# C_2017322EN.01028101.xml

| 28.9.2017 | EN | Official Journal of the European Union | C 322/281 |
| --- | --- | --- | --- |

28.9.2017

EN

Official Journal of the European Union

C 322/281

---

ANNUAL REPORT ON THE ACTIVITIES FUNDED BY THE 8TH, 9TH, 10TH AND 11TH EUROPEAN DEVELOPMENT FUNDS FOR THE FINANCIAL YEAR 2016

(2017/C 322/02)

Annual report on the activities funded by the 8th, 9th, 10th and 11th European Development Funds for the financial year 2016

Annual report on the activities funded by the 8th, 9th, 10th and 11th European Development Funds for the financial year 2016

TABLE OF CONTENTS

| Introduction | 1-5 |
| --- | --- |

| Brief description of the European Development Funds | 2-5 |
| --- | --- |

| Chapter I — Financial Implementation of the 8th, 9th, 10th and 11th EDFs | 6-9 |
| --- | --- |

| Chapter II — The Court’s statement of assurance on the EDFs | 10-36 |
| --- | --- |

| The Court’s statement of assurance on the 8th, 9th, 10th and 11th EDFs to the European Parliament and the Council — Independent auditor’s report | I-XVIII |
| --- | --- |

| Information in support of the statement of assurance | 10-36 |
| --- | --- |

| Audit scope and approach | 10-13 |
| --- | --- |

| Reliability of accounts | 14 |
| --- | --- |

| Regularity of transactions | 15-26 |
| --- | --- |

| Annual activity report and other governance arrangements | 27-36 |
| --- | --- |

| Conclusion and recommendations | 37-40 |
| --- | --- |

| Conclusion | 37-38 |
| --- | --- |

| Recommendations | 39-40 |
| --- | --- |

| Annex 1 — | Results of transaction testing for the European Development Funds |
| --- | --- |

Annex 1 —

| Annex 2 — | Overview of errors with an impact of at least 20 % |
| --- | --- |

Annex 2 —

| Annex 3 — | Follow-up of previous recommendations for the European Development Funds |
| --- | --- |

Annex 3 —

| THE COURT’S OBSERVATIONS | |
| --- | --- |
| INTRODUCTION |
| 1. | This annual report presents our findings on the 8th, 9th, 10th and 11th European Development Funds (EDFs).
  Box 1
  gives an overview of the activities and spending for this area in 2016. |

THE COURT’S OBSERVATIONS

THE COURT’S OBSERVATIONS

INTRODUCTION

INTRODUCTION

1.

This annual report presents our findings on the 8th, 9th, 10th and 11th European Development Funds (EDFs).
  Box 1
  gives an overview of the activities and spending for this area in 2016.

Box 1

Box 1 —   European Development Funds — 2016 financial overview

Box 1 —

European Development Funds — 2016 financial overview

Image

Table 1 — European Development Funds — Key information 2016

Table 1 — European Development Funds — Key information 2016

| (million euro) |
| --- |
| Total operational payments (projects) | 2 676 |
| Total operational payments (budget support) | 644 |
| Total administrative payments (42) | 96 |
| Total payments | 3 416 |
| - advances and EDF contributions to EU Trust Funds | 2 057 |
| + clearings of advances and EU Trust Funds | 1 477 |
| Audited population | 2 836 |
| | |
| Total individual commitments
   (43) | 4 234 |
| | |
| Total global commitments
   (43) | 6 491 |

(million euro)

Total operational payments (projects)

2 676

Total operational payments (budget support)

644

Total administrative payments (42)

42

96

Total payments

Total payments

3 416

3 416

- advances and EDF contributions to EU Trust Funds

- advances and EDF contributions to EU Trust Funds

2 057

2 057

- clearings of advances and EU Trust Funds

- clearings of advances and EU Trust Funds

1 477

1 477

Audited population

Audited population

2 836

2 836

Total individual commitments
   (43)

Total individual commitments

43

4 234

4 234

Total global commitments
   (43)

Total global commitments

43

6 491

6 491

THE COURT’S OBSERVATIONS

THE COURT’S OBSERVATIONS

Brief description of the European Development Funds

Brief description of the European Development Funds

| 2. | Launched in 1959, the EDFs are the main instrument by which the European Union (EU) provides development cooperation aid to the African, Caribbean and Pacific (ACP) countries 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 governing the EU’s relations with ACP countries and OCTs. Its primary objective is to reduce and ultimately eradicate poverty. |
| --- | --- |

2.

Launched in 1959, the EDFs are the main instrument by which the European Union (EU) provides development cooperation aid to the African, Caribbean and Pacific (ACP) countries 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 governing the EU’s relations with ACP countries and OCTs. Its primary objective is to reduce and ultimately eradicate poverty.

| 3. | The EDFs are particular in that:






  (a) | they are funded by the Member States according to quotas, or ‘contribution keys’, which are set by the national governments at the Council of the European Union; |
| --- | --- | --- |

3.

The EDFs are particular in that:

(a)

they are funded by the Member States according to quotas, or ‘contribution keys’, which are set by the national governments at the Council of the European Union;

| (b) | they are managed by the Commission, outside the framework of the EU general budget, and the European Investment Bank (EIB); |
| --- | --- |

(b)

they are managed by the Commission, outside the framework of the EU general budget, and the European Investment Bank (EIB);

| (c) | due to the intergovernmental nature of the EDFs, the European Parliament exercises a more limited role in their functioning than it does for the development cooperation instruments financed by the EU general budget; notably, it is not involved in establishing and allocating EDF resources. However, the European Parliament is still the discharge authority, except for the Investment Facility, which is managed by the EIB and therefore outside the scope of our audit (1)
   (2); |
| --- | --- |

(c)

due to the intergovernmental nature of the EDFs, the European Parliament exercises a more limited role in their functioning than it does for the development cooperation instruments financed by the EU general budget; notably, it is not involved in establishing and allocating EDF resources. However, the European Parliament is still the discharge authority, except for the Investment Facility, which is managed by the EIB and therefore outside the scope of our audit (1)
   (2);

discharge

1

2

| (d) | the principle of annuality does not apply to the EDFs: EDF agreements are usually concluded for a commitment period of five to seven years, and payments can be made over a much longer time frame. |
| --- | --- |

(d)

the principle of annuality does not apply to the EDFs: EDF agreements are usually concluded for a commitment period of five to seven years, and payments can be made over a much longer time frame.

| 4. | The EDFs are managed almost entirely by the Commission’s Directorate-General for International Cooperation and Development (DG DEVCO) (3). |
| --- | --- |

4.

