsidies to individual farmers remains essentially based on the surface of land farmed and thus a high proportion of Single Payment Scheme aid still goes to large farms as was the case under the previous system (26). |
| --- | --- |

10.28.

The Single Payment Scheme of the common agricultural policy (CAP) was designed to encourage farmers to respond to market demand and to promote more environmentally-friendly agricultural practices. However, there is a contradiction in the design of the scheme: while it is intended to support individual income, in practice the way that financial assistance is distributed takes little account of the specific circumstances of the recipient, with the result that the distribution of subsidies to individual farmers remains essentially based on the surface of land farmed and thus a high proportion of Single Payment Scheme aid still goes to large farms as was the case under the previous system (26).

| 10.28. | The Single Payment Scheme (SPS) has proven to be a very effective tool to grant basic income support while allowing the farmer to make production decisions on the basis of market signals. This is because payments are decoupled from production and do not interfere with production decisions. To be eligible for payments, beneficiaries, parcels and activities must match clear conditions set up in the Council Regulation that are compatible with WTO rules, i.e. not linked with production factors.

  The needs for basic income support of ‘large farms’ should not be considered systematically lower than those of other farms as income in general depends strongly on types of production, input and output costs, farm labour, etc.


  The value and number of entitlements were calculated, using historical references of production and surfaces so as to ensure a smooth transition towards decoupling. Hence, the current distribution of direct payments between farms is simply a reflection of the fact that agricultural land and agricultural production are not shared equally among the farms in the EU.


  Nevertheless, the issue of redistribution of support between farmers and Member States is considered in the legal proposals for CAP post-2013, and should also lead to improved targeting of the SPS aid. As to add value and quality in spending, the Commission has proposed to improve and add also some other elements, thus covering some of the issues mentioned by the Court in its special report: redesign and better targeting of support. |
| --- | --- |

10.28.

The needs for basic income support of ‘large farms’ should not be considered systematically lower than those of other farms as income in general depends strongly on types of production, input and output costs, farm labour, etc.

The value and number of entitlements were calculated, using historical references of production and surfaces so as to ensure a smooth transition towards decoupling. Hence, the current distribution of direct payments between farms is simply a reflection of the fact that agricultural land and agricultural production are not shared equally among the farms in the EU.

Nevertheless, the issue of redistribution of support between farmers and Member States is considered in the legal proposals for CAP post-2013, and should also lead to improved targeting of the SPS aid. As to add value and quality in spending, the Commission has proposed to improve and add also some other elements, thus covering some of the issues mentioned by the Court in its special report: redesign and better targeting of support.

| 10.29. | The Geographical Indications Scheme (GIS) is a scheme intended to protect names that identify agricultural products whose given quality, reputation or other characteristic are essentially attributable to their geographical origin (e.g. ‘prosciutto di Parma’, ‘Bayerisches Bier’, etc.). The success of the GIS depends, inter alia, on its usage by producers. Potential exists for attracting further producers to join the GIS especially in Member States where there is a low take-up. However, the measures available and procedures applied do not encourage these producers to participate (27). |
| --- | --- |

10.29.

The Geographical Indications Scheme (GIS) is a scheme intended to protect names that identify agricultural products whose given quality, reputation or other characteristic are essentially attributable to their geographical origin (e.g. ‘prosciutto di Parma’, ‘Bayerisches Bier’, etc.). The success of the GIS depends, inter alia, on its usage by producers. Potential exists for attracting further producers to join the GIS especially in Member States where there is a low take-up. However, the measures available and procedures applied do not encourage these producers to participate (27).

| 10.29. | The scheme is primarily an intellectual property protection scheme. The appropriate instruments and legal means are in place and producers are invited to join the scheme on a voluntary basis. This is also confirmed by the clear interest in the scheme shown by producers: a significant number of product names has been registered (above 1 000), accounting for a market value of 14,5 billion euro (in 2008).

  The Member States that have joined the EU since 2004 are still picking up on speed in relation to the scheme. A series of initiatives, including information campaigns, trade fairs, thematic international exhibitions and/or preparation of guides for applicants for geographical indications (PDO or PGI), have been launched to further attract potential applicants. |
| --- | --- |

10.29.

The Member States that have joined the EU since 2004 are still picking up on speed in relation to the scheme. A series of initiatives, including information campaigns, trade fairs, thematic international exhibitions and/or preparation of guides for applicants for geographical indications (PDO or PGI), have been launched to further attract potential applicants.

| 10.30. | Under the common fisheries policy, the Commission provides support for Member States to reduce the capacity of their fishing fleets with the ultimate goal of preserving fish stocks. Design problems are reducing the effectiveness of this support. For example, the eligibility and selection criteria for fishing vessel decommissioning schemes were poorly targeted, with the result that some fishing vessels were scrapped with little or no effect on targeted fish stocks (28). |
| --- | --- |

10.30.

Under the common fisheries policy, the Commission provides support for Member States to reduce the capacity of their fishing fleets with the ultimate goal of preserving fish stocks. Design problems are reducing the effectiveness of this support. For example, the eligibility and selection criteria for fishing vessel decommissioning schemes were poorly targeted, with the result that some fishing vessels were scrapped with little or no effect on targeted fish stocks (28).

| 10.30. | The cases analysed by the Court have been revised and discussed with Member States. Corrective actions — including the recovery of wrongly paid amounts — are being taken by Member States where necessary. |
| --- | --- |

10.30.

EU added value: justification for the EU intervention

| 10.31. | The Commission has defined EU added value as ‘the value resulting from an EU intervention which is additional to the value that would have been otherwise created by Member State action alone’ (29). The Court has previously suggested that any definition of the term should draw on the principles set out in box 10.2, and has recommended articulating the concept of EU added value in order to provide guidance to the EU’s political authorities when choosing expenditure priorities, and doing so in a suitable political declaration or in EU legislation (30). |
| --- | --- |

10.31.

The Commission has defined EU added value as ‘the value resulting from an EU intervention which is additional to the value that would have been otherwise created by Member State action alone’ (29). The Court has previously suggested that any definition of the term should draw on the principles set out in box 10.2, and has recommended articulating the concept of EU added value in order to provide guidance to the EU’s political authorities when choosing expenditure priorities, and doing so in a suitable political declaration or in EU legislation (30).

| 10.31. | The Commission underlines that the concept of EU added value may be used in many different contexts, such as in academic reflections on the EU budget, for defining goals and/or criteria for project selection in specific EU programmes, in provisions of the Financial Regulation and in evaluation of existing programmes but it also considers that the added value of a political project goes beyond simply referring to figures.

  One of the purposes of the mentioned staff working paper was to explain the added value of having an EU budget and to present many examples of how this works in practice in the Member States, thus providing the EU’s decision-making bodies with the necessary guidance to prioritise expenditure.


  Moreover, the Commission Impact Assessment process prepares evidence for political decision-makers on the advantages and disadvantages of possible policy options by assessing their potential impact. In so doing, the process also deals with the issue of the added value of Commission proposals. |
| --- | --- |

10.31.

One of the purposes of the mentioned staff working paper was to explain the added value of having an EU budget and to present many examples of how this works in practice in the Member States, thus providing the EU’s decision-making bodies with the necessary guidance to prioritise expenditure.

Moreover, the Commission Impact Assessment process prepares evidence for political decision-makers on the advantages and disadvantages of possible policy options by assessing their potential impact. In so doing, the process also deals with the issue of the added value of Commission proposals.

Court’s suggested principles underlying the concept of EU added value:

| — | Expenditure from the European Union budget within the Union must offer clear and visible benefits for the EU and for its citizens which could not be achieved by spending only at national, regional or local level, but could rather, by reason of the scale or effects of the proposed action, be better achieved at Union level. |
| --- | --- |

—

Expenditure from the European Union budget within the Union must offer clear and visible benefits for the EU and for its citizens which could not be achieved by spending only at national, regional or local level, but could rather, by reason of the scale or effects of the proposed action, be better achieved at Union level.

| — | Expenditure with trans-frontier effects of common interest is prima facie a stronger candidate for EU action than expenditure with limited geographical effects. |
| --- | --- |

—

Expenditure with trans-frontier effects of common interest is prima facie a stronger candidate for EU action than expenditure with limited geographical effects.

| — | Reasonable concentration of expenditure is prima facie likely to support the objective of adding value. |
| --- | --- |

—

Reasonable concentration of expenditure is prima facie likely to support the objective of adding value.

| — | For expenditure outside the Union, such as on development assistance, value added is also likely to be enhanced by a selective approach: for example, focusing on the coordination of development assistance in areas where there is global donor endorsement and focusing on activities for which specific EU expertise is of particular value (31). |
| --- | --- |

—

For expenditure outside the Union, such as on development assistance, value added is also likely to be enhanced by a selective approach: for example, focusing on the coordination of development assistance in areas where there is global donor endorsement and focusing on activities for which specific EU expertise is of particular value (31).

The Commission considers that the added value of a political project should be a key test to justify spending at the EU level.

The Commission tested the added value of proposed expenditure in all policy areas when making its proposals for the EU budget for the period 2007-2013, using the following criteria:

| — | Effectiveness: where EU action is the only way to get results. |
| --- | --- |

—

Effectiveness: where EU action is the only way to get results.

| — | Efficiency: where the EU offers better value for money. |
| --- | --- |

—

Efficiency: where the EU offers better value for money.

| — | Synergy: where EU actions are necessary to complement, stimulate, and leverage actions. |
| --- | --- |

—

Synergy: where EU actions are necessary to complement, stimulate, and leverage actions.

The Commission designed both the new Multiannual Financial Framework and the sectoral instruments and programmes in a way that:

| — | the delivery of objectives can better be achieved through spending at EU level, |
| --- | --- |

—

the delivery of objectives can better be achieved through spending at EU level,

| — | the contribution of the expenditure at EU level is made obvious, |
| --- | --- |

—

the contribution of the expenditure at EU level is made obvious,

| — | the EU added value is prominent, |
| --- | --- |

—

the EU added value is prominent,

| — | pooling resources at EU level do generate economies of scale and better results. |
| --- | --- |

—

pooling resources at EU level do generate economies of scale and better results.

The Commission Agenda for Change communication of October 2011 and its subsequent Council Conclusions of 14 May 2012 recommend a better targeting on countries that need help most and a focus on a limited number of sector where impact can be maximised and EU added value is clear.

| 10.32. | The Court has stated that expenditure programmes which do not add EU value are by definition unlikely to be an efficient and effective use of the EU taxpayer’s money (32). In its 2011 special reports, the Court found examples where the existence of EU added value was at best questionable: |
| --- | --- |

10.32.

The Court has stated that expenditure programmes which do not add EU value are by definition unlikely to be an efficient and effective use of the EU taxpayer’s money (32). In its 2011 special reports, the Court found examples where the existence of EU added value was at best questionable:

| 10.32. | The Commission considers that the evaluation of the added value of the expenditure programmes has to be done in relation to the objectives set and in relation to the criteria used when testing initially the added value of the Commission proposals (see Box 10.2). |
| --- | --- |

10.32.

| — | the EU added value of the Small and Medium-sized Enterprise Guarantee (SMEG) facility had not been demonstrated, as the results arising from the facility might also have been achieved by funding under national schemes (33), |
| --- | --- |

—

the EU added value of the Small and Medium-sized Enterprise Guarantee (SMEG) facility had not been demonstrated, as the results arising from the facility might also have been achieved by funding under national schemes (33),

| — | The Commission is already taking the observation into account in the discussions and planning for the next generation of financial instruments in the post-2013 Multiannual Financial Framework, where ‘ensuring EU added value’ is one of the key principles that must be respected by all proposed instruments. |
| --- | --- |

—

| — | for tourism projects co-financed by the ERDF, in the absence of a suitable system for setting objectives and monitoring performance against them, it was difficult to assess the extent of EU added value secured (34), and |
| --- | --- |

—

for tourism projects co-financed by the ERDF, in the absence of a suitable system for setting objectives and monitoring performance against them, it was difficult to assess the extent of EU added value secured (34), and

| — | The Commission notes that the Court’s performance audit found high employment effects for the examined tourism projects. |
| --- | --- |

—

| — | in the case of the EU support provided for nuclear decommissioning in three Member States, the Court concluded that the policy framework was relatively loose and recommended that the EU should base any decision about providing further financial assistance on an evaluation of the EU added value of such an intervention (35). |
| --- | --- |

—

in the case of the EU support provided for nuclear decommissioning in three Member States, the Court concluded that the policy framework was relatively loose and recommended that the EU should base any decision about providing further financial assistance on an evaluation of the EU added value of such an intervention (35).

| — | The Commission considers that the EU added value of the programmes was clear: without them, reaching the overall goal of significantly improving EU nuclear safety, as well as helping Member States mitigate the effects of early closure, would have been extremely difficult.

  On 24 November 2011 the Commission proposed a Council regulation on Union support for the nuclear decommissioning assistance programmes in Bulgaria, Lithuania and Slovakia (COM(2011) 783) for the period 2014-2020. This was accompanied by a comprehensive impact assessment that includes an evaluation of the EU added value. |
| --- | --- |

—

On 24 November 2011 the Commission proposed a Council regulation on Union support for the nuclear decommissioning assistance programmes in Bulgaria, Lithuania and Slovakia (COM(2011) 783) for the period 2014-2020. This was accompanied by a comprehensive impact assessment that includes an evaluation of the EU added value.

| 10.33. | Recent Court opinions have referred to the Commission weaknesses in defining policy objectives in terms of results — what the EU funding is designed to achieve (36). Without clear targets for expected results, it will continue to be difficult for the Commission to demonstrate that its expenditure achieves EU added value — and thus difficult to provide assurance that its spending is efficient and effective. |
| --- | --- |

10.33.

Recent Court opinions have referred to the Commission weaknesses in defining policy objectives in terms of results — what the EU funding is designed to achieve (36). Without clear targets for expected results, it will continue to be difficult for the Commission to demonstrate that its expenditure achieves EU added value — and thus difficult to provide assurance that its spending is efficient and effective.

| 10.33. | An increased focus on performance and results is one of the main goals of the Commission in its proposals ‘A budget for EU2020’ for the delivery of the long-term strategic objectives of the Union with the budget available for the next seven years.

  In this line, all programmes and instruments included in the Multiannual Financial Framework proposal have been designed to ensure that their outputs and impacts substantially contribute to the achievement of the key policy objectives of the EU, thus emphasising expected results and performance. |
| --- | --- |

10.33.

In this line, all programmes and instruments included in the Multiannual Financial Framework proposal have been designed to ensure that their outputs and impacts substantially contribute to the achievement of the key policy objectives of the EU, thus emphasising expected results and performance.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

| 10.34. | The process by which the annual activity reports are prepared by Commission DGs is evolving. Compared with the previous year, there were welcome signs of improvement (paragraph 10.7). |
| --- | --- |

10.34.

The process by which the annual activity reports are prepared by Commission DGs is evolving. Compared with the previous year, there were welcome signs of improvement (paragraph 10.7).

| 10.34. | The Commission strives to continuously improve the quality and clarity of its accountability reports. |
| --- | --- |

10.34.

| 10.35. | Relevance remains an issue, in particular concerning the internal coherence of the objectives and indicators, the setting of meaningful quantified targets and the annual measurement of progress. As was the case last year, the three DGs assessed by the Court did not report on economy and efficiency in part 1 of the annual activity reports (see paragraphs 10.8 to 10.12). |
| --- | --- |

10.35.