The EDFs are managed almost entirely by the Commission’s Directorate-General for International Cooperation and Development (DG DEVCO) (3).

3

| 5. | The expenditure covered in this report is delivered using a wide range of methods implemented in 79 countries. Rules and procedures are often complex, including those for tendering and awarding contracts. |
| --- | --- |

5.

The expenditure covered in this report is delivered using a wide range of methods implemented in 79 countries. Rules and procedures are often complex, including those for tendering and awarding contracts.

CHAPTER I — FINANCIAL IMPLEMENTATION OF THE 8TH, 9TH, 10TH AND 11TH EDFS

CHAPTER I — FINANCIAL IMPLEMENTATION OF THE 8TH, 9TH, 10TH AND 11TH EDFS

| 6. | The budget of the 8th EDF (1995-2000) was 12 840  million euro, that of the 9th EDF (2000-2007) 13 800  million euro, and that of the 10th EDF (2008-2013) 22 682  million euro. |
| --- | --- |

6.

The budget of the 8th EDF (1995-2000) was 12 840  million euro, that of the 9th EDF (2000-2007) 13 800  million euro, and that of the 10th EDF (2008-2013) 22 682  million euro.

| 7. | The Internal Agreement establishing the 11th EDF (4) (2015-2020) came into force on 1 March 2015. The 11th EDF holds 30 506  million euro (5), of which 29 089  million euro is allocated to the ACP countries and 364,5  million euro to the OCTs. |
| --- | --- |

7.

The Internal Agreement establishing the 11th EDF (4) (2015-2020) came into force on 1 March 2015. The 11th EDF holds 30 506  million euro (5), of which 29 089  million euro is allocated to the ACP countries and 364,5  million euro to the OCTs.

4

5

| 8. | Box 2
  shows the use of EDF resources both in 2016 and cumulatively. |
| --- | --- |

8.

Box 2
  shows the use of EDF resources both in 2016 and cumulatively.

Box 2

Box 2 —   Use of EDF resources at 31 December 2016

Box 2 —

Use of EDF resources at 31 December 2016

| (million euro) |
| --- |
| | Situation at end of 2015 | Budgetary implementation during the 2016 financial year (net) (49) | Situation at end of 2016 |
| | Total amount | Implement. rate (45) | 8th EDF (46) | 9th EDF (46) | 10th EDF | 11th EDF (46) | Total amount | 8th EDF | 9th EDF | 10th EDF | 11th EDF | Total amount | Implement. rate (45) |
| A — | RESOURCES
   (44) |

(million euro)

Situation at end of 2015

Budgetary implementation during the 2016 financial year (net) (49)

49

Situation at end of 2016

Total amount

Total amount

Implement. rate (45)

45

8th EDF (46)

46

9th EDF (46)

46

10th EDF

11th EDF (46)

46

Total amount

Total amount

8th EDF

9th EDF

10th EDF

11th EDF

Total amount

Total amount

Implement. rate (45)

45

A —

A —

RESOURCES

44

76 880

76 880

- 20

- 20

- 163

- 163

223

223

- 24

- 24

16

16

10 392

10 392

15 467

15 467

21 607

21 607

29 430

29 430

76 896

76 896

| B — | USE |
| --- | --- |

B —

B —

USE

| 1. | Global commitments
   (47) |
| --- | --- |

1.

Global commitments

47

53 607

53 607

69,7  %

69,7  %

- 13

- 13

- 104

- 104

- 80

- 80

6 688

6 688

6 491

6 491

10 391

10 391

15 429

15 429

21 058

21 058

13 220

13 220

60 097

60 097

78,2  %

78,2  %

| 2. | Individual commitments
   (48) |
| --- | --- |

2.

Individual commitments

48

48 797

48 797

63,5  %

63,5  %

- 6

- 6

- 46

- 46

541

541

3 745

3 745

4 234

4 234

10 378

10 378

15 309

15 309

19 576

19 576

7 769

7 769

53 032

53 032

69,0  %

69,0  %

| 3. | Payments |
| --- | --- |

3.

Payments

41 989

41 989

54,6  %

54,6  %

0

0

68

68

1 466

1 466

1 816

1 816

3 350

3 350

10 376

10 376

15 053

15 053

16 476

16 476

3 435

3 435

45 339

45 339

59,0  %

59,0  %

| C — | Outstanding commitments (B1 – B3) |
| --- | --- |

C —

C —

Outstanding commitments (B1 – B3)

11 618

11 618

15,1  %

15,1  %

15

15

376

376

4 582

4 582

9 785

9 785

14 758

14 758

19,2  %

19,2  %

| D — | Available balance (A – B1) |
| --- | --- |

D —

D —

Available balance (A – B1)

23 273

23 273

30,3  %

30,3  %

1

1

38

38

549

549

16 210

16 210

16 799

16 799

21,8  %

21,8  %

THE COURT’S OBSERVATIONS

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

THE COMMISSION’S REPLIES

| 9. | Across its entire area of responsibility, in 2016 DG DEVCO continued its efforts to reduce old prefinancing payments and commitments, largely exceeding its targets (6). It also sought to bring down the number of open expired contracts (7). As in the last two years, DG DEVCO was close to meeting its 2016 target for the share of expired contracts in its portfolio as a whole (8), but progress was less satisfactory in respect of the EDFs (9). |
| --- | --- |

9.

Across its entire area of responsibility, in 2016 DG DEVCO continued its efforts to reduce old prefinancing payments and commitments, largely exceeding its targets (6). It also sought to bring down the number of open expired contracts (7). As in the last two years, DG DEVCO was close to meeting its 2016 target for the share of expired contracts in its portfolio as a whole (8), but progress was less satisfactory in respect of the EDFs (9).

6

7

8

9

| 9. | The main problems preventing the closure of expired contracts for EDF are recovery orders not cashed, legal cases and ongoing audit processes. Although these aspects are not entirely under its control, the Commission will pursue its efforts to speed up the closure of expired contracts. |
| --- | --- |

9.

9.

The main problems preventing the closure of expired contracts for EDF are recovery orders not cashed, legal cases and ongoing audit processes. Although these aspects are not entirely under its control, the Commission will pursue its efforts to speed up the closure of expired contracts.

CHAPTER II — THE COURT’S STATEMENT OF ASSURANCE ON THE EDFS

CHAPTER II — THE COURT’S STATEMENT OF ASSURANCE

The Court’s statement of assurance on the 8th, 9th, 10th and 11th EDFs to the European Parliament and the Council — Independent auditor’s report

The Court’s statement of assurance on the 8th, 9th, 10th and 11th EDFs to the European Parliament and the Council — Independent auditor’s report

Opinion

Opinion

| I. | We have audited:






  (a) | the annual accounts of the 8th, 9th, 10th and 11th EDFs, which comprise the balance sheet, the statement of financial performance, the statement of cash flow, the statement of changes in net assets, and the report on financial implementation for the financial year ended 31 December 2016, approved by the Commission on 23 June 2017, and |
| --- | --- | --- |

I.

We have audited:

(a)

the annual accounts of the 8th, 9th, 10th and 11th EDFs, which comprise the balance sheet, the statement of financial performance, the statement of cash flow, the statement of changes in net assets, and the report on financial implementation for the financial year ended 31 December 2016, approved by the Commission on 23 June 2017, and

| (b) | the legality and regularity of the transactions which underlie those accounts and of which financial management falls to the Commission (10), |
| --- | --- |

(b)

the legality and regularity of the transactions which underlie those accounts and of which financial management falls to the Commission (10),

regularity

transactions

10

as required by Article 287 of the Treaty on the Functioning of the European Union (TFEU) and Article 49 of the Financial Regulation applicable to the 11th EDF, which also applies to previous EDFs.

Financial Regulation

Reliability of the accounts

Reliability of the accounts

Opinion on the reliability of the accounts

Opinion on the reliability of the accounts

| II. | In our opinion, the annual accounts of the 8th, 9th, 10th and 11th EDFs for the year ended 31 December 2016 present fairly, in all material respects, the financial position as at 31 December 2016, the results of their operations, their cash flows and the changes in net assets for the year then ended, in accordance with the EDF Financial Regulation and with accounting rules based on internationally accepted accounting standards for the public sector. |
| --- | --- |

II.

In our opinion, the annual accounts of the 8th, 9th, 10th and 11th EDFs for the year ended 31 December 2016 present fairly, in all material respects, the financial position as at 31 December 2016, the results of their operations, their cash flows and the changes in net assets for the year then ended, in accordance with the EDF Financial Regulation and with accounting rules based on internationally accepted accounting standards for the public sector.

Legality and regularity of the transactions underlying the accounts

Legality and regularity of the transactions underlying the accounts

Revenue

Revenue

Opinion on the legality and regularity of revenue underlying the accounts

Opinion on the legality and regularity of revenue underlying the accounts

| III. | In our opinion, the revenue underlying the accounts for the year ended 31 December 2016 is legal and regular in all material respects. |
| --- | --- |

III.

In our opinion, the revenue underlying the accounts for the year ended 31 December 2016 is legal and regular in all material respects.

Payments

Payments

Adverse opinion on the legality and regularity of payments underlying the accounts

Adverse opinion on the legality and regularity of payments underlying the accounts

| IV. | In our opinion, because of the significance of the matters described in the basis for adverse opinion on the legality and regularity of payments underlying the accounts paragraph, the payments underlying the accounts for the year ended 31 December 2016 are materially affected by error. |
| --- | --- |

IV.

In our opinion, because of the significance of the matters described in the basis for adverse opinion on the legality and regularity of payments underlying the accounts paragraph, the payments underlying the accounts for the year ended 31 December 2016 are materially affected by error.

error

Basis for opinion

Basis for opinion

| V. | We conducted our audit in accordance with the IFAC International Standards on Auditing (ISAs) and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions (ISSAIs). Our responsibilities under those standards are further described in the Auditor’s responsibilities section of our report. We are independent in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. |
| --- | --- |

V.

We conducted our audit in accordance with the IFAC International Standards on Auditing (ISAs) and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions (ISSAIs). Our responsibilities under those standards are further described in the Auditor’s responsibilities section of our report. We are independent in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Auditor’s responsibilities

Basis for adverse opinion on the legality and regularity of payments underlying the accounts

Basis for adverse opinion on the legality and regularity of payments underlying the accounts

| VI. | Expenditure recorded in 2016 under the 8th, 9th, 10th and 11th EDFs is materially affected by error. Our estimated level of error for expenditure underlying the accounts is 3,3  %. |
| --- | --- |

VI.

Expenditure recorded in 2016 under the 8th, 9th, 10th and 11th EDFs is materially affected by error. Our estimated level of error for expenditure underlying the accounts is 3,3  %.

estimated level of error

Key audit matters

Key audit matters

| VII. | Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. |
| --- | --- |

VII.

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters.

Accrued charges

Accrued charges

| VIII. | We assessed the accrued charges presented in the accounts (see note 2.9) which are subject to a high degree of estimation. At year-end 2016, the Commission estimated that eligible expenses incurred but not yet reported by beneficiaries amounted to 3 903  million euro (year-end 2015: 3 797  million euro). |
| --- | --- |

VIII.

We assessed the accrued charges presented in the accounts (see note 2.9) which are subject to a high degree of estimation. At year-end 2016, the Commission estimated that eligible expenses incurred but not yet reported by beneficiaries amounted to 3 903  million euro (year-end 2015: 3 797  million euro).

| IX. | We examined the calculation of these accrual estimates and reviewed a sample of 30 individual contracts to address the risk that the accrual was misstated. The work performed led us to conclude that the accrued charges recognised in the final accounts were appropriate once the Commission had made all necessary corrections we identified. |
| --- | --- |

IX.

We examined the calculation of these accrual estimates and reviewed a sample of 30 individual contracts to address the risk that the accrual was misstated. The work performed led us to conclude that the accrued charges recognised in the final accounts were appropriate once the Commission had made all necessary corrections we identified.

Responsibilities of management

Responsibilities of management

| X. | In accordance with Articles 310 to 325 of the TFEU and the 11th EDF Financial Regulation, management is responsible for the preparation and presentation of the annual accounts of the EDFs on the basis of internationally accepted accounting standards for the public sector and for the legality and regularity of the transactions underlying them. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error. The Commission bears the ultimate responsibility for the legality and regularity of the transactions underlying the EDF accounts. |
| --- | --- |

X.