Relevance remains an issue, in particular concerning the internal coherence of the objectives and indicators, the setting of meaningful quantified targets and the annual measurement of progress. As was the case last year, the three DGs assessed by the Court did not report on economy and efficiency in part 1 of the annual activity reports (see paragraphs 10.8 to 10.12).

| 10.35. | The Commission strengthened the standing instructions for the 2011 AARs, in terms of efficiency and effectiveness, and requested the directorates-general to add indicators on voluntary basis on sound financial management in Part 3. A number of DGs did report on this in 2011. |
| --- | --- |

10.35.

| 10.36. | Objectives, indicators and targets set in the management plans of DG AGRI and DG REGIO were generally those used for reporting in the annual activity reports, and were generally consistent with last year. However, where changes were made, explanations were not always provided (see paragraphs 10.13 to 10.16). |
| --- | --- |

10.36.

Objectives, indicators and targets set in the management plans of DG AGRI and DG REGIO were generally those used for reporting in the annual activity reports, and were generally consistent with last year. However, where changes were made, explanations were not always provided (see paragraphs 10.13 to 10.16).

| 10.36. | The Commission agrees that changes in comparison to Annual Activity Report of the previous year deserve explanation. It is however of the view that sufficient information has been provided in this respect. |
| --- | --- |

10.36.

| 10.37. | Legal limitations and practical constraints impaired the reliability of the information collected by the DGs from Member States regarding programmes under shared management. Some steps are being taken to provide Member States with incentives to supply relevant, comparable and reliable performance data for the CSF funds in the next programming period, and it may be that valuable lessons can be drawn from this in the future. There is an additional problem of timing (see paragraphs 10.17 to 10.18). |
| --- | --- |

10.37.

Legal limitations and practical constraints impaired the reliability of the information collected by the DGs from Member States regarding programmes under shared management. Some steps are being taken to provide Member States with incentives to supply relevant, comparable and reliable performance data for the CSF funds in the next programming period, and it may be that valuable lessons can be drawn from this in the future. There is an additional problem of timing (see paragraphs 10.17 to 10.18).

| 10.37. | The Commission’s quality checking of the data supplied by the Member States for the current programming period will be continued and intensified. However, the Commission does not consider the timeliness of the data as challenging.

  Given the seven-year programming period, data available 16 months after the end of the year is still of use to adjust programmes for which the data suggests a lack of performance (see reply to paragraph 10.18). |
| --- | --- |

10.37.

Given the seven-year programming period, data available 16 months after the end of the year is still of use to adjust programmes for which the data suggests a lack of performance (see reply to paragraph 10.18).

| 10.38. | In its 2011 special reports, in terms of the three specific areas analysed, the Court found that: |
| --- | --- |

10.38.

In its 2011 special reports, in terms of the three specific areas analysed, the Court found that:

10.38.

| (a) | good quality needs assessments are often not present although they are key to ensuring that EU expenditure is targeted on the areas (geographical or by topic) most in need (paragraphs 10.22 to 10.24); |
| --- | --- |

(a)

good quality needs assessments are often not present although they are key to ensuring that EU expenditure is targeted on the areas (geographical or by topic) most in need (paragraphs 10.22 to 10.24);

| (a) | The Commission agrees that a sound needs analysis forms an important part of the programme cycle and is analysing carefully the cases in which the Court found that a needs analysis had not been carried out sufficiently. |
| --- | --- |

(a)

| (b) | there are weaknesses in the design of programmes which affect negatively the Commission’s ability to establish and report on the results and impacts of EU spending (paragraphs 10.25 to 10.30); |
| --- | --- |

(b)

there are weaknesses in the design of programmes which affect negatively the Commission’s ability to establish and report on the results and impacts of EU spending (paragraphs 10.25 to 10.30);

| (b) | The Commission acknowledges the importance of project design but does not agree with all assessments made by the Court with regard to the cases mentioned in paragraphs 10.25 to 10.30. However, the Commission analyses carefully the Court’s assessments in this regard and adapts its practice whenever appropriate to achieve further improvements in project design. |
| --- | --- |

(b)

| (c) | it is a challenge for the Commission to demonstrate the EU added value of EU spending (paragraphs 10.31 to 10.33). |
| --- | --- |

(c)

it is a challenge for the Commission to demonstrate the EU added value of EU spending (paragraphs 10.31 to 10.33).

| (c) | In the design of the next Multiannual Financial Framework the Commission has implemented the principles outlined in the 2010 budget review, namely focusing on added value of the EU budget. |
| --- | --- |

(c)

Recommendations

| 10.39. | Following the review and the findings and conclusions for 2011, the Court recommends that: |
| --- | --- |

10.39.

Following the review and the findings and conclusions for 2011, the Court recommends that:

10.39.

| — | Recommendation 1: The Commission should, in the design of new spending programmes, seek to focus its activities on the results and impacts it wants to achieve. If results and impacts cannot be readily measured, the Commission should put in place indicators and milestones, based on ‘SMART’ (37) objectives that would demonstrate that its activities support its desired goals. |
| --- | --- |

—

Recommendation 1: The Commission should, in the design of new spending programmes, seek to focus its activities on the results and impacts it wants to achieve. If results and impacts cannot be readily measured, the Commission should put in place indicators and milestones, based on ‘SMART’ (37) objectives that would demonstrate that its activities support its desired goals.

The Commission agrees with the Court’s recommendation and — as outlined — has already taken action in this regard.

In the design of the next Multiannual Financial Framework, the Commission has implemented the principles it had presented in the 2010 budget review:

| — | focus on delivering key policy priorities, |
| --- | --- |

—

focus on delivering key policy priorities,

| — | focus on EU added value, |
| --- | --- |

—

focus on EU added value,

| — | focus on impacts and results, |
| --- | --- |

—

focus on impacts and results,

| — | delivering mutual benefits across the European Union. |
| --- | --- |

—

delivering mutual benefits across the European Union.

| — | Recommendation 2: The Commission should work with Member States with a view to improving the quality and timeliness of the data submitted. In particular, it should draw on any lessons to be learned from the steps being taken in the CSF funds to provide Member States with incentives to supply high quality performance data. |
| --- | --- |

—

Recommendation 2: The Commission should work with Member States with a view to improving the quality and timeliness of the data submitted. In particular, it should draw on any lessons to be learned from the steps being taken in the CSF funds to provide Member States with incentives to supply high quality performance data.

The Commission agrees that cooperation with Member States is important to improve the quality and timeliness of the data. Following a verification exercise with Member States to confirm the correctness of the indicators submitted electronically, the Commission is confident that improvements in data quality will continue. However, under the reporting arrangements in the current and proposed future regulations, data for the previous year will not be available until April of the following year.

| — | Recommendation 3: For the next programming period, 2014-2020, the Commission should demonstrate and report how it secures EU added value. |
| --- | --- |

—

Recommendation 3: For the next programming period, 2014-2020, the Commission should demonstrate and report how it secures EU added value.

All specific proposals presented by the Commission to the Legislative Authority define general and specific objectives whose achievement will contribute to sustain the EU added value of the financial instruments proposed.

---

(1)  Article 318 of the Treaty on the Functioning of the European Union (TFEU) (OJ C 83, 30.3.2010) provides for a report from the Commission to the European Parliament and the Council on the evaluation of the Union’s finances based on the results achieved.

(2)  Article 60(7) of the Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities (OJ L 248, 16.9.2002, p. 1) provides that the annual activity reports ‘shall indicate the results of the operations by reference to the objectives set, the risks associated with these operations, the use made of resources provided and the efficiency and effectiveness of the internal control system’.

(3)  The Court’s special reports cover the EU budget, as well as the European Development Funds.

(4)  Article 27 of the Financial Regulation.

(5)  Report from the Commission to the European Parliament and the Council on the evaluation of the Union’s finances based on the results achieved (COM(2012) 40 final).

(6)  Articles 318 and 319 TFEU.

(7)  Opinion No 4/2012 on the Commission’s evaluation report on the Union’s finances based on results achieved established under Article 318 of the Treaty of the Functioning of the European Union (OJ C 179, 20.6.2012).

(8)  The annual activity reports of DG AGRI and DG REGIO were also examined in the Court’s 2010 Annual Report. EuropeAid was created in January 2011 by the merger of the DGs for Development and Relations with African, Caribbean and Pacific States (DG DEV), and the EuropeAid Co-operation Office (DG AIDCO).

(9)  DG AGRI: 56,2 billion euro, DG REGIO: 32,9 billion euro, EuropeAid: 4,1 billion euro.

(10)  For this aspect, the Court carried out only a limited review — see paragraph 10.17.

(11)  The timing of the Court’s annual report is such that there is limited time available for the Commission’s annual activity reports to take account of its messages.

(12)  DG AGRI: five indicators; EuropeAid: five indicators; DG REGIO: one indicator.

(13)  These funds comprise the European Regional Development Fund (ERDF), the European Social Fund (ESF), the Cohesion Fund (CF) the European Agricultural Fund for Rural Development (EAFRD) and the European Maritime and Fisheries Fund (EMFF).

(14)  Adopted means approved for publication. Publication itself, which requires layout and translation etc., is generally around two months later.

(15)  The ECA’s special reports are available on the Court’s website at: http://eca.europa.eu/portal/page/portal/publications/auditreportsandopinions/specialreports.

(16)  Opinions No 7/2011 on the proposal for a Regulation of the European Parliament and of the Council laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund covered by the Common Strategic Framework and laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund and repealing Regulation (EC) No 1083/2006 (OJ C 47, 17.2.2012) and No 1/2012 on certain proposals for regulations relating to the common agricultural policy for the period 2014-2020 (http://eca.europa.eu).

(17)  Annual Report concerning the financial year 2010, paragraph 8.36.

(18)  Special Report No 14/2011 ‘Has EU assistance improved Croatia’s capacity to manage post-accession funding?’, paragraph 17 (http://eca.europa.eu).

(19)  Special Report No 9/2011 ‘Have the e-Government projects supported by ERDF been effective?’, paragraph 56(a) (http://eca.europa.eu).

(20)  Special Report No 16/2011 ‘EU financial assistance for the decommissioning of nuclear plants in Bulgaria, Lithuania and Slovakia: achievements and future challenges’, paragraph 26 and Figure 7 (http://eca.europa.eu).

(21)  Special Report No 9/2011, paragraph 56(b).

(22)  Special Report No 7/2011 ‘Is agri-environment support well designed and managed?’, paragraphs 72 and 78 (http://eca.europa.eu).

(23)  Deadweight occurs where a measure is used to support beneficiaries who would have made the same choice in the absence of the aid.

(24)  Special Report No 10/2011 ‘Are the School Milk and School Fruit Schemes effective?’, paragraph 53 (http://eca.europa.eu).

(25)  Special Report No 3/2011 ‘The efficiency and effectiveness of EU contributions channelled through United Nations organisations in conflict-affected countries’, paragraphs 23, 24 and 48 (http://eca.europa.eu).

(26)  Special Report No 5/2011 ‘Single Payment Scheme (SPS): issues to be addressed to improve its sound financial management’, paragraph 44 (http://eca.europa.eu).

(27)  Special Report No 11/2011 ‘Do the design and management of the geographical indications scheme allow it to be effective?’, paragraph 61 (http://eca.europa.eu).

(28)  Special Report No 12/2011 ‘Have EU measures contributed to adapting the capacity of the fishing fleets to available fishing opportunities?’, paragraphs 51-58 and 76 (http://eca.europa.eu).

(29)  Commission Staff Working Paper, The added value of the EU budget, SEC(2011) 867 final section 1.1, accompanying the document A budget for Europe 2020 (COM(2011) 500 final).

(30)  Opinion No 1/2010 ‘Improving the financial management of the European Union budget: Risks and challenges’, paragraph 18 (http://eca.europa.eu).

(31)  Response by the European Court of Auditors to the Commission’s communication ‘Reforming the Budget, Changing Europe’, paragraph 8, April 2008.

(32)  Opinion No 7/2011, paragraph 9.

(33)  Special Report No 4/2011 ‘The audit of the SME Guarantee facility’, paragraph 104 (http://eca.europa.eu).

(34)  Special Report No 6/2011 ‘Were ERDF co-financed tourism projects effective?’, paragraph 46 (http://eca.europa.eu).

(35)  Special Report No 16/2011, paragraph 42(b).

(36)  Opinion No 7/2011, paragraph 10, and Opinion No 1/2012, paragraphs 8 and 151.

(37)  Specific, measurable, achievable, relevant and timed. See the Court of Auditors’ Annual Report concerning the financial year 2010, paragraph 8.33.

(38)  A kilotonne of oil equivalent (ktoe) is the amount of energy released by burning one kilotonne of crude oil.

---

| 12.11.2012 | EN | Official Journal of the European Union | C 344/243 |
| --- | --- | --- | --- |

12.11.2012

EN

Official Journal of the European Union

C 344/243

---

ANNUAL REPORT ON THE ACTIVITIES FUNDED BY THE 8TH, 9TH AND 10TH EUROPEAN DEVELOPMENT FUNDS (EDFs)

2012/C 344/02

Annual Report on the activities funded by the 8th, 9th and 10th European Development Funds (EDFs)

TABLE OF CONTENTS

Introduction

Specific characteristics of the European Development Funds

Chapter I — Implementation of the 8th, 9th and 10th EDFs

Financial implementation

The Commission’s Annual Report on the financial management of the 8th to 10th European Development Funds

Chapter II — The Court’s Statement of Assurance on the EDFs

The Court’s Statement of Assurance on the 8th, 9th and 10th European Development Funds (EDFs) to the European Parliament and the Council — Independent Auditor’s Report

Information in support of the Statement of Assurance

Audit scope and approach

Reliability of the accounts

Regularity of transactions

Effectiveness of systems

Conclusions and recommendations

Conclusions

Recommendations

| THE COURT’S OBSERVATIONS | THE COMMISSION’S REPLIES |
| --- | --- |
| INTRODUCTION |
| 1. | This Annual Report presents the Court’s assessment of the European Development Funds (EDFs). Key information on the activities covered and the spending in 2011 is provided in
  Table 1
  . |

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

1.

This Annual Report presents the Court’s assessment of the European Development Funds (EDFs). Key information on the activities covered and the spending in 2011 is provided in
  Table 1
  .