In accordance with Articles 310 to 325 of the TFEU and the 11th EDF Financial Regulation, management is responsible for the preparation and presentation of the annual accounts of the EDFs on the basis of internationally accepted accounting standards for the public sector and for the legality and regularity of the transactions underlying them. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error. The Commission bears the ultimate responsibility for the legality and regularity of the transactions underlying the EDF accounts.

| XI. | In preparing the EDF accounts, the Commission is responsible for assessing the EDFs’ ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. |
| --- | --- |

XI.

In preparing the EDF accounts, the Commission is responsible for assessing the EDFs’ ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so.

| XII. | The Commission is responsible for overseeing the EDFs’ financial reporting process. |
| --- | --- |

XII.

The Commission is responsible for overseeing the EDFs’ financial reporting process.

Auditor's responsibilities for the audit of the EDF accounts and underlying transactions

Auditor's responsibilities for the audit of the EDF accounts and underlying transactions

| XIII. | Our objectives are to obtain reasonable assurance about whether the EDF accounts are free from material misstatement and the transactions underlying them are legal and regular and to provide, on the basis of our audit, the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the transactions underlying them. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit will always detect a material misstatement or non-compliance when it exists. These can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these EDF accounts. |
| --- | --- |

XIII.

Our objectives are to obtain reasonable assurance about whether the EDF accounts are free from material misstatement and the transactions underlying them are legal and regular and to provide, on the basis of our audit, the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the transactions underlying them. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit will always detect a material misstatement or non-compliance when it exists. These can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these EDF accounts.

| XIV. | As part of an audit in accordance with ISAs and ISSAIs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:






  — | Identify and assess the risks of material misstatement of the EDF accounts and of material non-compliance of the underlying transactions with the requirements of the EDF legal framework, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement or non-compliance resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. |
| --- | --- | --- |

XIV.

As part of an audit in accordance with ISAs and ISSAIs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

—

Identify and assess the risks of material misstatement of the EDF accounts and of material non-compliance of the underlying transactions with the requirements of the EDF legal framework, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement or non-compliance resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

| — | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control. |
| --- | --- |

—

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control.

| — | Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. |
| --- | --- |

—

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

| — | Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the EDFs’ ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated accounts or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the entity to cease to continue as a going concern. |
| --- | --- |

—

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the EDFs’ ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated accounts or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the entity to cease to continue as a going concern.

| — | Evaluate the overall presentation, structure and content of the annual accounts, including the disclosures, and whether the annual accounts represent the underlying transactions and events in a manner that achieves fair presentation. |
| --- | --- |

—

Evaluate the overall presentation, structure and content of the annual accounts, including the disclosures, and whether the annual accounts represent the underlying transactions and events in a manner that achieves fair presentation.

| XV. | We communicate with those charged with the management regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. |
| --- | --- |

XV.

We communicate with those charged with the management regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

| XVI. | For revenue, we examine all contributions from Member States and a sample of other types of revenue transactions. |
| --- | --- |

XVI.

For revenue, we examine all contributions from Member States and a sample of other types of revenue transactions.

| XVII. | For expenditure, we examine payment transactions when expenditure has been incurred, recorded and accepted. This examination covers all categories of payments (including those made for the purchase of assets) other than advances at the point they are made. Advance payments are examined when the recipient of funds provides justification for their proper use and the Institution or body accepts the justification by clearing the advance payment, whether in the same year or later. |
| --- | --- |

XVII.

For expenditure, we examine payment transactions when expenditure has been incurred, recorded and accepted. This examination covers all categories of payments (including those made for the purchase of assets) other than advances at the point they are made. Advance payments are examined when the recipient of funds provides justification for their proper use and the Institution or body accepts the justification by clearing the advance payment, whether in the same year or later.

recipient

| XVIII. | From the matters communicated with the Commission, we determine those matters that were of most significance in the audit of the EDF accounts of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. |
| --- | --- |

XVIII.

From the matters communicated with the Commission, we determine those matters that were of most significance in the audit of the EDF accounts of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

13 July 2017

Klaus-Heiner LEHNE

President

President

European Court of Auditors

12, rue Alcide De Gasperi, Luxembourg, LUXEMBOURG

THE COURT’S OBSERVATIONS

THE COURT’S OBSERVATIONS

Information in support of the statement of assurance

Information in support of the statement of assurance

Audit scope and approach

Audit scope and approach

| 10. | Annex 1.1 to chapter 1 of the Court’s 2016 annual report on the implementation of the budget sets out our audit approach and methods. The following specific points should be noted in connection with this year’s audit of the EDFs. |
| --- | --- |

10.

Annex 1.1 to chapter 1 of the Court’s 2016 annual report on the implementation of the budget sets out our audit approach and methods. The following specific points should be noted in connection with this year’s audit of the EDFs.

| 11. | Our observations on the reliability of the EDF accounts are based on the financial statements (11) of the 8th, 9th, 10th and 11th EDFs, approved by the Commission in compliance with the EDF Financial Regulation (12), together with the accounting officer’s letter of representation received on 27 June 2017. We tested amounts and disclosures, and assessed the accounting principles used, as well as any significant estimates made by the Commission and the overall presentation of the accounts. |
| --- | --- |

11.

Our observations on the reliability of the EDF accounts are based on the financial statements (11) of the 8th, 9th, 10th and 11th EDFs, approved by the Commission in compliance with the EDF Financial Regulation (12), together with the accounting officer’s letter of representation received on 27 June 2017. We tested amounts and disclosures, and assessed the accounting principles used, as well as any significant estimates made by the Commission and the overall presentation of the accounts.

11

12

| 12. | For the audit of the regularity of transactions, we: |
| --- | --- |

12.