Table 1 —   European Development Funds — Key information

| (million euro) |
| --- |
| Budget Title | Policy area | Description | Payments 2011 | Management Mode |
| European Development Funds | 8th EDF | Administrative expenditure | 0 | |
| Operational expenditure | | |
| Projects | 8 | Centralised direct |
| Budget Support | 0 | Centralised direct |
| Projects | 19 | Centralised indirect |
| Projects | 59 | Decentralised |
| Projects | 3 | Joint management |
| | 89 | |
| 9th EDF | Administrative expenditure | 3 | |
| Operational expenditure | | |
| Projects | 112 | Centralised direct |
| Budget Support | 77 | Centralised direct |
| Projects | –4 | Central indirect |
| Projects | 591 | Decentralised |
| Projects | 127 | Joint management |
| | 906 | |
| 10th EDF | Administrative expenditure | 90 | |
| Operational expenditure | | |
| Projects | 210 | Centralised direct |
| Budget Support | 660 | Centralised direct |
| Projects | 29 | Centralised indirect |
| Projects | 407 | Decentralised |
| Projects | 483 | Joint management |
| | 1 879 | |
| Total administrative expenditure | 93 | |
| Total operational expenditure (Projects) | 2 044 | |
| Total operational expenditure (Budget Support) | 737 | |
| Total payments
   (43) | 2 874 | |
| Total individual commitments
   (43)
   (44) | 2 509 | |
| Total global commitments
   (43)
   (44) | 3 049 | |
| Source: European Court of Auditors on the basis of data provided by DG DEVCO. |

(million euro)

Budget Title

Policy area

Description

Payments 2011

Management Mode

European Development Funds

8th EDF

Administrative expenditure

0

Operational expenditure

Projects

8

Centralised direct

Budget Support

0

Centralised direct

Projects

19

Centralised indirect

Projects

59

Decentralised

Projects

3

Joint management

89

9th EDF

Administrative expenditure

3

Operational expenditure

Projects

112

Centralised direct

Budget Support

77

Centralised direct

Projects

–4

Central indirect

Projects

591

Decentralised

Projects

127

Joint management

906

10th EDF

Administrative expenditure

90

Operational expenditure

Projects

210

Centralised direct

Budget Support

660

Centralised direct

Projects

29

Centralised indirect

Projects

407

Decentralised

Projects

483

Joint management

1 879

Total administrative expenditure

93

Total operational expenditure (Projects)

2 044

Total operational expenditure (Budget Support)

737

Total payments
   (43)

2 874

Total individual commitments
   (43)
   (44)

2 509

Total global commitments
   (43)
   (44)

3 049

Source: European Court of Auditors on the basis of data provided by DG DEVCO.

Specific characteristics of the European Development Funds

| 2. | The EDF is the main instrument for providing European Union aid for development cooperation to the African, Caribbean and Pacific (ACP) States and Overseas Countries and Territories (OCTs). The partnership agreement, signed in Cotonou on 23 June 2000, for a period of 20 years (‘the Cotonou Agreement’), is the current framework for the European Union’s relations with ACP States and OCTs. It is centred on the objective of reducing and eventually eradicating poverty, consistent with the objectives of sustainable development and the gradual integration of the ACP countries and OCTs in the world economy. It is based on three complementary pillars:






  — | development cooperation, |
| --- | --- | --- |

2.

The EDF is the main instrument for providing European Union aid for development cooperation to the African, Caribbean and Pacific (ACP) States and Overseas Countries and Territories (OCTs). The partnership agreement, signed in Cotonou on 23 June 2000, for a period of 20 years (‘the Cotonou Agreement’), is the current framework for the European Union’s relations with ACP States and OCTs. It is centred on the objective of reducing and eventually eradicating poverty, consistent with the objectives of sustainable development and the gradual integration of the ACP countries and OCTs in the world economy. It is based on three complementary pillars:

—

development cooperation,

| — | economic and trade cooperation, and |
| --- | --- |

—

economic and trade cooperation, and

| — | the political dimension. |
| --- | --- |

—

the political dimension.

| 3. | The EDFs are funded by the Member States, governed by their own financial regulations and managed outside the framework of the EU general budget. The European Commission is responsible for the financial implementation of operations funded with resources from the EDFs. The European Investment Bank (EIB) manages the Investment Facility, which is not covered by the Court's Statement of Assurance or the European Parliament's discharge procedure (1)
   (2). |
| --- | --- |

3.

The EDFs are funded by the Member States, governed by their own financial regulations and managed outside the framework of the EU general budget. The European Commission is responsible for the financial implementation of operations funded with resources from the EDFs. The European Investment Bank (EIB) manages the Investment Facility, which is not covered by the Court's Statement of Assurance or the European Parliament's discharge procedure (1)
   (2).

| 3. | The accountability and transparency of the implementation of the Investment Facility is ensured by the publication of the Investment Facility's annual report, by its annual external financial audit as well as by the supervision of its operations by the European Court of Auditors. |
| --- | --- |

3.

| 4. | Operations financed by each EDF are programmed at the beginning of the period covered. A Country Strategy Paper, prepared by the Commission and the ACP State or OCT concerned after consultation with a wide range of players in the development process, sets out the country’s medium-term development objectives and strategies. It also indicates the programmable EU financial allocation from which the country or regional organisation may benefit. |
| --- | --- |

4.

Operations financed by each EDF are programmed at the beginning of the period covered. A Country Strategy Paper, prepared by the Commission and the ACP State or OCT concerned after consultation with a wide range of players in the development process, sets out the country’s medium-term development objectives and strategies. It also indicates the programmable EU financial allocation from which the country or regional organisation may benefit.

| 5. | The European External Action Service (EEAS) was launched on 1 December 2010. The EEAS prepares the Commission decisions for country allocations, country and regional strategy papers and national and regional indicative programmes jointly with relevant Commission departments, as part of the programming cycle for most external action instruments. |
| --- | --- |

5.

The European External Action Service (EEAS) was launched on 1 December 2010. The EEAS prepares the Commission decisions for country allocations, country and regional strategy papers and national and regional indicative programmes jointly with relevant Commission departments, as part of the programming cycle for most external action instruments.

| 6. | Following the creation of the EEAS and the Commission reorganisation in 2011, the newly created Directorate-General for Development and Cooperation (EuropeAid) combined the policy expertise of the former Directorate-General for Development and Relations with ACP States with the implementing resources of the former EuropeAid Cooperation Office. In June 2011, the new organisation setup for EuropeAid entered into force and new mission statements at directorate-general, directorate and unit levels were established. EuropeAid implements a wide range of the Commission’s external assistance instruments (3) financed by the EDFs and the general budget (4). In 2011, almost all the EDF interventions were managed by EuropeAid. A small proportion of these (5) related to humanitarian aid and was managed by the Directorate-General for Humanitarian Aid (DG ECHO). |
| --- | --- |

6.

Following the creation of the EEAS and the Commission reorganisation in 2011, the newly created Directorate-General for Development and Cooperation (EuropeAid) combined the policy expertise of the former Directorate-General for Development and Relations with ACP States with the implementing resources of the former EuropeAid Cooperation Office. In June 2011, the new organisation setup for EuropeAid entered into force and new mission statements at directorate-general, directorate and unit levels were established. EuropeAid implements a wide range of the Commission’s external assistance instruments (3) financed by the EDFs and the general budget (4). In 2011, almost all the EDF interventions were managed by EuropeAid. A small proportion of these (5) related to humanitarian aid and was managed by the Directorate-General for Humanitarian Aid (DG ECHO).

| 7. | EDF interventions are implemented through projects and budget support (6) under three main methods of implementation (7) (see
  Table 1
  ):






  (a) | under centralised management (42 % of payments in 2011), the Commission implements the aid activities directly; |
| --- | --- | --- |

7.

EDF interventions are implemented through projects and budget support (6) under three main methods of implementation (7) (see
  Table 1
  ):

(a)

under centralised management (42 % of payments in 2011), the Commission implements the aid activities directly;

| (b) | under joint management (21 % of payments in 2011), international organisations are responsible for implementing European Union funded actions, provided that the accounting, audit, control and procurement procedures of the organisations offer guarantees equivalent to internationally accepted standards. EuropeAid’s main partners are the United Nations agencies and the World Bank; |
| --- | --- |

(b)

under joint management (21 % of payments in 2011), international organisations are responsible for implementing European Union funded actions, provided that the accounting, audit, control and procurement procedures of the organisations offer guarantees equivalent to internationally accepted standards. EuropeAid’s main partners are the United Nations agencies and the World Bank;

| (c) | under decentralised management (37 % of payments in 2011), the Commission may entrust the management of certain tasks to the authorities of beneficiary countries. In most cases, under decentralised management Commission’s procedures are still to be used and EuropeAid remains responsible for performing ex-ante checks (e.g. on procurement procedures and invoices) and making payments to contractors. |
| --- | --- |

(c)

under decentralised management (37 % of payments in 2011), the Commission may entrust the management of certain tasks to the authorities of beneficiary countries. In most cases, under decentralised management Commission’s procedures are still to be used and EuropeAid remains responsible for performing ex-ante checks (e.g. on procurement procedures and invoices) and making payments to contractors.

| 8. | The external aid financed by the EDFs and the general budget is implemented in a high risk environment, notably due to geographically dispersed activities, and the wide range of cooperation instruments, delivery methods, own financial rules and procedures, and implementing organisations. In addition, many partner countries have weak institutional and administrative capacities. |
| --- | --- |

8.

The external aid financed by the EDFs and the general budget is implemented in a high risk environment, notably due to geographically dispersed activities, and the wide range of cooperation instruments, delivery methods, own financial rules and procedures, and implementing organisations. In addition, many partner countries have weak institutional and administrative capacities.

| 8. | The Commission mitigates these risks through substantial early detection and correction interventions. EuropeAid (at HQ and in delegations) performs a high level of ex-ante control both in terms of coverage and in terms of the nature of these controls, going well beyond the financial safeguards required by legislation. Preventative measures also play a very significant part in the control strategy including substantial training provision both for Commission staff and specifically designed for National Authorising Officer's (NAO) staff. In addition ‘NAO support’ has been put in place in a number of countries. |
| --- | --- |

8.

| 9. | The Cotonou Agreement provides (8) that direct budgetary assistance should be granted in support of macroeconomic or sectoral reforms, notably where public financial management (PFM) is sufficiently transparent, accountable and effective. |
| --- | --- |

9.

The Cotonou Agreement provides (8) that direct budgetary assistance should be granted in support of macroeconomic or sectoral reforms, notably where public financial management (PFM) is sufficiently transparent, accountable and effective.

| 10. | These legal provisions offer broad scope for interpretation (9) and what is considered as ‘sufficient’ in terms of transparency, accountability and effectiveness in PFM can vary greatly, depending on the specific situation of the country but also on the direction taken by its government. Under such circumstances, it should be recalled that:






  (a) | budget support is often provided to countries with weak PFM systems. One important risk is that the budget of the recipient country may be affected by fraud and corruption. Given that the funds transferred under budget support operations are merged with other budget resources within the country’s budget (known as ‘fungibility’), they are also exposed to the same PFM weaknesses; |
| --- | --- | --- |

10.

These legal provisions offer broad scope for interpretation (9) and what is considered as ‘sufficient’ in terms of transparency, accountability and effectiveness in PFM can vary greatly, depending on the specific situation of the country but also on the direction taken by its government. Under such circumstances, it should be recalled that:

(a)

budget support is often provided to countries with weak PFM systems. One important risk is that the budget of the recipient country may be affected by fraud and corruption. Given that the funds transferred under budget support operations are merged with other budget resources within the country’s budget (known as ‘fungibility’), they are also exposed to the same PFM weaknesses;

| (b) | as budget support operations are implemented through the partner countries’ PFM systems, processes and institutions, the Court’s audit of legality and regularity cannot go beyond the stage where the aid is paid into the partner countries’ budgets; |
| --- | --- |

(b)

as budget support operations are implemented through the partner countries’ PFM systems, processes and institutions, the Court’s audit of legality and regularity cannot go beyond the stage where the aid is paid into the partner countries’ budgets;

| (c) | the Commission has wide flexibility in deciding whether a partner country is eligible for budget support. Due to this broad scope for interpretation, budget support operations carried out by the Commission are less prone to legality and regularity errors. |
| --- | --- |

(c)

the Commission has wide flexibility in deciding whether a partner country is eligible for budget support. Due to this broad scope for interpretation, budget support operations carried out by the Commission are less prone to legality and regularity errors.

| 10. (a)-(c) | The Commission does not fully share the Court's analysis of the operation of budget support.

  Budget support operates in a development context where core government systems such as public financial management can have major weaknesses. Nevertheless eligibility conditions are rigorous. A partner country is eligible for budget support only when the government has a relevant and credible strategy in place to address these weaknesses. The Commission can also require specific short term measures to mitigate risks. New budget support guidelines (40) (which were revised in 2012 following the Commission proposals (41) and Council Conclusions of 14 May 2012 for a new approach to Budget Support) now include a number of new provisions to further clarify the rules. This includes new eligibility rules on transparency and oversight, a formal risk assessment process and a senior management governance framework.


  Untargeted budget support is designed to reward results rather than finance activities. Therefore it is clear that audit cannot go beyond the stage where funds are transferred following the achievement of agreed conditions. However, the audit of activities which budget support payments may finance is the remit of national audit authorities to which accompanying programmes offer concrete support.


  This aid delivery mechanism represents one of the ways in which the Commission has responded to calls by the international development community and EU stakeholders for more effective interventions which focus on results and ownership and are less administratively complex, thereby reducing transaction costs for partner countries. |
| --- | --- |

10. (a)-(c)

Budget support operates in a development context where core government systems such as public financial management can have major weaknesses. Nevertheless eligibility conditions are rigorous. A partner country is eligible for budget support only when the government has a relevant and credible strategy in place to address these weaknesses. The Commission can also require specific short term measures to mitigate risks. New budget support guidelines (40) (which were revised in 2012 following the Commission proposals (41) and Council Conclusions of 14 May 2012 for a new approach to Budget Support) now include a number of new provisions to further clarify the rules. This includes new eligibility rules on transparency and oversight, a formal risk assessment process and a senior management governance framework.

Untargeted budget support is designed to reward results rather than finance activities. Therefore it is clear that audit cannot go beyond the stage where funds are transferred following the achievement of agreed conditions. However, the audit of activities which budget support payments may finance is the remit of national audit authorities to which accompanying programmes offer concrete support.

This aid delivery mechanism represents one of the ways in which the Commission has responded to calls by the international development community and EU stakeholders for more effective interventions which focus on results and ownership and are less administratively complex, thereby reducing transaction costs for partner countries.

| 11. | Payments to international organisations for multi-donor actions are also subject to specific risks partly due to the notional approach adopted by the Commission (10). |
| --- | --- |

11.

Payments to international organisations for multi-donor actions are also subject to specific risks partly due to the notional approach adopted by the Commission (10).

| 11. | The Commission is not aware of any specific problems with the ‘notional approach’ (which has been developed in recent years to allow the Commission to participate in multi-donor actions including trust funds). This approach guarantees that the legal requirements applicable to EU funding in external actions are met (by ensuring that the amount contributed by other donors is sufficient to pay for any activities which are ineligible under EU rules) while spending EU funds in the most efficient way (through donor coordination), in accordance with the principle of sound financial management.

  The Commission limits this risk by assessing the accounting, audit, internal control and procurement procedures of the partner international organisations in advance of any joint working, the presence of its staff in the field (and participation in steering groups) and the rigorous overall financial reporting required of the international organisation. In addition, during the implementation of external actions, systems are regularly reviewed through the performance of verification missions undertaken by external auditors.


  EuropeAid and ECHO auditors have not to date reported any findings or ‘specific risks’ of this nature.


  The Commission believes that these internal control measures which it has put in place together with those of the international organisation concerned limits this theoretical risk to a level where it is indeed negligible. |
| --- | --- |

11.

The Commission limits this risk by assessing the accounting, audit, internal control and procurement procedures of the partner international organisations in advance of any joint working, the presence of its staff in the field (and participation in steering groups) and the rigorous overall financial reporting required of the international organisation. In addition, during the implementation of external actions, systems are regularly reviewed through the performance of verification missions undertaken by external auditors.

EuropeAid and ECHO auditors have not to date reported any findings or ‘specific risks’ of this nature.