For the audit of the regularity of transactions, we:

| (a) | examined all Member State contributions and a sample of other types of revenue transactions; |
| --- | --- |

(a)

examined all Member State contributions and a sample of other types of revenue transactions;

| (b) | examined a sample of 143 transactions designed to be representative of the full range of payments within the EDFs and consisting of 108 payments authorised by 16 EU delegations (13) and 35 payments approved by the Commission headquarters (14); |
| --- | --- |

(b)

examined a sample of 143 transactions designed to be representative of the full range of payments within the EDFs and consisting of 108 payments authorised by 16 EU delegations (13) and 35 payments approved by the Commission headquarters (14);

13

14

| (c) | analysed the relevant systems where errors had been detected in the transactions, to identify the weaknesses involved; |
| --- | --- |

(c)

analysed the relevant systems where errors had been detected in the transactions, to identify the weaknesses involved;

| (d) | assessed systems at DG DEVCO and the EU delegations, covering: (i) ex ante checks by Commission staff, external auditors or supervisors before payments were made, and (ii) monitoring and supervision, notably the follow-up of external audits and DG DEVCO’s 2016 residual error rate (RER) study; |
| --- | --- |

(d)

assessed systems at DG DEVCO and the EU delegations, covering: (i) ex ante checks by Commission staff, external auditors or supervisors before payments were made, and (ii) monitoring and supervision, notably the follow-up of external audits and DG DEVCO’s 2016 residual error rate (RER) study;

residual error rate

| (e) | reviewed the annual activity report (AAR) of DG DEVCO; |
| --- | --- |

(e)

reviewed the annual activity report (AAR) of DG DEVCO;

annual activity report (AAR)

| (f) | followed up our previous recommendations. |
| --- | --- |

(f)

followed up our previous recommendations.

Box 3 —   Auditors examining the accuracy of road thickness measurements for a payment relating to a road project in Zambia

Box 3 —

Auditors examining the accuracy of road thickness measurements for a payment relating to a road project in Zambia

Image

Source: European Court of Auditors.

Source:

THE COURT’S OBSERVATIONS

THE COURT’S OBSERVATIONS

| 13. | As stated in paragraph 4, DG DEVCO implements most of the external assistance instruments financed from both the general budget and the EDFs. Our observations on systems, the reliability of the AAR and the Director-General’s declaration for 2016 relate to DG DEVCO’s entire area of responsibility. |
| --- | --- |

13.

As stated in paragraph 4, DG DEVCO implements most of the external assistance instruments financed from both the general budget and the EDFs. Our observations on systems, the reliability of the AAR and the Director-General’s declaration for 2016 relate to DG DEVCO’s entire area of responsibility.

THE COURT’S OBSERVATIONS

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

THE COMMISSION’S REPLIES

Reliability of accounts

Reliability of accounts

| 14. | Last year we reported on recoveries of unspent prefinancing which had been incorrectly recorded as operational revenue. DG DEVCO’s accounting tests and our review of a sample of recovery orders (15) have also identified similar cases in 2016. Although corrections amounting to 3,2  million euro (16) were made in the final EDF accounts, it is likely that similar errors occurred in the untested population. At the end of 2016, DG DEVCO issued detailed instructions to its staff on the correct encoding of recovery orders of this type. |
| --- | --- |

14.

Last year we reported on recoveries of unspent prefinancing which had been incorrectly recorded as operational revenue. DG DEVCO’s accounting tests and our review of a sample of recovery orders (15) have also identified similar cases in 2016. Although corrections amounting to 3,2  million euro (16) were made in the final EDF accounts, it is likely that similar errors occurred in the untested population. At the end of 2016, DG DEVCO issued detailed instructions to its staff on the correct encoding of recovery orders of this type.

15

16

| 14. | Instructions produced by DEVCO on the encoding of recovery orders and corrections made by DEVCO on the basis of controls made on recovery orders issued in 2016 resulted in a significant reduction of errors in the encoding of recovery orders and/or recovery contexts (from 9,6  million euro detected by the Court in 2015 down to 3,2  million euro detected by DEVCO and/or the Court in 2016). DEVCO will pursue its efforts in 2017. |
| --- | --- |

14.

14.

Instructions produced by DEVCO on the encoding of recovery orders and corrections made by DEVCO on the basis of controls made on recovery orders issued in 2016 resulted in a significant reduction of errors in the encoding of recovery orders and/or recovery contexts (from 9,6  million euro detected by the Court in 2015 down to 3,2  million euro detected by DEVCO and/or the Court in 2016). DEVCO will pursue its efforts in 2017.

Regularity of transactions

Regularity of transactions

Revenue

Revenue

| 15. | Revenue transactions did not contain a material level of error. |
| --- | --- |

15.

Revenue transactions did not contain a material level of error.

Payments

Payments

| 16. | Annex 1
  provides an overview of the results of transaction testing. Of the 143 payment transactions examined, 35 (24 %) contained errors. On the basis of the 26 errors we have quantified, we estimate the level of error to be 3,3  % (17). |
| --- | --- |

16.

Annex 1
  provides an overview of the results of transaction testing. Of the 143 payment transactions examined, 35 (24 %) contained errors. On the basis of the 26 errors we have quantified, we estimate the level of error to be 3,3  % (17).

Annex 1

17

| 17. | Box 4
  gives a breakdown of our estimated level of error for 2016 by error type. |
| --- | --- |

17.

Box 4
  gives a breakdown of our estimated level of error for 2016 by error type.

Box 4

Box 4 —   Breakdown of the estimated level of error

Box 4 —

Breakdown of the estimated level of error

Image

Source: European Court of Auditors.

Source:

THE COURT’S OBSERVATIONS

THE COURT’S OBSERVATIONS

| 18. | Of the 130 project-related payment transactions that we examined, 35 (27 %) contained errors. Of the 26 (74 %) payment transactions containing quantifiable errors, nine were final transactions authorised once all ex ante checks had been carried out. |
| --- | --- |

18.

Of the 130 project-related payment transactions that we examined, 35 (27 %) contained errors. Of the 26 (74 %) payment transactions containing quantifiable errors, nine were final transactions authorised once all ex ante checks had been carried out.

| 19. | As in previous years, the Commission and its implementing partners committed more errors in transactions relating to programme estimates, grants and contribution agreements with international organisations than it did with other forms of support. Of the 67 transactions of this type examined, 23 (34 %) contained quantifiable errors, which accounted for 85 % of the estimated level of error. |
| --- | --- |

19.

As in previous years, the Commission and its implementing partners committed more errors in transactions relating to programme estimates, grants and contribution agreements with international organisations than it did with other forms of support. Of the 67 transactions of this type examined, 23 (34 %) contained quantifiable errors, which accounted for 85 % of the estimated level of error.

programme estimates

grants

THE COURT’S OBSERVATIONS

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

THE COMMISSION’S REPLIES

Box 5 — Examples of quantifiable errors in project transactions

Box 5 — Examples of quantifiable errors in project transactions

Box 5 — Examples of quantifiable errors in project transactions

Box 5 — Examples of quantifiable errors in project transactions

Non-compliance by the beneficiary with procurement rules

Non-compliance by the beneficiary

We examined the Commission’s clearance of 3 489 416  euro spent under a grant contract to support trade capacity development in ACP countries, implemented by an international organisation. Of the 10 expenditure items sampled, 6 were found to contain errors, including 5 in which fees and allowances were paid to trade advisors on the basis of service contracts. These contracts (total value 570 500  euro) were not awarded following a competitive selection procedure, as required by the grant agreement. Instead, the contracts were directly awarded to advisors who had previously worked on a predecessor project.

Non-compliance by the beneficiary with procurement rules

Non-compliance by the beneficiary with procurement rules

The project consisted almost exclusively of the recruitment of regional and national trade advisors. Independently of the type of selection procedure, their recruitment was subject to standard operative processes for recruitment of international staff, including prior publication of the vacancy notice.

The project consisted almost exclusively of the recruitment of regional and national trade advisors. Independently of the type of selection procedure, their recruitment was subject to standard operative processes for recruitment of international staff, including prior publication of the vacancy notice.

Ineligible expenditure — activities not covered by the contract

Ineligible expenditure — activities not covered by the contract

We examined the Commission’s final clearance of 10 875 375  euro spent on the 2012 work programme of an international body providing assistance to enterprises in ACP countries. Of the 10 cost items sampled, 3 related to contracts sub-granted to third-party beneficiaries (value 147 990  euro). No provision was made for sub-granting under the special conditions of the grant, meaning the activities were in breach of contract. Furthermore, the sub-grants were directly awarded without a competitive selection procedure.

provision

Ineligible expenditure — activities not covered by the contract

Ineligible expenditure — activities not covered by the contract

The Commission initiated the recovery procedure.

The Commission initiated the recovery procedure.

| 20. | In two cases of quantifiable error, the Commission had sufficient information to prevent, or to detect and correct, the error before accepting the expenditure. Had the Commission made proper use of all the information at its disposal, the estimated level of error for this chapter would have been 0,7  % lower. We found five other transactions with errors which should have been detected by external auditors and supervisors. These cases contributed 0,1  % to the estimated level of error (18). |
| --- | --- |

20.

In two cases of quantifiable error, the Commission had sufficient information to prevent, or to detect and correct, the error before accepting the expenditure. Had the Commission made proper use of all the information at its disposal, the estimated level of error for this chapter would have been 0,7  % lower. We found five other transactions with errors which should have been detected by external auditors and supervisors. These cases contributed 0,1  % to the estimated level of error (18).

18

THE COURT’S OBSERVATIONS

THE COURT’S OBSERVATIONS

| 21. | In addition, a further 10 transactions containing a quantifiable error (19) were subjected to an audit or expenditure verification. The information provided in the audit/verification reports on the actual work done did not allow us to assess whether the errors could have been detected and corrected during these ex ante checks. |
| --- | --- |

21.

In addition, a further 10 transactions containing a quantifiable error (19) were subjected to an audit or expenditure verification. The information provided in the audit/verification reports on the actual work done did not allow us to assess whether the errors could have been detected and corrected during these ex ante checks.

19

| 22. | In two areas, the nature of the funding and the payment conditions limit the extent to which transactions are prone to error. These areas are budget support
   (20) and those where the ‘notional approach’ is applied in multidonor projects carried out by international organisations (21). |
| --- | --- |

22.

In two areas, the nature of the funding and the payment conditions limit the extent to which transactions are prone to error. These areas are budget support
   (20) and those where the ‘notional approach’ is applied in multidonor projects carried out by international organisations (21).

budget support

20

21

| 23. | Budget support is a contribution to a state’s general budget or its budget for a specific policy or objective. We examined whether the Commission had complied with the conditions governing budget support payments to partner countries and had verified that general eligibility conditions (such as satisfactory progress in public finance management) had been met. |
| --- | --- |

23.

Budget support is a contribution to a state’s general budget or its budget for a specific policy or objective. We examined whether the Commission had complied with the conditions governing budget support payments to partner countries and had verified that general eligibility conditions (such as satisfactory progress in public finance management) had been met.

| 24. | However, given the legal provisions’ broad scope for interpretation, the Commission has considerable flexibility in deciding whether the general conditions have been met. Our regularity audit cannot go beyond the stage at which aid is paid to the partner country, since the funds are then merged with the recipient country’s budget resources. Any weaknesses in its financial management leading to misuse at national level will not lead to errors in our audit of regularity (22). |
| --- | --- |

24.

However, given the legal provisions’ broad scope for interpretation, the Commission has considerable flexibility in deciding whether the general conditions have been met. Our regularity audit cannot go beyond the stage at which aid is paid to the partner country, since the funds are then merged with the recipient country’s budget resources. Any weaknesses in its financial management leading to misuse at national level will not lead to errors in our audit of regularity (22).

22

| 25. | When the Commission’s contributions to multi-donor projects are pooled with those of other donors and are not earmarked for specific identifiable items of expenditure, the Commission assumes that EU eligibility rules are complied with as long as the pooled amount includes sufficient eligible expenditure to cover the EU contribution. This approach, as applied by the Commission, has also been taken into account in our substantive testing (23). |
| --- | --- |

25.

When the Commission’s contributions to multi-donor projects are pooled with those of other donors and are not earmarked for specific identifiable items of expenditure, the Commission assumes that EU eligibility rules are complied with as long as the pooled amount includes sufficient eligible expenditure to cover the EU contribution. This approach, as applied by the Commission, has also been taken into account in our substantive testing (23).

23

| 26. | When excluding the 13 budget support and 6 notional approach transactions (referred to in paragraphs 22 to 25) from the audited sample, the estimated level of error is 4,4  % (24). |
| --- | --- |

26.

When excluding the 13 budget support and 6 notional approach transactions (referred to in paragraphs 22 to 25) from the audited sample, the estimated level of error is 4,4  % (24).