The Commission believes that these internal control measures which it has put in place together with those of the international organisation concerned limits this theoretical risk to a level where it is indeed negligible.

CHAPTER I —   IMPLEMENTATION OF THE 8TH, 9TH AND 10TH EDFs

Financial implementation

| 12. | In 2011, the 8th, 9th and 10th EDFs were implemented simultaneously. Each EDF agreement is usually concluded for a commitment period of around five years, but payments can be made over a longer period. The 8th EDF (1995-2000) amounts to 14 625 million euro and the 9th EDF (2000-2007) to 15 200 million euro. |
| --- | --- |

12.

In 2011, the 8th, 9th and 10th EDFs were implemented simultaneously. Each EDF agreement is usually concluded for a commitment period of around five years, but payments can be made over a longer period. The 8th EDF (1995-2000) amounts to 14 625 million euro and the 9th EDF (2000-2007) to 15 200 million euro.

| 13. | The 10th EDF (2008-2013) amounts to 22 682 million euro. Of this amount, 21 967 million euro are allocated to ACP countries and 285 million euro to OCTs. These amounts include 1 500 million euro and 30 million euro for the investment facility managed by the EIB for the ACP and OCT countries respectively. Finally, 430 million euro are earmarked for the Commission’s expenditure for programming and implementing the EDF. |
| --- | --- |

13.

The 10th EDF (2008-2013) amounts to 22 682 million euro. Of this amount, 21 967 million euro are allocated to ACP countries and 285 million euro to OCTs. These amounts include 1 500 million euro and 30 million euro for the investment facility managed by the EIB for the ACP and OCT countries respectively. Finally, 430 million euro are earmarked for the Commission’s expenditure for programming and implementing the EDF.

| 14. | In 2011, total contributions from the Member States to the Commission amounted to 3 100 million euro, including the final call for 660 million euro under the 9th EDF and the first contributions of 2 440 million euro under the 10th EDF. |
| --- | --- |

14.

In 2011, total contributions from the Member States to the Commission amounted to 3 100 million euro, including the final call for 660 million euro under the 9th EDF and the first contributions of 2 440 million euro under the 10th EDF.

| 15. | Table 2
  shows the cumulative use of EDF resources managed by the Commission and their financial implementation. For 2011, individual commitments were 13 % below target, in particular due to delays in contracting important infrastructure programmes and significant global commitments made during the last months of 2011. Payments were 16 % less than planned, mainly due to lower budget support disbursements, because the eligibility conditions had not been met in some cases, and delays in infrastructure projects. Outstanding payments and old and dormant unspent commitments (11) remained stable compared with 2010. |
| --- | --- |

15.

Table 2
  shows the cumulative use of EDF resources managed by the Commission and their financial implementation. For 2011, individual commitments were 13 % below target, in particular due to delays in contracting important infrastructure programmes and significant global commitments made during the last months of 2011. Payments were 16 % less than planned, mainly due to lower budget support disbursements, because the eligibility conditions had not been met in some cases, and delays in infrastructure projects. Outstanding payments and old and dormant unspent commitments (11) remained stable compared with 2010.

| 15. | EuropeAid achieved 101 % (3 279 million euro) of its 2011 global commitments target of 3 250 million euro. However contracts and payments came in slightly under target, notably due to decisions made by EuropeAid to withhold payments on budget support programmes in relation to non-achievement of disbursement conditions (for example, in the Central African Republic because of important fiscal slippage and absence of an IMF programme and in Benin because of poor performance in the implementation of the national development strategy and the slow pace of reforms in public financial management). |
| --- | --- |

15.

The Commission’s Annual Report on the financial management of the 8th to 10th European Development Funds

| 16. | The Financial Regulation applicable to the 10th EDF requires the Commission to report each year on the financial management of the EDFs (12). In the Court’s opinion, this report presents an accurate description of the achievement of the Commission’s operational objectives for the financial year (particularly concerning financial implementation and control activities), as well as of the financial situation and the events that had a significant influence on the activities carried out in 2011. |
| --- | --- |

16.

The Financial Regulation applicable to the 10th EDF requires the Commission to report each year on the financial management of the EDFs (12). In the Court’s opinion, this report presents an accurate description of the achievement of the Commission’s operational objectives for the financial year (particularly concerning financial implementation and control activities), as well as of the financial situation and the events that had a significant influence on the activities carried out in 2011.

Table 2 —   Cumulative use of EDF resources at 31 December 2011

| (million euro) |
| --- |
| | Situation at end of 2010 | Budgetary implementation during the financial year 2011
  (net amounts) (50) | Situation at end of 2011 |
| Consolidated amount | Implementation rate (46) | 8th EDF (47) | 9th EDF (47) | 10th EDF | Consolidated amount | 8th EDF | 9th EDF | 10th EDF | Consolidated amount | Implementation rate (46) |
| A — | RESOURCES
   (45) |

(million euro)

Situation at end of 2010

Budgetary implementation during the financial year 2011

(net amounts) (50)

Situation at end of 2011

Consolidated amount

Implementation rate (46)

8th EDF (47)

9th EDF (47)

10th EDF

Consolidated amount

8th EDF

9th EDF

10th EDF

Consolidated amount

Implementation rate (46)

A —

48 797

–38

70

25

57

10 663

16 552

21 639

48 854

B —   USE

| 1. | Global commitments
   (48) |
| --- | --- |

1.

37 778

77,4 %

–60

–9

3 118

3 049

10 640

16 454

13 735

40 827

83,6 %

| 2. | Individual commitments
   (49) |
| --- | --- |

2.

32 324

66,2 %

–13

8

2 514

2 509

10 494

15 691

8 648

34 833

71,3 %

| 3. | Payments |
| --- | --- |

3.

26 334

54,0 %

90

905

1 879

2 874

10 330

14 026

4 852

29 208

59,8 %

| C — | Outstanding payments (B1 – B3) |
| --- | --- |

C —

11 444

23,5 %

– 150

– 914

1 239

175

310

2 428

8 883

11 619

23,8 %

| D — | Available balance (A – B1) |
| --- | --- |

D —

11 019

22,6 %

22

79

–3 093

–2 992

23

98

7 904

8 027

16,4 %

Source: Court of Auditors, based on the EDF reports on financial implementation and financial statements at 31 December 2011.

CHAPTER II —   THE COURT’S STATEMENT OF ASSURANCE ON THE EDFs

The Court’s Statement of Assurance on the 8th, 9th and 10th European Development Funds (EDFs) to the European Parliament and the Council — Independent Auditor’s Report

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Reliability of the accounts

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Legality and regularity of the transactions underlying the accounts

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Revenue

Commitments

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Payments

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26 July 2012

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Vítor Manuel da SILVA CALDEIRA

President

| European Court of Auditors |
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| 12, rue Alcide De Gasperi, 1615 Luxembourg, LUXEMBOURG |

European Court of Auditors

12, rue Alcide De Gasperi, 1615 Luxembourg, LUXEMBOURG

Information in support of the Statement of Assurance

Audit scope and approach

| 17. | The observations regarding the reliability of the EDFs’ accounts set out in paragraph VI of the Statement of Assurance, are based on an audit of the financial statements (16) and the report on the financial implementation of the 8th, 9th and 10th EDFs (17). The audit examined, on a test basis, evidence relating to the amounts and disclosures. It included an assessment of the accounting principles used, significant estimates made by management and the overall presentation of the accounts. |
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17.

The observations regarding the reliability of the EDFs’ accounts set out in paragraph VI of the Statement of Assurance, are based on an audit of the financial statements (16) and the report on the financial implementation of the 8th, 9th and 10th EDFs (17). The audit examined, on a test basis, evidence relating to the amounts and disclosures. It included an assessment of the accounting principles used, significant estimates made by management and the overall presentation of the accounts.

| 18. | The Court's overall audit approach and methodology regarding the regularity of transactions underlying the accounts is described in Annex 1.1, Part 2, of Chapter 1 of the 2011 Annual Report of the Court of Auditors on the implementation of the budget. The observations regarding the regularity of EDF transactions, set out in paragraphs VII to X of the Statement of Assurance are based on the following components:






  (a) | an audit of all contributions from Member States and a sample of other types of revenue transactions; |
| --- | --- | --- |

18.

The Court's overall audit approach and methodology regarding the regularity of transactions underlying the accounts is described in Annex 1.1, Part 2, of Chapter 1 of the 2011 Annual Report of the Court of Auditors on the implementation of the budget. The observations regarding the regularity of EDF transactions, set out in paragraphs VII to X of the Statement of Assurance are based on the following components:

(a)

an audit of all contributions from Member States and a sample of other types of revenue transactions;

| (b) | an audit of a sample of 193 transactions, corresponding to 30 global commitments and 163 interim and final payments made by delegations or the Commission headquarters (18). Where necessary, implementing organisations and final beneficiaries were visited on the spot to verify the underlying payments declared in financial reports or cost statements; |
| --- | --- |

(b)

an audit of a sample of 193 transactions, corresponding to 30 global commitments and 163 interim and final payments made by delegations or the Commission headquarters (18). Where necessary, implementing organisations and final beneficiaries were visited on the spot to verify the underlying payments declared in financial reports or cost statements;

| (c) | an assessment of the effectiveness of supervisory and control systems at EuropeAid’s headquarters and delegations; this covered the following elements:






  (i) | control environment and internal control standards; |
| --- | --- | --- |

(c)

an assessment of the effectiveness of supervisory and control systems at EuropeAid’s headquarters and delegations; this covered the following elements:

(i)

control environment and internal control standards;

| (ii) | ex-ante checks of contracts and payments by the authorising officers, including the national authorising officers; |
| --- | --- |

(ii)

ex-ante checks of contracts and payments by the authorising officers, including the national authorising officers;

| (iii) | monitoring and supervision; |
| --- | --- |

(iii)

monitoring and supervision;

| (iv) | external audits; |
| --- | --- |

(iv)

external audits;

| (v) | internal audit; |
| --- | --- |

(v)

internal audit;

| (d) | a review of Commission management representation, comprising an assessment of the annual activity report of EuropeAid. |
| --- | --- |

(d)

a review of Commission management representation, comprising an assessment of the annual activity report of EuropeAid.

Reliability of the accounts

| 19. | The Court found that the accounts of the EDFs for the financial year ended on 31 December 2011 fairly present, in all material respects, the financial position of the EDFs and the results of their operations and cash flows, in accordance with the provisions of the respective Financial Regulations and the relevant accounting rules adopted by the accounting officer. |
| --- | --- |

19.

The Court found that the accounts of the EDFs for the financial year ended on 31 December 2011 fairly present, in all material respects, the financial position of the EDFs and the results of their operations and cash flows, in accordance with the provisions of the respective Financial Regulations and the relevant accounting rules adopted by the accounting officer.

| 19. | The Commission welcomes the Court's positive Statement of Assurance concerning the reliability of the EDF accounts. |
| --- | --- |

19.

| 20. | As in previous years, the Court and EuropeAid’s own checks (see paragraph 40) identified a high frequency of encoding errors (19). While the Court’s audit found that the financial statements are free from material error, encoding errors remain a source of concern as they affect the accuracy of the data used for the preparation of the annual accounts, in particular with respect to the annual cut-off exercise at year-end (20). |
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20.

As in previous years, the Court and EuropeAid’s own checks (see paragraph 40) identified a high frequency of encoding errors (19). While the Court’s audit found that the financial statements are free from material error, encoding errors remain a source of concern as they affect the accuracy of the data used for the preparation of the annual accounts, in particular with respect to the annual cut-off exercise at year-end (20).

| 20. | The Commission shares the Court's concern and will continue to improve the quality of data held in the external aid management information system (CRIS). However, as the Court states, the encoding errors found have had no material impact on the annual accounts.

  See also reply to paragraph 58(b). |
| --- | --- |

20.

See also reply to paragraph 58(b).

Regularity of transactions

| 21. | Annex 1
  contains a summary of the results of transaction testing. |
| --- | --- |

21.

Annex 1
  contains a summary of the results of transaction testing.

Revenue

| 22. | The Court’s audit of revenue transactions found them to be free from material error. |
| --- | --- |

22.

The Court’s audit of revenue transactions found them to be free from material error.

Commitments

| 23. | The Court’s audit of commitments found them to be free from material error. |
| --- | --- |

23.

The Court’s audit of commitments found them to be free from material error.

Payments

| 24. | The Court’s audit found that payments were affected by material error. The Court’s testing of its sample of 163 transactions found 54 (33 %) to be affected by error. The most likely error estimated by the Court is 5,1 % (21). |
| --- | --- |

24.

The Court’s audit found that payments were affected by material error. The Court’s testing of its sample of 163 transactions found 54 (33 %) to be affected by error. The most likely error estimated by the Court is 5,1 % (21).

| 25. | With regard to the 133 project payments sampled, 47 (35 %) were affected by errors, of which 29 (62 %) were quantifiable errors. For the 30 budget support payments tested, 7 (23 %) were affected by errors, all of which were non-quantifiable errors. |
| --- | --- |

25.

With regard to the 133 project payments sampled, 47 (35 %) were affected by errors, of which 29 (62 %) were quantifiable errors. For the 30 budget support payments tested, 7 (23 %) were affected by errors, all of which were non-quantifiable errors.

| 24-26. | The Commission will step up its efforts to prevent, detect and correct such errors in 2012.

  Nevertheless, the Commission underlines the multi-annuality of EuropeAid's control architecture which means that some errors highlighted by the Court would have been corrected in a later period within the normal cycle of external aid controls. Nearly two thirds of payments in the sample concern transactions such as interim payments or clearings for which checks and corrections can still be made at final payment.


  Furthermore, the Commission's monitoring of external aid expenditure does not finish with final payments. An extensive programme of ex-post audits is managed by EuropeAid and ECHO on an annual basis, based on a formal risk assessment process.


  However, given the high risk environment in which development and humanitarian aid operates, the risk of financial error cannot be realistically reduced to zero. |
| --- | --- |

24-26.

Nevertheless, the Commission underlines the multi-annuality of EuropeAid's control architecture which means that some errors highlighted by the Court would have been corrected in a later period within the normal cycle of external aid controls. Nearly two thirds of payments in the sample concern transactions such as interim payments or clearings for which checks and corrections can still be made at final payment.

Furthermore, the Commission's monitoring of external aid expenditure does not finish with final payments. An extensive programme of ex-post audits is managed by EuropeAid and ECHO on an annual basis, based on a formal risk assessment process.

However, given the high risk environment in which development and humanitarian aid operates, the risk of financial error cannot be realistically reduced to zero.

Project payments

| 26. | For the transactions related to projects, the majority of the errors were found in grants and contribution agreements with international organizations; out of the 45 transactions tested, 26 (58 %) were affected by error. Programme estimates (22) were also revealed to be prone to error, with errors found in 10 of the 27 transactions tested. |
| --- | --- |

26.

For the transactions related to projects, the majority of the errors were found in grants and contribution agreements with international organizations; out of the 45 transactions tested, 26 (58 %) were affected by error. Programme estimates (22) were also revealed to be prone to error, with errors found in 10 of the 27 transactions tested.

| 27. | Of the 47 project transactions affected by error 26 had already been subject to external audits contracted by the Commission or the beneficiary. Of the 29 transactions affected by quantifiable errors, 11 were final payments already subjected to the Commissions checks (23). |
| --- | --- |

27.