24

Annual activity report and other governance arrangements

Annual activity report and other governance arrangements

| 27. | In every annual activity report since 2012, DG DEVCO has issued a reservation on the regularity of underlying transactions. An action plan has then been adopted to address the weaknesses in the implementation of DG DEVCO’s control system.
  Box 6
  shows the efforts made in the last four years. |
| --- | --- |

27.

In every annual activity report since 2012, DG DEVCO has issued a reservation on the regularity of underlying transactions. An action plan has then been adopted to address the weaknesses in the implementation of DG DEVCO’s control system.
  Box 6
  shows the efforts made in the last four years.

reservation

Box 6

Box 6 — DG DEVCO’s efforts to improve the implementation of its control system

Box 6 — DG DEVCO’s efforts to improve the implementation of its control system

Last year we reported on the satisfactory progress achieved on the 2013 and 2014 action plans; 19 actions had been fully implemented, with the remaining 4 transferred to the 2015 action plan.

The design of the 2015 action plan was further improved with the inclusion of measures targeting high-risk areas: funds under indirect management via international organisations and grants under direct management. All actions were initially scheduled to be completed by June 2016. By the end of 2016, ten actions had been completed, five partially implemented and one was ongoing.

direct management

Four new targeted measures were added to the 2016 action plan, the progress of which will be assessed in our next annual report.

THE COURT’S OBSERVATIONS

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

THE COMMISSION’S REPLIES

| 28. | DG DEVCO’s control system is centred around ex ante checks conducted before the expenditure claimed by beneficiaries is accepted. In this year too, the frequency of the errors found — including some contained in final claims which had been subjected to ex ante external audits and expenditure verifications — points to weaknesses in these checks. |
| --- | --- |

28.

DG DEVCO’s control system is centred around ex ante checks conducted before the expenditure claimed by beneficiaries is accepted. In this year too, the frequency of the errors found — including some contained in final claims which had been subjected to ex ante external audits and expenditure verifications — points to weaknesses in these checks.

| 29. | In our 2014 and 2015 annual reports, we reported on the measures (25) which DG DEVCO had already taken to improve the quality of these audits and verifications (26). DG DEVCO is currently revising the terms of reference of the audits and verifications to obtain information allowing for a quality assessment, as we recommended in last year’s report. Although planned to be finalised by June 2017 (27), this critical revision has not yet been completed. |
| --- | --- |

29.

In our 2014 and 2015 annual reports, we reported on the measures (25) which DG DEVCO had already taken to improve the quality of these audits and verifications (26). DG DEVCO is currently revising the terms of reference of the audits and verifications to obtain information allowing for a quality assessment, as we recommended in last year’s report. Although planned to be finalised by June 2017 (27), this critical revision has not yet been completed.

25

26

27

| 29. | Work on the revision of the Terms of Reference for Audits and Verifications is ongoing. The Commission expects the work to be completed, even if not fully operational, by the end of 2017. |
| --- | --- |

29.

29.

Work on the revision of the Terms of Reference for Audits and Verifications is ongoing. The Commission expects the work to be completed, even if not fully operational, by the end of 2017.

2016 RER study

2016 RER study

| 30. | In 2016 DG DEVCO carried out its fifth RER study to estimate the level of error which had evaded all management checks to prevent, detect and correct errors across its entire area of responsibility (28). The scope of the RER study and its limitations were disclosed in the AAR following our 2013 recommendation (29). |
| --- | --- |

30.

In 2016 DG DEVCO carried out its fifth RER study to estimate the level of error which had evaded all management checks to prevent, detect and correct errors across its entire area of responsibility (28). The scope of the RER study and its limitations were disclosed in the AAR following our 2013 recommendation (29).

28

29

| 31. | The study examined a representative sample of transactions made under contracts closed between September 2015 and August 2016. We reviewed the 2016 RER study and found that it had been conducted in compliance with the RER methodology. All weaknesses reported in our 2013 report had been addressed, with the exception of the RER-specific estimation method, which still left too wide a margin for judgement when estimating individual error rates. |
| --- | --- |

31.

The study examined a representative sample of transactions made under contracts closed between September 2015 and August 2016. We reviewed the 2016 RER study and found that it had been conducted in compliance with the RER methodology. All weaknesses reported in our 2013 report had been addressed, with the exception of the RER-specific estimation method, which still left too wide a margin for judgement when estimating individual error rates.

| 31. | The number of estimations has decreased year-on-year from 43 in 2012 to 6 in 2016. Each estimation is reviewed at Director and Partner level to ensure consistency. This procedure restricts the margin for judgement when estimating individual error rates. Estimations are done when there is a legal or logistical reason for documentation not being available for the RER auditor before the deadline for completion of work at the end of the study. Those transactions where documentation has not been provided present an inherently enhanced risk of susceptibility to error and therefore estimations increase the level of error. |
| --- | --- |

31.

31.

The number of estimations has decreased year-on-year from 43 in 2012 to 6 in 2016. Each estimation is reviewed at Director and Partner level to ensure consistency. This procedure restricts the margin for judgement when estimating individual error rates. Estimations are done when there is a legal or logistical reason for documentation not being available for the RER auditor before the deadline for completion of work at the end of the study. Those transactions where documentation has not been provided present an inherently enhanced risk of susceptibility to error and therefore estimations increase the level of error.

| 32. | For the first time in 2016 the study estimated the RER to be within the 2 % materiality threshold set by the Commission (30). This result is attributable to a combination of the following main factors: |
| --- | --- |

32.

For the first time in 2016 the study estimated the RER to be within the 2 % materiality threshold set by the Commission (30). This result is attributable to a combination of the following main factors:

materiality threshold

30

| 32. | The Commission considers that the decrease in the error rate through the years is linked to a number of factors, the main one being the measures taken to reinforce the internal control system of DEVCO. |
| --- | --- |

32.

32.