Of the 47 project transactions affected by error 26 had already been subject to external audits contracted by the Commission or the beneficiary. Of the 29 transactions affected by quantifiable errors, 11 were final payments already subjected to the Commissions checks (23).

| 27. | Ex-ante controls have to be considered within the context of the overall control system as ex-post audits and other checks can still be made after final payment. |
| --- | --- |

27.

| 28. | The types of quantifiable errors found in project payments concerned:






  (a) | occurrence: absence of invoices or other supporting documents to justify expenditure (affecting 5 transactions), prefinancing cleared for expenditure not incurred by beneficiaries (affecting 3 transactions) and quantities claimed in excess of works carried out (affecting 3 transactions); |
| --- | --- | --- |

28.

The types of quantifiable errors found in project payments concerned:

(a)

occurrence: absence of invoices or other supporting documents to justify expenditure (affecting 5 transactions), prefinancing cleared for expenditure not incurred by beneficiaries (affecting 3 transactions) and quantities claimed in excess of works carried out (affecting 3 transactions);

| (b) | eligibility: expenditure incurred outside the implementation period or related to activities and services not included in the contract (affecting 5 transactions), ineligible VAT (affecting 4 transactions), non-compliance with procurement procedures by the beneficiary (affecting 4 transactions), non-compliance with the rules of origin or nationality (affecting 3 transactions) and non-compliance with daily allowances limits (1 transaction); |
| --- | --- |

(b)

eligibility: expenditure incurred outside the implementation period or related to activities and services not included in the contract (affecting 5 transactions), ineligible VAT (affecting 4 transactions), non-compliance with procurement procedures by the beneficiary (affecting 4 transactions), non-compliance with the rules of origin or nationality (affecting 3 transactions) and non-compliance with daily allowances limits (1 transaction);

| (c) | accuracy: calculation errors (affecting 1 transaction) and use of incorrect exchange rates (affecting 3 transactions). |
| --- | --- |

(c)

accuracy: calculation errors (affecting 1 transaction) and use of incorrect exchange rates (affecting 3 transactions).

| 28. (a)-(c) | The Court's observations comprehensively illustrate the main challenges in working with implementing organisations and partner countries in the development and humanitarian aid context.

  Regarding the retention of supporting documents, EuropeAid has implemented an action plan to improve record keeping and archiving in delegations in 2012.


  For clearing, EuropeAid has launched an internal reflection to clarify the interpretation of ‘incurred costs’ for the purposes of clearing which has led to these errors. The Commission considers that these are self-correcting errors since the clearing in excess of cost should be covered by subsequent expenditure.


  Regarding non-conformity with rules of origin, the Commission underlines that the legislation in force does foresee derogations to the ACP/EU origin of goods rules, where duly justified. EuropeAid accepts that contractors should in some cases have made a derogation request, but considers that some of these errors, where conditions allowing derogation to the rule were in place, had no financial impact.


  VAT remains a challenging eligibility issue and is the subject of new proposals in the context of the revision of the Financial Regulation. The Commission operates in countries where it is difficult if not impossible for contractors (often NGOs) to get mandatory VAT payments reimbursed by the State. |
| --- | --- |

28. (a)-(c)

Regarding the retention of supporting documents, EuropeAid has implemented an action plan to improve record keeping and archiving in delegations in 2012.

For clearing, EuropeAid has launched an internal reflection to clarify the interpretation of ‘incurred costs’ for the purposes of clearing which has led to these errors. The Commission considers that these are self-correcting errors since the clearing in excess of cost should be covered by subsequent expenditure.

Regarding non-conformity with rules of origin, the Commission underlines that the legislation in force does foresee derogations to the ACP/EU origin of goods rules, where duly justified. EuropeAid accepts that contractors should in some cases have made a derogation request, but considers that some of these errors, where conditions allowing derogation to the rule were in place, had no financial impact.

VAT remains a challenging eligibility issue and is the subject of new proposals in the context of the revision of the Financial Regulation. The Commission operates in countries where it is difficult if not impossible for contractors (often NGOs) to get mandatory VAT payments reimbursed by the State.

Examples of errors are provided below.

Non-compliance with procurement rules and lack of supporting documents

The Court examined a final payment under a grant agreement providing for water supply, sanitation and hygiene promotion and support for improved management of natural resources in Ethiopia. Contracts were awarded on the basis that the suppliers guaranteed access to spare parts and maintenance facilities, although this was not a criterion set in the tender notice. In addition, part of the expenditure could not be corroborated by supporting documents due to the unsatisfactory quality of the beneficiary’s accounting records. The auditors contracted by the beneficiary to perform the expenditure verification had not identified these problems.

Non-compliance with procurement rules and lack of supporting documents

The access to spare parts and maintenance facilities is an important factor in the award of a contract concerning the purchase of vehicles, notably in countries where this access is difficult. At the time of the tender notice an error was made by the beneficiary in not communicating this criterion to potential suppliers. However, the selection of the supplier to whom the contract was awarded did then take into account the presumed availability of spare parts and maintenance services. Moreover, the audit of this contract had been foreseen in the 2010 audit planning following the delegation’s risk assessment.

Non-compliance with the rule of origin

Expenditure under a grant for rural electrification in Mozambique related to supplies that did not comply with the rule of origin: supplies originated from China, and not from either the European Union or ACP countries. The auditors contracted by the beneficiary to verify the expenditure had not identified this problem.

Non-compliance with the rule of origin

The legislation in force does specifically allow for derogations to the ACP/EU origin of goods rules, where duly justified. It is currently almost impossible to avoid non-EU/ACP electric supplies when implementing these kinds of projects in Africa. The beneficiary should have requested derogation from the Commission which would have been given if duly justified.

| 29. | The most frequent types of non-quantifiable errors concerned insufficient supporting documents (affecting 14 transactions) and the nonadjustment of performance guarantees after changes in the contract (affecting 3 transactions). |
| --- | --- |

29.

The most frequent types of non-quantifiable errors concerned insufficient supporting documents (affecting 14 transactions) and the nonadjustment of performance guarantees after changes in the contract (affecting 3 transactions).

| 29. | See reply to paragraph 28(a)-(c). |
| --- | --- |

29.

Budget support payments

| 30. | As regards budget support payments, the non-quantifiable errors resulted from a lack of a structured demonstration of compliance with the eligibility criteria because PFM achievements were not compared with the objectives set for the period under review. |
| --- | --- |

30.

As regards budget support payments, the non-quantifiable errors resulted from a lack of a structured demonstration of compliance with the eligibility criteria because PFM achievements were not compared with the objectives set for the period under review.

| 30. | In the specific cases concerned the Commission is seeking to bring its assessments into line with its standard practice as applied in other countries. This is based on an annual assessment of progress against clearly identified milestones and objectives which results in a structured demonstration of compliance with the eligibility criterion. In a number of cases in 2011 the Commission withheld disbursements when it was not satisfied that sufficient progress had been made in this area.

  The newly created Budget Support Steering Committee made up of the Directors and Director-General of EuropeAid will examine, among other questions, all sensitive cases. This will improve the governance and assessment of eligibility criteria.


  See also replies to paragraphs 10 and 15. |
| --- | --- |

30.

The newly created Budget Support Steering Committee made up of the Directors and Director-General of EuropeAid will examine, among other questions, all sensitive cases. This will improve the governance and assessment of eligibility criteria.

See also replies to paragraphs 10 and 15.

Effectiveness of systems

| 31. | Annex 2
  contains a summary of the results of the Court’s examination of supervisory and control systems. The Court considers the systems to be partially effective. |
| --- | --- |

31.

Annex 2
  contains a summary of the results of the Court’s examination of supervisory and control systems. The Court considers the systems to be partially effective.

| 31. | See reply to paragraph 56. |
| --- | --- |

31.

| 32. | As indicated in paragraph 6, EuropeAid implements most of the external assistance instruments financed from the general budget and the EDFs. Therefore, unless otherwise specified, the Court’s observations concerning both the effectiveness of supervisory and control systems and the reliability of the director-general’s annual activity report (‘the annual activity report’) and declaration for 2011 refer to EuropeAid’s area of responsibility. |
| --- | --- |

32.

As indicated in paragraph 6, EuropeAid implements most of the external assistance instruments financed from the general budget and the EDFs. Therefore, unless otherwise specified, the Court’s observations concerning both the effectiveness of supervisory and control systems and the reliability of the director-general’s annual activity report (‘the annual activity report’) and declaration for 2011 refer to EuropeAid’s area of responsibility.

Control environment

| 33. | EuropeAid has a clear control strategy to prevent or detect and correct errors and the Commission's Internal Control Standards are largely implemented. It has an action plan to strengthen its management and control systems (24) which addresses most of the observations and recommendations from the Court's previous annual reports. In 2011, EuropeAid has notably introduced the new version of the External Assistance Management Report (EAMR) (see paragraph 39) and issued the ‘Financial Management Toolkit for recipients of EU funds for external actions’ (see paragraph 41). |
| --- | --- |

33.

EuropeAid has a clear control strategy to prevent or detect and correct errors and the Commission's Internal Control Standards are largely implemented. It has an action plan to strengthen its management and control systems (24) which addresses most of the observations and recommendations from the Court's previous annual reports. In 2011, EuropeAid has notably introduced the new version of the External Assistance Management Report (EAMR) (see paragraph 39) and issued the ‘Financial Management Toolkit for recipients of EU funds for external actions’ (see paragraph 41).

| 33. | Other guidance has also been significantly expanded including the publication in 2011 of an online Practical Guide to Contracts as well as an e-learning module on the same topic available via the internet which makes contract award and management guidance publicly available on demand — notably for the benefit of implementing organisations. |
| --- | --- |

33.

| 34. | The annual activity report indicates that human resources policy has continued to be a persistent concern (25) due to the high staff turnover and the reorganisation that took place mid-2011 (see paragraph 6). A cause for concern was that EuropeAid staff members were being used for tasks other than aid management over and above the flexibility limits agreed with the EEAS. EuropeAid considers that, if a re-balancing of resources is not carried out, this will have a negative impact on the assurance which can be given for 2012. |
| --- | --- |

34.

The annual activity report indicates that human resources policy has continued to be a persistent concern (25) due to the high staff turnover and the reorganisation that took place mid-2011 (see paragraph 6). A cause for concern was that EuropeAid staff members were being used for tasks other than aid management over and above the flexibility limits agreed with the EEAS. EuropeAid considers that, if a re-balancing of resources is not carried out, this will have a negative impact on the assurance which can be given for 2012.

| 34. | The high turnover of Contract Agent staff in HQ should be reduced with the entry in force of the new staff regulation. It is expected that the new staff regulation will foresee an extension of the maximum duration of CA contracts of two or three years (i.e. from the current 3-year to a 5 or 6-year duration). In addition, EuropeAid has been granted the possibility to convert a certain number of CA credits into AD official job quotas for 2011, 2012 and 2013, de facto reinforcing its permanent staff.

  The potential risks related to staff resources not being used for the purposes for which they were intended has been mitigated by a number of actions including formal joint EEAS-Commission guidance to Heads of Delegation, specific human resources reporting from the field (in the External Assistance Management Reports) and internal audit planning in 2012.


  The staff rebalancing exercise in delegations is a prerequisite for the implementation of the new development policy, to be able to increase monitoring in the field, to increase thematic know-how and to pursue efficient aid delivery. Human resources are likely to be reinforced in Africa and in the ‘Neighbourhood’ region. |
| --- | --- |

34.

The potential risks related to staff resources not being used for the purposes for which they were intended has been mitigated by a number of actions including formal joint EEAS-Commission guidance to Heads of Delegation, specific human resources reporting from the field (in the External Assistance Management Reports) and internal audit planning in 2012.

The staff rebalancing exercise in delegations is a prerequisite for the implementation of the new development policy, to be able to increase monitoring in the field, to increase thematic know-how and to pursue efficient aid delivery. Human resources are likely to be reinforced in Africa and in the ‘Neighbourhood’ region.

Ex-ante checks

| 35. | The Court assessed ex-ante checks by authorising officers at EuropeAid’s headquarters and in the delegations as partially effective. |
| --- | --- |

35.

The Court assessed ex-ante checks by authorising officers at EuropeAid’s headquarters and in the delegations as partially effective.

| 36. | Given the high risk environment (see paragraph 8), EuropeAid’s control architecture places most reliance on ex-ante checks by Commission staff, external supervisors (for works contracts) or external auditors (for programme estimates, grants and fee-based service contracts) before final project payments. While they detect and correct significant amounts of ineligible expenditure, the frequency of errors found by the Court, including in final claims of expenditure which had been subject to external audits and expenditure verifications, point to weaknesses in these ex-ante checks. |
| --- | --- |

36.

Given the high risk environment (see paragraph 8), EuropeAid’s control architecture places most reliance on ex-ante checks by Commission staff, external supervisors (for works contracts) or external auditors (for programme estimates, grants and fee-based service contracts) before final project payments. While they detect and correct significant amounts of ineligible expenditure, the frequency of errors found by the Court, including in final claims of expenditure which had been subject to external audits and expenditure verifications, point to weaknesses in these ex-ante checks.

| 36. | The internal control architecture put into place by EuropeAid to verify the legality and regularity of expenditure relies on the work of external auditors, technical supervisors and project management staff in addition to the Commission's own internal controls, within a multi-annual framework. The Commission recognises that a certain residual risk of error remains even at the completion of all these checks. Nevertheless, given the challenges of carrying out further ex-ante checks given the associated costs and project implementation delays, the Commission will continue its efforts to improve its current systems in order to provide a reasonable assurance based on a cost-effectiveness assessment.

  See also reply to paragraph 24. |
| --- | --- |

36.

See also reply to paragraph 24.

| 37. | The Court notes that EuropeAid’s ex-post transactional checks have also found procedural errors in ex ante checks, such as incorrect or missing checklists, for about 20 % of the transactions checked (26). The Internal Audit Service (IAS) has also found weaknesses in several key control layers concerning programme estimates and calls for proposals for EDF grants (27). |
| --- | --- |

37.

The Court notes that EuropeAid’s ex-post transactional checks have also found procedural errors in ex ante checks, such as incorrect or missing checklists, for about 20 % of the transactions checked (26). The Internal Audit Service (IAS) has also found weaknesses in several key control layers concerning programme estimates and calls for proposals for EDF grants (27).

| 37. | Ex-post checks are always referred for formal follow-up to the relevant authorising officer. However the procedural errors cited (such as incorrect or missing checklists) had no quantifiable financial impact.

  Following the finalisation of the IAS audit reports the implementation of action plans are underway in 2012 to respond to the IAS recommendations and mitigate the risks identified. |
| --- | --- |

37.

Following the finalisation of the IAS audit reports the implementation of action plans are underway in 2012 to respond to the IAS recommendations and mitigate the risks identified.

Monitoring and supervision

| 38. | The Court considered monitoring and supervision to be effective for EuropeAid’s headquarters and partially effective for delegations. |
| --- | --- |

38.

The Court considered monitoring and supervision to be effective for EuropeAid’s headquarters and partially effective for delegations.

EuropeAid’s headquarters

| 39. | In July 2011, under its Action Plan, EuropeAid implemented, for the first time, the new version of the six-monthly External Assistance Management Report (EAMR) based on key performance indicators (KPIs) and statements of assurance signed by the Heads of Delegation. This strengthens the role of the EAMR as the main accountability tool between delegations and EuropeAid’s headquarters. However, the reliability of KPIs related to financial checks is affected by inaccurate CRIS (28) data. In addition, many indicators are difficult to interpret. |
| --- | --- |

39.

In July 2011, under its Action Plan, EuropeAid implemented, for the first time, the new version of the six-monthly External Assistance Management Report (EAMR) based on key performance indicators (KPIs) and statements of assurance signed by the Heads of Delegation. This strengthens the role of the EAMR as the main accountability tool between delegations and EuropeAid’s headquarters. However, the reliability of KPIs related to financial checks is affected by inaccurate CRIS (28) data. In addition, many indicators are difficult to interpret.

| 39. | The Commission considers that one of the most effective ways of ensuring that CRIS data improves in the medium to long term is to make more visible to Heads of Delegation the consequences of putting incorrect data into the management information system (CRIS). The new EAMR system does this by using CRIS data to ‘feed’ the regular reports from delegations. However the EAMR has been designed to allow delegations to correct and comment on the reporting data, so that incorrect data does not ‘pollute’ accurate reporting but does serve to highlight and correct data and improve entry over time. Even during an EAMR exercise it is possible to refresh data if a delegation spots an error which is easy to amend. The EAMR thus represents a structural step forward in responding to the Court's findings on deficiencies in CRIS data quality (while paying the price of errors being more ‘visible’ in the short term).

  The Commission does not share the Court's view regarding the utility of indicators for monitoring purposes. The KPIs were newly introduced by a steering group representing a wide range of interests and stakeholders for annual reporting on 2011 (in 2012). The KPIs are set of indicators in a standardised format which are meaningful for the purposes of performance monitoring at delegation, region, instrument or portfolio level and — given the complexity of the development environment — can be open to different interpretations in many different contexts. Some have quantified targets — based on well understood historic data — and some do not.


  See also reply to paragraph 59(d). |
| --- | --- |

39.

The Commission does not share the Court's view regarding the utility of indicators for monitoring purposes. The KPIs were newly introduced by a steering group representing a wide range of interests and stakeholders for annual reporting on 2011 (in 2012). The KPIs are set of indicators in a standardised format which are meaningful for the purposes of performance monitoring at delegation, region, instrument or portfolio level and — given the complexity of the development environment — can be open to different interpretations in many different contexts. Some have quantified targets — based on well understood historic data — and some do not.

See also reply to paragraph 59(d).

| 40. | In 2011, EuropeAid made 15 verification visits to check the adequacy of the delegations' internal organisation, systems and processes. These visits were useful in identifying areas which required improvements, such as insufficient expertise available, training needs hindered by human and financial resource constraints, inaccurate CRIS data and inadequate project monitoring. However, an IAS audit noted that there is no evidence for a formal annual verification visit programme based on a documented risk assessment. Furthermore, EuropeAid has not developed procedures for monitoring the implementation of recommendations from these verification visits and the annual activity report does not provide any information in this respect (29). |
| --- | --- |

40.

In 2011, EuropeAid made 15 verification visits to check the adequacy of the delegations' internal organisation, systems and processes. These visits were useful in identifying areas which required improvements, such as insufficient expertise available, training needs hindered by human and financial resource constraints, inaccurate CRIS data and inadequate project monitoring. However, an IAS audit noted that there is no evidence for a formal annual verification visit programme based on a documented risk assessment. Furthermore, EuropeAid has not developed procedures for monitoring the implementation of recommendations from these verification visits and the annual activity report does not provide any information in this respect (29).

| 40. | Action has been taken in relation to the IAS audit mentioned to ensure a more formalised planning process for delegation verification missions.

  For the future, the Commission will consider whether the purpose and the specific objectives of EuropeAid's delegation verification missions need to be re-examined and whether the current risk-based approach to selecting delegations could be complemented by additional selection criteria.


  See also reply to paragraph 59(b). |
| --- | --- |

40.

For the future, the Commission will consider whether the purpose and the specific objectives of EuropeAid's delegation verification missions need to be re-examined and whether the current risk-based approach to selecting delegations could be complemented by additional selection criteria.

See also reply to paragraph 59(b).

| 41. | Audit firms which have signed framework contract agreements with EuropeAid provide annual summary reports on their audit findings and recommendations. These reports provide valuable information on the systemic weaknesses and the measures required to prevent or reduce ineligible expenditure. On this basis, in January 2011, EuropeAid issued the ‘Financial Management Toolkit for recipients of EU funds for external actions’ to improve their knowledge of financial management and eligibility rules. |
| --- | --- |

41.

Audit firms which have signed framework contract agreements with EuropeAid provide annual summary reports on their audit findings and recommendations. These reports provide valuable information on the systemic weaknesses and the measures required to prevent or reduce ineligible expenditure. On this basis, in January 2011, EuropeAid issued the ‘Financial Management Toolkit for recipients of EU funds for external actions’ to improve their knowledge of financial management and eligibility rules.

| 42. | The quality of external audits and verifications contracted by the Commission is subject to a review by EuropeAid, the results of which are presented in an annual report. The annual activity report does not provide information on the results of this review (30). |
| --- | --- |

42.

The quality of external audits and verifications contracted by the Commission is subject to a review by EuropeAid, the results of which are presented in an annual report. The annual activity report does not provide information on the results of this review (30).

| 42. | The Commission did not finalise a 2011 audit quality review in EuropeAid as was done for 2010, so it clearly could not have featured in the Annual Activity Report. In any event, the 2010 audit quality report was not the subject of any text in the 2010 AAR either, not least given that the AAR Standing Instructions do not require its inclusion. |
| --- | --- |

42.

| 43. | The audit and recovery modules of the CRIS information system were linked in 2011 (31). This is a significant improvement but does not yet provide complete and accurate information on the results and follow-up of all ex-ante checks: |
| --- | --- |

43.

The audit and recovery modules of the CRIS information system were linked in 2011 (31). This is a significant improvement but does not yet provide complete and accurate information on the results and follow-up of all ex-ante checks:

| 43. | The Commission is not currently in a position to supply and maintain the necessary additional resources for significant further processing of financial management data. Moreover it is currently engaged in a streamlining process on local IT applications across the Commission. |
| --- | --- |

43.

| (a) | CRIS-Audit does not provide information on the amounts eventually considered ineligible by EuropeAid; |
| --- | --- |

(a)

CRIS-Audit does not provide information on the amounts eventually considered ineligible by EuropeAid;

| (a) | The audit module of the external aid management information system (CRIS) was designed to plan, and record the results of external audits rather than track audit follow-up made by the Commission. However the Commission would like to be able to develop this functionality in the medium term, resources permitting. |
| --- | --- |

(a)

| (b) | CRIS does not provide complete information on the amounts found ineligible and corrected by the Commission’s own ex-ante checks (32); and |
| --- | --- |

(b)

CRIS does not provide complete information on the amounts found ineligible and corrected by the Commission’s own ex-ante checks (32); and

| (b) | CRIS provides robust and adequate information on amounts considered ineligible in the processing of claims, including basic categorisation of ineligible amounts. However contractors do often send a replacement invoice (rather than a credit note and a new invoice) once the Commission notifies them of errors detected, and thus not all effective interventions by Commission staff in detecting errors can be fully captured in the accounting system. Exhaustive information on the results and follow-up of all ex-ante checks would absorb significant resources with a limited benefit and are therefore judged not cost effective. |
| --- | --- |

(b)

| (c) | the accuracy of CRIS data remains problematic, as found by EuropeAid's own ex-post checks. |
| --- | --- |

(c)

the accuracy of CRIS data remains problematic, as found by EuropeAid's own ex-post checks.

| (c) | Although encoding errors found have had no material impact on the annual accounts, the Commission shares the Court's concern to continue to improve the quality of data held in the external aid management information system (CRIS). EuropeAid will re-launch its efforts to improve CRIS data quality in 2012. |
| --- | --- |

(c)

Delegations

| 44. | As in previous years, the Court found poorly documented and ineffective checks at most national authorising officers in EDF beneficiary countries. EuropeAid’s headquarters and the delegations frequently provided technical assistance to improve these checks, but this cannot compensate for the underlying weaknesses. |
| --- | --- |

44.

As in previous years, the Court found poorly documented and ineffective checks at most national authorising officers in EDF beneficiary countries. EuropeAid’s headquarters and the delegations frequently provided technical assistance to improve these checks, but this cannot compensate for the underlying weaknesses.

| 44. | The Commission is aware that national administrations do not systematically perform to the required standards of financial management and therefore implements the bulk of its project support under partially decentralised management, with ex-ante controls carried out by its Delegations on the major part of the portfolio. The Commission continues to reinforce the capacities of National Authorising Officers through a significant training effort. |
| --- | --- |

44.

| 45. | Most delegations visited by the Court in 2011 did not perform a risk-based selection and planning of on-the-spot monitoring visits. Verification missions from EuropeAid’s headquarters (see paragraph 40) found that delegations were often faced with resource constraints on staffing and mission budgets which limited their capacity to perform monitoring activities, such as on-site project monitoring, particularly as regards financial aspects. The important reorganisation which took place in 2011 and the use of resources for tasks other than aid management did not improve this situation (see paragraphs 6 and 34). |
| --- | --- |

45.

Most delegations visited by the Court in 2011 did not perform a risk-based selection and planning of on-the-spot monitoring visits. Verification missions from EuropeAid’s headquarters (see paragraph 40) found that delegations were often faced with resource constraints on staffing and mission budgets which limited their capacity to perform monitoring activities, such as on-site project monitoring, particularly as regards financial aspects. The important reorganisation which took place in 2011 and the use of resources for tasks other than aid management did not improve this situation (see paragraphs 6 and 34).

| 45. | The prioritisation of limited resources is clearly a key factor in decision making regarding the planning and implementation of on-the-spot monitoring activities in delegation. Indeed, given that most on-the-spot monitoring visits are made by operational staff and are not primarily for the purpose of financial checks, risk is rarely the most important factor in the planning of such field visits. On-the-spot visits are one of the elements contributing to the follow-up of activities along with — inter alia — implementation reports, contacts with the beneficiaries, Results Orientated Monitoring reports, evaluations and audits.

  Regarding the use of resources for tasks other than aid management, instructions were sent to delegations in December 2011 in a joint communication from the Commission and the EEAS to clarify the possibilities for and limitations on ‘flexibility’ in the use of staff.


  See also reply to paragraph 59(b). |
| --- | --- |

45.

Regarding the use of resources for tasks other than aid management, instructions were sent to delegations in December 2011 in a joint communication from the Commission and the EEAS to clarify the possibilities for and limitations on ‘flexibility’ in the use of staff.

See also reply to paragraph 59(b).

External audits

| 46. | The Court assessed the external audit function as effective with regard to EuropeAid’s headquarters and partially effective in respect of the delegations. |
| --- | --- |

46.

The Court assessed the external audit function as effective with regard to EuropeAid’s headquarters and partially effective in respect of the delegations.

| 47. | EuropeAid's headquarters have developed a methodology on the set-up, implementation and follow-up of annual audit plans. They closely monitor the delegations' external audit functions and the quality of external audits carried out under the Commission's audit framework contract. |
| --- | --- |

47.

EuropeAid's headquarters have developed a methodology on the set-up, implementation and follow-up of annual audit plans. They closely monitor the delegations' external audit functions and the quality of external audits carried out under the Commission's audit framework contract.

| 48. | In most respects, the delegations managed their external audits in accordance with the applicable methodology. Audit plans were set up in accordance with the guidelines and implemented in a timely manner and audit findings were acted upon, in particular through recoveries and deductions from subsequent payments. However, the Court found that there remained areas where improvement was necessary. As indicated in previous years (33), risk-based audits were not always selected on the basis of a documented risk assessment and were fewer than necessary due to staff constraints and the priority to be given to compulsory audits. In some cases, there were delays in the audit clearance process, which could lead to ineligible expenditure becoming irrecoverable. |
| --- | --- |

48.

In most respects, the delegations managed their external audits in accordance with the applicable methodology. Audit plans were set up in accordance with the guidelines and implemented in a timely manner and audit findings were acted upon, in particular through recoveries and deductions from subsequent payments. However, the Court found that there remained areas where improvement was necessary. As indicated in previous years (33), risk-based audits were not always selected on the basis of a documented risk assessment and were fewer than necessary due to staff constraints and the priority to be given to compulsory audits. In some cases, there were delays in the audit clearance process, which could lead to ineligible expenditure becoming irrecoverable.

| 48. | While it is true that staffing constraints can have a negative impact on the length of the audit clearance process, all mandatory audit reports must be received before the Commission makes final payment, and therefore the risk that funds become irrecoverable is very limited. |
| --- | --- |

48.

Internal Audit

| 49. | The Court assessed internal audit as partially effective. |
| --- | --- |

49.

The Court assessed internal audit as partially effective.

| 50. | The Commission reorganisation that took place in 2011 (see paragraphs 6 and 34) had a major impact on the activity of the Internal Audit Capability (IAC) (34). There was a major change in the staffing of the unit and most of the new staff members had no audit experience. The IAC was able to implement only about half of its initial annual work plan. This is not mentioned in the annual activity report (35). |
| --- | --- |

50.

The Commission reorganisation that took place in 2011 (see paragraphs 6 and 34) had a major impact on the activity of the Internal Audit Capability (IAC) (34). There was a major change in the staffing of the unit and most of the new staff members had no audit experience. The IAC was able to implement only about half of its initial annual work plan. This is not mentioned in the annual activity report (35).

| 50. | The initial 2011 Annual Work Plan was only partially implemented for obvious reasons, since as a result of the reorganisation of EuropeAid in June, an entirely new Annual Work Plan had to be established for the new internal audit unit in early July 2011. This new work plan had to take account of the changes to the Directorate-General and the new staffing situation in the IAC requiring extensive audit training.

  See also reply to paragraph 59(e). |
| --- | --- |

50.

See also reply to paragraph 59(e).

| 51. | In 2011, the Internal Audit Service (IAS) (36) finalised two audits on the financial management of programme estimates and EDF grants. Its findings concur with those of the Court as regards weaknesses in ex-ante checks (see paragraph 36). |
| --- | --- |

51.

In 2011, the Internal Audit Service (IAS) (36) finalised two audits on the financial management of programme estimates and EDF grants. Its findings concur with those of the Court as regards weaknesses in ex-ante checks (see paragraph 36).

| 51. | See reply to paragraph 36. |
| --- | --- |

51.

Reliability of Commission management representation

| 52. | The Director-General declares (37) that he has obtained reasonable assurance that the control procedures put in place give the necessary guarantees concerning the regularity of the underlying transactions. The annual activity report contains no reservation. Instead, it states (38) that, taking into account the design and the results of its multiannual control architecture, EuropeAid does not believe that the residual error rate — once all of its controls have been applied — is material. This is in contrast to the material error rate, high error frequency and partially effective systems found by the Court for 2011. |
| --- | --- |

52.

The Director-General declares (37) that he has obtained reasonable assurance that the control procedures put in place give the necessary guarantees concerning the regularity of the underlying transactions. The annual activity report contains no reservation. Instead, it states (38) that, taking into account the design and the results of its multiannual control architecture, EuropeAid does not believe that the residual error rate — once all of its controls have been applied — is material. This is in contrast to the material error rate, high error frequency and partially effective systems found by the Court for 2011.

| 52. | The Court's methodology for annual most likely estimated error rate and error frequency for the EDFs cannot be directly compared to the criteria for the residual amount at risk (once all multiannual checks have been completed) which is a key factor in Director-General's Statement of Assurance relating to the EuropeAid portfolio as a whole financed by the EDFs and by the EU budget. The Commission notes that the Court's annual most likely estimated error rate for external aid under the EU budget — the larger proportion of the portfolio — has been below materiality for 2010 and 2011, as were the EDFs in 2009.

  See also replies to paragraph 57 and 58(a). |
| --- | --- |

52.

See also replies to paragraph 57 and 58(a).

| 53. | The Court's review of the annual activity report shows that: |
| --- | --- |

53.

The Court's review of the annual activity report shows that:

53.

| (a) | evidence is not presented to support the contention that the residual error rate is below 2 %; |
| --- | --- |

(a)

evidence is not presented to support the contention that the residual error rate is below 2 %;

| (a) | See reply to paragraph 58(a). |
| --- | --- |

(a)

| (b) | strong concerns are expressed about the adequacy of staff resources for aid management (see paragraph 34); and |
| --- | --- |

(b)

strong concerns are expressed about the adequacy of staff resources for aid management (see paragraph 34); and

| (b) | It is now more than 10 years since the devolution process was launched. The Commission has taken stock of its very positive results but also become aware of imbalances which have arisen over time and need to be corrected. In line with the Communication ‘Agenda for Change’ and following the workload assessment of EuropeAid's staff in EU Delegations carried out in 2011, a report on the use of Commission resources in the EU Delegations was submitted to the Secretary General on 12/03/2012 and presented to the Commissioner's Group on External Relations. It entails conclusions on rebalancing of staff between Delegations to better match EuropeAid's needs and priorities with existing resources. The conclusions will be/were submitted for Commission approval in July 2012.

  See also reply to paragraph 34. |
| --- | --- |

(b)

See also reply to paragraph 34.

| (c) | control weaknesses are identified by both the IAS and EuropeAid's own ex-post transactional checks (see paragraphs 37 and 51). |
| --- | --- |

(c)

control weaknesses are identified by both the IAS and EuropeAid's own ex-post transactional checks (see paragraphs 37 and 51).

| (c) | Both the internal audit process and the ex-post transactional checks are designed to pinpoint control weaknesses and are the subject of extensive follow-up, including formal action plans. |
| --- | --- |

(c)

Conclusions and recommendations

Conclusions

| 54. | Based on its audit work, the Court concludes that the EDFs accounts for the financial year ended on 31 December 2011 fairly present, in all material respects, the financial position of the EDFs and the results of their operations and cash flows for the year then ended, in accordance with the provisions of the Financial Regulation and the accounting rules adopted by the accounting officer. |
| --- | --- |

54.

Based on its audit work, the Court concludes that the EDFs accounts for the financial year ended on 31 December 2011 fairly present, in all material respects, the financial position of the EDFs and the results of their operations and cash flows for the year then ended, in accordance with the provisions of the Financial Regulation and the accounting rules adopted by the accounting officer.

| 54. | The Commission welcomes the Court's positive Statement of Assurance on the reliability of the EDF accounts. |
| --- | --- |

54.

| 55. | Based on its audit work, the Court concludes that, for the financial year ended on 31 December 2011: |
| --- | --- |

55.

Based on its audit work, the Court concludes that, for the financial year ended on 31 December 2011:

55.

| (a) | the revenue of the EDFs was free from material error; |
| --- | --- |

(a)

the revenue of the EDFs was free from material error;

| (b) | the global commitments entered into by the EDFs were free from material error; and |
| --- | --- |

(b)

the global commitments entered into by the EDFs were free from material error; and

| (c) | the payments made by the EDFs were affected by material error (see paragraphs 24 to 30). |
| --- | --- |

(c)

the payments made by the EDFs were affected by material error (see paragraphs 24 to 30).

| (c) | The Commission will step up its efforts to prevent, detect and correct such errors in 2012.

  Nevertheless, the Commission underlines the multi-annuality of EuropeAid's control architecture which means that some errors highlighted by the Court would have been corrected in a later period within the normal cycle of external aid controls. Nearly two thirds of payments in the sample concern transactions such as interim payments or clearings for which checks and corrections can still be made at final payment. Furthermore, the Commission's monitoring of external aid expenditure does not finish with final payments. An extensive programme of ex-post audits is managed by EuropeAid and ECHO on an annual basis, based on a formal risk assessment process.


  However, given the high risk environment in which development and humanitarian aid operates, the risk of financial error cannot be realistically reduced to zero. |
| --- | --- |

(c)

Nevertheless, the Commission underlines the multi-annuality of EuropeAid's control architecture which means that some errors highlighted by the Court would have been corrected in a later period within the normal cycle of external aid controls. Nearly two thirds of payments in the sample concern transactions such as interim payments or clearings for which checks and corrections can still be made at final payment. Furthermore, the Commission's monitoring of external aid expenditure does not finish with final payments. An extensive programme of ex-post audits is managed by EuropeAid and ECHO on an annual basis, based on a formal risk assessment process.

However, given the high risk environment in which development and humanitarian aid operates, the risk of financial error cannot be realistically reduced to zero.

| 56. | Based on its audit work, the Court found that the examined supervisory and control systems of EuropeAid were partially effective (see paragraphs 31 to 53). |
| --- | --- |

56.

Based on its audit work, the Court found that the examined supervisory and control systems of EuropeAid were partially effective (see paragraphs 31 to 53).

| 56. | The Commission has designed its controls to cover the full lifecycle of its multi-annual projects. It believes that these supervisory and control systems are effective and have significantly improved year on year, covering both the operation of the EDFs and activities financed by the EU budget. Despite the challenges of a high risk external aid environment, the Court's most likely estimated annual error rate for external aid under the EU budget has been below materiality for 2010 and 2011, and was below materiality for the EDFs in 2009. |
| --- | --- |

56.

| 57. | The Court concludes that the quality of CRIS data remains a source of concern and affects both the accuracy of the data used for the preparation of the annual accounts (see paragraph 20) and the effectiveness of supervisory and control systems (see paragraphs 39, 40 and 43) (39). |
| --- | --- |

57.

The Court concludes that the quality of CRIS data remains a source of concern and affects both the accuracy of the data used for the preparation of the annual accounts (see paragraph 20) and the effectiveness of supervisory and control systems (see paragraphs 39, 40 and 43) (39).

| 57. | The Commission shares the Court's concern to continue to improve the quality of data held in the external aid management information system (CRIS). However, as the Court states in paragraph 20, the encoding errors found have had no material impact on the annual accounts. |
| --- | --- |

57.

Recommendations

| 58. | Annex 3
  shows the result of the Court’s review of progress in addressing recommendations made in its 2009 Annual Report. The following points should be noted: |
| --- | --- |

58.

Annex 3
  shows the result of the Court’s review of progress in addressing recommendations made in its 2009 Annual Report. The following points should be noted:

| 58. | With particular reference to the provisions of the Financial Regulation applicable to the 10th European Development Fund (42) and in view of the proposed reduction of its available resources, the Commission will consider the cost and benefits of the Court's recommendations before taking and/or proposing appropriate action. |
| --- | --- |

58.

| (a) | EuropeAid has made significant progress in implementing many of the Court’s recommendations. This is notably the case in relation to the development of the methodology for estimating the residual error rate, the dissemination of the financial management toolkit to improve the beneficiaries’ knowledge of eligibility rules, the planning and monitoring of audits and the assessment of eligibility for budget support; |
| --- | --- |

(a)

EuropeAid has made significant progress in implementing many of the Court’s recommendations. This is notably the case in relation to the development of the methodology for estimating the residual error rate, the dissemination of the financial management toolkit to improve the beneficiaries’ knowledge of eligibility rules, the planning and monitoring of audits and the assessment of eligibility for budget support;

| (a) | The Commission's results for the estimation of EuropeAid's residual error rate i.e. the financial impact of errors remaining after all planned controls are completed) will be available in early 2013 for the 2012 reporting period. |
| --- | --- |

(a)

| (b) | further efforts are necessary to fully implement the Court’s recommendations concerning the quality of CRIS data, the follow-up of audit findings and recommendations and the assessment of the cost-effectiveness of the transactional ex-post control system. |
| --- | --- |

(b)

further efforts are necessary to fully implement the Court’s recommendations concerning the quality of CRIS data, the follow-up of audit findings and recommendations and the assessment of the cost-effectiveness of the transactional ex-post control system.

| (b) | EuropeAid will re-launch its efforts to improve CRIS data quality in 2012 and better link the financial findings of audits to the recovery of funds. The transactional ex-post system was suspended in 2012. |
| --- | --- |

(b)

| 59. | Following this review and the findings and conclusions for 2011, the Court recommends that EuropeAid: |
| --- | --- |

59.

Following this review and the findings and conclusions for 2011, the Court recommends that EuropeAid:

59.

| (a) | improve the management of contract awarding procedures, by setting out clear selection criteria and better documenting the evaluation process (see paragraph 28(b)); |
| --- | --- |

(a)

improve the management of contract awarding procedures, by setting out clear selection criteria and better documenting the evaluation process (see paragraph 28(b));

| (a) | The Commission will launch a process designed to learn the lessons of the errors detected by the Court in the contract awarding process and a revision of the Practical Guide to Contracts will be issued in 2013. |
| --- | --- |

(a)

| (b) | introduce documented risk-based planning and systematic follow-up for verification visits (see paragraph 40) and on-the-spot monitoring visits (see paragraph 45); |
| --- | --- |

(b)

introduce documented risk-based planning and systematic follow-up for verification visits (see paragraph 40) and on-the-spot monitoring visits (see paragraph 45);

| (b) | The Commission will consider whether the purpose and the specific objectives of EuropeAid's delegation verification missions need to be re-examined.

  EuropeAid will introduce a more formal assessment and annual planning process for both verification missions to delegations and on-the-spot monitoring of projects. However the Commission considers that the current risk-based selection process may usefully be complemented by additional selection criteria.


  See also reply to paragraph 40. |
| --- | --- |

(b)

EuropeAid will introduce a more formal assessment and annual planning process for both verification missions to delegations and on-the-spot monitoring of projects. However the Commission considers that the current risk-based selection process may usefully be complemented by additional selection criteria.

See also reply to paragraph 40.

| (c) | render compulsory the guidelines on risk analysis for the preparation of annual audit plans by delegations and EuropeAid’s headquarters (see paragraph 48); |
| --- | --- |

(c)

render compulsory the guidelines on risk analysis for the preparation of annual audit plans by delegations and EuropeAid’s headquarters (see paragraph 48);

| (c) | The Commission will consider making EuropeAid's audit planning risk analysis methodology compulsory for the 2013 period onwards. |
| --- | --- |

(c)

| (d) | review the design of KPIs to ensure that they are unambiguous and easy to interpret (see paragraph 39); |
| --- | --- |

(d)

review the design of KPIs to ensure that they are unambiguous and easy to interpret (see paragraph 39);

| (d) | The Commission is not able to undertake to review the EuropeAid's Key Performance Indicators in the short to medium term. The KPIs were newly introduced (by a steering group representing a wide range of interests and stakeholders) for annual reporting on 2011 (in 2012) and the Commission does not yet have sufficient information or analysis of the dataset. However they may well require adjustment over time once the new reporting system is embedded. |
| --- | --- |

(d)

| (e) | assess the IAC’s capacity to perform its task effectively (see paragraph 50). |
| --- | --- |

(e)

assess the IAC’s capacity to perform its task effectively (see paragraph 50).

| (e) | The Commission will assess the capacity of EuropeAid's Internal Audit Unit (IAC) and consider a potential reinforcement if found to be necessary. |
| --- | --- |

(e)

Given the commitment to reduce its overall staff, EuropeAid will look in the first instance at possibilities for enhancing available expertise.

---

(1)  See Articles 118, 125 and 134 of Council Regulation (EC) No 215/2008 of 18 February 2008 on the Financial Regulation applicable to the 10th European Development Fund (OJ L 78, 19.3.2008, p. 1) and the Court’s Opinion No 9/2007 on the proposal for this Regulation (OJ C 23, 28.1.2008, p. 3).

(2)  A tripartite agreement between the EIB, the Commission and the Court (Article 134 of Regulation (EC) No 215/2008) sets out rules for the audit of these operations by the Court.

(3)  European Neighbourhood and Partnership Instrument, Development Cooperation Instrument, Financing Instrument for the Promotion of Democracy and Human Rights, Instrument for Stability, Instrument for Nuclear Safety Cooperation, Facility for rapid response to soaring food prices in developing countries.

(4)  See Chapter 7 ‘External relations, aid and enlargement’ of the Court’s 2011 Annual Report on the implementation of the EU budget.

(5)  Representing 1,2 % of payments made in 2011.

(6)  Budget support involves the transfer of funds by the Commission to the national treasury of the partner country to provide additional budgetary resources to support a national development strategy.

(7)  Articles 21 to 29 of Regulation (EC) No 215/2008.

(8)  Article 61(2).

(9)  See paragraph 46 of the Court’s Annual Report on the activities of the sixth, seventh, eighth and ninth European Development Funds (EDFs) for the financial year 2003 (OJ C 293, 30.11.2004, p. 315).

(10)  For an explanation of this notional approach, see paragraph 7.11 of the Court’s 2011 Annual Report on the implementation of the EU budget.

(11)  Old unspent commitments are funds committed more than five years ago and still unspent. Dormant unspent commitments are funds committed but neither contracted nor spent in more than two years.

(12)  Articles 118 and 124 of Regulation (EC) No 215/2008.

(13)  The financial statements comprise the balance sheet, the statement of economic outturn, the statement of cash flow, the statement of changes in net assets and the table of items payable to the European Development Funds.

(14)  Pursuant to Articles 2, 3, 4, 125(4) and 134 of the Financial Regulation applicable to the 10th EDF this Statement of Assurance does not extend to the part of the EDFs resources that are managed by the EIB and for which it is responsible.

(15)  The accounting rules adopted by the EDF accounting officer are derived from International Public Sector Accounting Standards (IPSAS) issued by the International Federation of Accountants or, in their absence, International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board. In accordance with the Financial Regulation, the financial statements for the financial year 2011 were prepared on the basis of these accounting rules adopted by the EDF accounting officer, which adapt accruals based accounting principles to the specific environment of the European Union, while the report on implementation of the EDFs continues to be primarily based on movements of cash.

(16)  See Article 122 of Regulation (EC) No 215/2008: the financial statements shall comprise the balance sheet, the statement of economic outturn, the statement of cash flow, and the table of items payable to the EDF.

(17)  See Article 123 of Regulation (EC) No 215/2008: the reports on financial implementation shall comprise tables describing the appropriations, the commitments and the payments.

(18)  EuropeAid: 125 projects and 30 budget support payments; DG ECHO: 8 project payments on humanitarian aid.

(19)  E.g.: contract type, contract start and end dates, management mode.

(20)  The cut-off exercise seeks to ensure that both revenue and expenditure is completely and accurately recorded in the correct accounting period.

(21)  The Court calculates its estimate of error from a representative statistical sample. The figure quoted is the best estimate (known as the MLE). The Court has 95 % confidence that the rate of error in the population lies between LEL 2,0 % and UEL 8,1 % (the lower and upper error limits respectively).

(22)  A programme estimate is prepared, usually annually, to establish a work programme and the resources necessary to carry this out. It is implemented by the institution or beneficiary concerned but subject to prior approval by the partner country's representative and the Commission.

(23)  See also paragraph 7.17 of Chapter 7 ‘External relations, aid and enlargement’ of the Court’s 2011 Annual Report on the implementation of the EU budget.

(24)  Action plan for a strengthened EuropeAid management and control pyramid, 19.11.2010.

(25)  Pages 21, 37, 38 and 45.

(26)  Annual activity report, p. 33.

(27)  Annual activity report, p. 40.

(28)  Common RELEX Information System.

(29)  Page 38.

(30)  Page 30.

(31)  As stated in the Commission’s reply to paragraphs 42 and 63(c) of the Court’s 2010 Annual Report.

(32)  E.g. cases of invoices sent back to beneficiaries or contractors for correction or invoices paid including identified ineligible expenditure for which a correction is to be made in a subsequent invoice.

(33)  Paragraph 45 of the 2009 Annual Report and paragraph 48 of the 2010 Annual Report.

(34)  The IAC is a unit of a Commission Directorate-General. It is managed by a Head of Unit who reports directly to the Director-General. Its task is to provide independent assurance on the effectiveness of the internal control system with a view to improving the Directorate-General’s operations.

(35)  Pages 39 and 40.

(36)  The IAS is a Directorate-General of the Commission. It is headed by the Commission’s Internal Auditor and reports to its Audit Progress Committee. Its task is to provide independent assurance on the effectiveness of the internal control systems and to help the Commission by means of opinions, advice and recommendations.

(37)  Page 47.

(38)  Page 46.

(39)  See also the Court’s Special Report No 5/2012 ‘The Common External Relations Information System (CRIS)’ (http://eca.europa.eu).

(40)  See http://ec.europa.eu/europeaid/what/economic-support/documents/guidelines_budget_support_en.pdf

(41)  See the Commission's Communication on The Future Approach to EU Budget Support to Third Countries (COM(2011) 638 final).

(42)  Articles 11-13.

(43)  Financial Year 2011 net amounts.

(44)  Global commitments relate to financing decisions. Individual commitments relate to individual contracts.

Source: European Court of Auditors on the basis of data provided by DG DEVCO.

(45)  Include initial allocations to the 8th, 9th and 10th EDFs, co-financing, interest, sundry resources and transfers from previous EDFs.

(46)  As a percentage of resources.

(47)  Negative amounts correspond to decommitments.

(48)  Global commitments relate to financing decisions.

(49)  Individual commitments relate to individual contracts.

(50)  Net commitments after decommitments. Net payments after recoveries.

Source: Court of Auditors, based on the EDF reports on financial implementation and financial statements at 31 December 2011.

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ANNEX 1

RESULTS OF TRANSACTION TESTING FOR THE EUROPEAN DEVELOPMENT FUNDS

| | 2011 | 2010 | 2009 | 2008 |
| --- | --- | --- | --- | --- |
| Projects | Budget support | Total |
| SIZE AND STRUCTURE OF THE SAMPLE |
| Total commitments | 27 | 3 | 30 | 30 | 50 | 45 |
| Total transactions (of which): | 133 | 30 | 163 | 165 | 170 | 170 |
| Advances | 0 | 0 | 0 | 0 | 0 | 40 |
| Interim/Final payments | 133 | 30 | 163 | 165 | 170 | 130 |
| RESULTS OF TESTING
   (1)
   (2) |
| Proportion (number) of transactions tested found to be: |
| Free of error | 65 % | (86) | 77 % | (23) | 67 % | (109) | 73 % | 78 % | 76 % |
| Affected by one or more errors | 35 % | (47) | 23 % | (7) | 33 % | (54) | 27 % | 22 % | 24 % |
| Analysis of transactions affected by error |
| Analysis by type of error |
| Non-quantifiable errors: | 38 % | (18) | 100 % | (7) | 46 % | (25) | 49 % | 65 % | 61 % |
| Quantifiable errors: | 62 % | (29) | 0 % | (0) | 54 % | (29) | 51 % | 35 % | 39 % |
| Eligibility | 52 % | (15) | 0 % | (0) | 52 % | (15) | 70 % | 23 % | 44 % |
| Occurrence | 38 % | (11) | 0 % | (0) | 38 % | (11) | 17 % | 23 % | 38 % |
| Accuracy | 10 % | (3) | 0 % | (0) | 10 % | (3) | 13 % | 54 % | 19 % |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| Most likely error rate | 5,1 % | | | |
| Upper error limit (UEL) | 8,1 % | | | |
| Lower error limit (LEL) | 2,0 % | | | |

2011

2010

2009

2008

Projects

Budget support

Total

SIZE AND STRUCTURE OF THE SAMPLE

Total commitments

27

3

30

30

50

45

Total transactions (of which):

133

30

163

165

170

170

Advances

0

0

0

0

0

40

Interim/Final payments

133

30

163

165

170

130

RESULTS OF TESTING
   (1)
   (2)

Proportion (number) of transactions tested found to be:

Free of error

65 %

(86)

77 %

(23)

67 %

(109)

73 %

78 %

76 %

Affected by one or more errors

35 %

(47)

23 %

(7)

33 %

(54)

27 %

22 %

24 %

Analysis of transactions affected by error

Analysis by type of error

Non-quantifiable errors:

38 %

(18)

100 %

(7)

46 %

(25)

49 %

65 %

61 %

Quantifiable errors:

62 %

(29)

0 %

(0)

54 %

(29)

51 %

35 %

39 %

Eligibility

52 %

(15)

0 %

(0)

52 %

(15)

70 %

23 %

44 %

Occurrence

38 %

(11)

0 %

(0)

38 %

(11)

17 %

23 %

38 %

Accuracy

10 %

(3)

0 %

(0)

10 %

(3)

13 %

54 %

19 %

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Most likely error rate

5,1 %

Upper error limit (UEL)

8,1 %

Lower error limit (LEL)

2,0 %

---

(1)  To improve insight into areas with different risk profiles within the policy group, the sample was split up into segments.

(2)  Numbers quoted in brackets represent the actual number of transactions.

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ANNEX 2

RESULTS OF EXAMINATION OF SYSTEMS FOR THE EUROPEAN DEVELOPMENT FUNDS AND DEVELOPMENT AID UNDER THE GENERAL BUDGET

Assessment of the systems examined

| System concerned | Ex-ante controls | Monitoring and supervision | External audits | Internal audits | Overall assessment |
| --- | --- | --- | --- | --- | --- |
| Central systems EuropeAid | Partially effective | Effective | Effective | Partially effective | Partially effective |
| Delegations | Partially effective | Partially effective | Partially effective | N/A | Partially effective |

System concerned

Ex-ante controls

Monitoring and supervision

External audits

Internal audits

Overall assessment

Central systems EuropeAid

Partially effective

Effective

Effective

Partially effective

Partially effective

Delegations

Partially effective

Partially effective

Partially effective

N/A

Partially effective

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ANNEX 3

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR THE EUROPEAN DEVELOPMENT FUNDS

| Year | Court recommendation | Court's analysis of the progress made | Commission reply |
| --- | --- | --- | --- |
| 2009 | EuropeAid should, in the context of its planned review of its overall control strategy, develop a key indicator for the estimated financial impact of residual errors after all ex-ante and ex-post controls have been implemented, based for example in an examination of a representative statistical sample of closed projects (2009 Annual Report, paragraph 54(a)). | EuropeAid has adopted a methodology to estimate the residual error rate and contracted an external audit firm to perform this work. The results of the first exercise should be available to be taken in consideration in EuropeAid's 2012 AAR. | The implementation of this recommendation is ongoing. The Commission's work is on track in relation to the establishment of the residual error rate for the EuropeAid portfolio. |
| EuropeAid should, in the context of this review, assess the cost-effectiveness of the various controls, notably of the transactional ex-post control system (2009 Annual Report, paragraph 54(b)). | In its replies to the 2010 Annual Report, the Commission has stated that it had started work on the cost effectiveness of controls in 2010. This work was to be reviewed and relaunched in 2011/2012 in the context of the final outcome of the current revision of the Financial Regulation. Limited progress was made in 2011. | The implementation of this recommendation is ongoing. Progress was indeed made in 2011 in relation to the costs and benefits of controls as set out in the Annual Activity Report 2011 which details the costs of many internal controls (e.g. audits, training, ex post controls) and reports on new and innovative ways of measuring benefits such as key performance indicators lifted from CRIS data and pre and post training tests. Cost benefit analysis has for example led to the suspension of ex-post transactional controls in 2012. |
| EuropeAid should finalise and disseminate the financial management toolkit targeting the high inherent risk of errors at the level of implementing organisations, contractors and beneficiaries to ensure adequate knowledge of financial management and eligibility rules (2009 Annual Report, paragraph 54(c)). | The Financial Toolkit was finalised and disseminated in early 2011. | The Commission believes that this recommendation has been fully implemented. |
| EuropeAid should continue its efforts to ensure that the Delegations record data in CRIS Audit in a comprehensive and timely manner (2009 Annual Report, paragraph 54(d)). | The quality of CRIS data remains an issue. EuropeAid has stated its intention to relaunch its efforts in 2012. | The implementation of this recommendation is ongoing. The Commission shares the Court's concern to continue to improve the quality of data held in the external aid management information system (CRIS). EuropeAid will relaunch its efforts to improve CRIS data quality in 2012. |
| 2009 | The design of CRIS Audit should be modified to provide information on the amounts of final ineligible expenditure and financial corrections done after the audit clearance process with the auditee has been completed (2009 Annual Report, paragraph 54(e)). | As indicated in the Commission’s reply to the Court’s 2010 Annual Report, the audit and recovery modules of the CRIS information system were linked in 2011. This is a significant improvement but does not provide yet complete information on the results and follow-up of audits.
  CRIS-Audit does not provide information of the amounts eventually considered ineligible by EuropeAid after the contradictory process with the beneficiaries, including in respect of amounts which the auditors considered warranted further consideration by EuropeAid. | The audit module of the external aid management information system (CRIS) was designed to plan, and record the results of external audits rather than track audit follow-up made by the Commission. However the Commission would like to be able to develop this functionality in the medium term, resources permitting. |
| EuropeAid should ensure that the specific conditions for performance-based variable tranches clearly specify the indicators, targets, calculation methods and verification sources (2009 Annual Report, paragraph 55(a)). | This recommendation has been fully implemented. | |
| EuropeAid should ensure that Delegations’ reports provide a structured and formalised demonstration of public finance management progress by clearly setting the criteria against which progress was to be assessed (i.e. the results that the recipient government had to achieve during the period concerned), the progress made and the reasons why the reform programme may have not been implemented according to plan (2009 Annual Report, paragraph 55(b)). | The quality of the assessment of the PFM general eligibility criterion has improved since the introduction of the new reporting format for the Delegation’s PFM Annual Monitoring Reports in 2010. However, the Court still detected cases in 2011 where this assessment was not sufficiently structured and formalised, as the PFM achievements were not compared with the objectives/targets set for the reference period. | The Commission believes that this recommendation has been fully implemented. Nevertheless efforts will continue for the improvement of the budget support performance framework, notably in the revision of Budget Support Guidelines due to be issued in 2012. |

Year

Court recommendation

Court's analysis of the progress made

Commission reply

2009

EuropeAid should, in the context of its planned review of its overall control strategy, develop a key indicator for the estimated financial impact of residual errors after all ex-ante and ex-post controls have been implemented, based for example in an examination of a representative statistical sample of closed projects (2009 Annual Report, paragraph 54(a)).

EuropeAid has adopted a methodology to estimate the residual error rate and contracted an external audit firm to perform this work. The results of the first exercise should be available to be taken in consideration in EuropeAid's 2012 AAR.

The implementation of this recommendation is ongoing. The Commission's work is on track in relation to the establishment of the residual error rate for the EuropeAid portfolio.

EuropeAid should, in the context of this review, assess the cost-effectiveness of the various controls, notably of the transactional ex-post control system (2009 Annual Report, paragraph 54(b)).

In its replies to the 2010 Annual Report, the Commission has stated that it had started work on the cost effectiveness of controls in 2010. This work was to be reviewed and relaunched in 2011/2012 in the context of the final outcome of the current revision of the Financial Regulation. Limited progress was made in 2011.

The implementation of this recommendation is ongoing. Progress was indeed made in 2011 in relation to the costs and benefits of controls as set out in the Annual Activity Report 2011 which details the costs of many internal controls (e.g. audits, training, ex post controls) and reports on new and innovative ways of measuring benefits such as key performance indicators lifted from CRIS data and pre and post training tests. Cost benefit analysis has for example led to the suspension of ex-post transactional controls in 2012.

EuropeAid should finalise and disseminate the financial management toolkit targeting the high inherent risk of errors at the level of implementing organisations, contractors and beneficiaries to ensure adequate knowledge of financial management and eligibility rules (2009 Annual Report, paragraph 54(c)).

The Financial Toolkit was finalised and disseminated in early 2011.

The Commission believes that this recommendation has been fully implemented.

EuropeAid should continue its efforts to ensure that the Delegations record data in CRIS Audit in a comprehensive and timely manner (2009 Annual Report, paragraph 54(d)).

The quality of CRIS data remains an issue. EuropeAid has stated its intention to relaunch its efforts in 2012.

The implementation of this recommendation is ongoing. The Commission shares the Court's concern to continue to improve the quality of data held in the external aid management information system (CRIS). EuropeAid will relaunch its efforts to improve CRIS data quality in 2012.

2009

The design of CRIS Audit should be modified to provide information on the amounts of final ineligible expenditure and financial corrections done after the audit clearance process with the auditee has been completed (2009 Annual Report, paragraph 54(e)).

As indicated in the Commission’s reply to the Court’s 2010 Annual Report, the audit and recovery modules of the CRIS information system were linked in 2011. This is a significant improvement but does not provide yet complete information on the results and follow-up of audits.

CRIS-Audit does not provide information of the amounts eventually considered ineligible by EuropeAid after the contradictory process with the beneficiaries, including in respect of amounts which the auditors considered warranted further consideration by EuropeAid.

The audit module of the external aid management information system (CRIS) was designed to plan, and record the results of external audits rather than track audit follow-up made by the Commission. However the Commission would like to be able to develop this functionality in the medium term, resources permitting.

EuropeAid should ensure that the specific conditions for performance-based variable tranches clearly specify the indicators, targets, calculation methods and verification sources (2009 Annual Report, paragraph 55(a)).

This recommendation has been fully implemented.

EuropeAid should ensure that Delegations’ reports provide a structured and formalised demonstration of public finance management progress by clearly setting the criteria against which progress was to be assessed (i.e. the results that the recipient government had to achieve during the period concerned), the progress made and the reasons why the reform programme may have not been implemented according to plan (2009 Annual Report, paragraph 55(b)).

The quality of the assessment of the PFM general eligibility criterion has improved since the introduction of the new reporting format for the Delegation’s PFM Annual Monitoring Reports in 2010. However, the Court still detected cases in 2011 where this assessment was not sufficiently structured and formalised, as the PFM achievements were not compared with the objectives/targets set for the reference period.

The Commission believes that this recommendation has been fully implemented. Nevertheless efforts will continue for the improvement of the budget support performance framework, notably in the revision of Budget Support Guidelines due to be issued in 2012.

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