The Commission considers that the decrease in the error rate through the years is linked to a number of factors, the main one being the measures taken to reinforce the internal control system of DEVCO.

| (a) | DG DEVCO’s efforts to improve the implementation of its internal control system (see paragraphs 27 to 29 and
  Box 6
  ); |
| --- | --- |

(a)

DG DEVCO’s efforts to improve the implementation of its internal control system (see paragraphs 27 to 29 and
  Box 6
  );

Box 6

| (b) | DG DEVCO’s efforts to obtain supporting documents which resulted in the decrease in the number of estimates in the RER sample, since these contain higher residual error rates than the rest of the population due to their increased inherent risk (31); |
| --- | --- |

(b)

DG DEVCO’s efforts to obtain supporting documents which resulted in the decrease in the number of estimates in the RER sample, since these contain higher residual error rates than the rest of the population due to their increased inherent risk (31);

31

| (c) | increase in the share of budget support transactions in the RER sample (32), for which the residual error rate is estimated to be 0 % (see also paragraphs 22 to 24). |
| --- | --- |

(c)

increase in the share of budget support transactions in the RER sample (32), for which the residual error rate is estimated to be 0 % (see also paragraphs 22 to 24).

32

| (c) | From the Commission's point of view, there is no direct correlation between the share of budget support transactions in the RER sample and the level of error rate. The number of Budget Support items in the sample is purely dependent on the monetary unit sampling applied. It is true that budget support contracts are hardly affected by errors, because of the substantial efforts the Commission has made to improve guidance and tackle the risks in line with your recommendations. However, the downward trend in the error rate has not been accompanied by a parallel increasing share in Budget Support transactions in the sample through the years. It can be argued that this may be one of the factors in the current situation of the error rate. |
| --- | --- |

(c)

(c)

From the Commission's point of view, there is no direct correlation between the share of budget support transactions in the RER sample and the level of error rate. The number of Budget Support items in the sample is purely dependent on the monetary unit sampling applied. It is true that budget support contracts are hardly affected by errors, because of the substantial efforts the Commission has made to improve guidance and tackle the risks in line with your recommendations. However, the downward trend in the error rate has not been accompanied by a parallel increasing share in Budget Support transactions in the sample through the years. It can be argued that this may be one of the factors in the current situation of the error rate.

From the Commission's point of view, there is no direct correlation between the share of budget support transactions in the RER sample and the level of error rate. The number of Budget Support items in the sample is purely dependent on the monetary unit sampling applied. It is true that budget support contracts are hardly affected by errors, because of the substantial efforts the Commission has made to improve guidance and tackle the risks in line with your recommendations. However, the downward trend in the error rate has not been accompanied by a parallel increasing share in Budget Support transactions in the sample through the years. It can be argued that this may be one of the factors in the current situation of the error rate.

Box 7 —   Evolution of DG DEVCO’s RER from 2012 to 2016

Box 7 —

Evolution of DG DEVCO’s RER from 2012 to 2016

Image

Source: European Court of Auditors, based on the 2012-2016 RER studies.

Source:

THE COURT’S OBSERVATIONS

THE COURT’S OBSERVATIONS

Review of the 2016 annual activity report

Review of the 2016 annual activity report

| 33. | For the years 2012-2014, the Director-General issued a general reservation on the legality and regularity of transactions for all DG DEVCO’s operations. For the first time in 2015, the Director-General made a risk-differentiated declaration of assurance and issued a reservation targeting two spending areas identified as high risk: (i) grants under direct management and (ii) indirect management via international organisations. |
| --- | --- |

33.

For the years 2012-2014, the Director-General issued a general reservation on the legality and regularity of transactions for all DG DEVCO’s operations. For the first time in 2015, the Director-General made a risk-differentiated declaration of assurance and issued a reservation targeting two spending areas identified as high risk: (i) grants under direct management and (ii) indirect management via international organisations.

| 34. | In 2016, DG DEVCO extended the reservation to grants and programme estimates under indirect management. Despite the 2016 RER being below the 2 % materiality threshold, this was done in consideration of all elements in the DG DEVCO's assurance-building process (33). The reservation issued is in line with our own recommendations and observations in both this and previous annual reports. |
| --- | --- |

34.

In 2016, DG DEVCO extended the reservation to grants and programme estimates under indirect management. Despite the 2016 RER being below the 2 % materiality threshold, this was done in consideration of all elements in the DG DEVCO's assurance-building process (33). The reservation issued is in line with our own recommendations and observations in both this and previous annual reports.

33

Box 8 —   DG DEVCO’s progress towards a risk-differentiated declaration of assurance

Box 8 —

DG DEVCO’s progress towards a risk-differentiated declaration of assurance

Image

Source: European Court of Auditors, based on DG DEVCO’s annual activity reports.

Source:

THE COURT’S OBSERVATIONS

THE COURT’S OBSERVATIONS

| 35. | DG DEVCO estimated the total amount at risk at the time of payment (34) for expenditure accepted in 2016 (5 393  million euro) to be 105 million euro (1,9  % of 2016 expenditure). Of this amount, it estimated that 25 million euro (24 %) would be corrected by its checks in subsequent years (35). |
| --- | --- |

35.

DG DEVCO estimated the total amount at risk at the time of payment (34) for expenditure accepted in 2016 (5 393  million euro) to be 105 million euro (1,9  % of 2016 expenditure). Of this amount, it estimated that 25 million euro (24 %) would be corrected by its checks in subsequent years (35).

34

35

THE COURT’S OBSERVATIONS

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

THE COMMISSION’S REPLIES

| 36. | The 2016 figure (36) (25 million euro) was half the 2015 estimate due to DG DEVCO’s efforts to exclude from the calculation recoveries on prefinancing, cancelled recovery orders and earned interest, as we recommended last year. Nevertheless, the reliability of the 2016 figure is still impaired (i) by detected errors that have not been fully extrapolated to the untested population of recovery orders in 2016 and in previous years (37); and (ii) because the calculation has not been reconciled with the EDF financial statements (38). It is difficult to quantify the overall extent of these shortcomings (39). |
| --- | --- |

36.

The 2016 figure (36) (25 million euro) was half the 2015 estimate due to DG DEVCO’s efforts to exclude from the calculation recoveries on prefinancing, cancelled recovery orders and earned interest, as we recommended last year. Nevertheless, the reliability of the 2016 figure is still impaired (i) by detected errors that have not been fully extrapolated to the untested population of recovery orders in 2016 and in previous years (37); and (ii) because the calculation has not been reconciled with the EDF financial statements (38). It is difficult to quantify the overall extent of these shortcomings (39).

36

37

38

39

| 36. | Measures taken by DEVCO for preventing and correcting errors in the encoding of recovery context are presented in paragraph 14. These efforts will be pursued in 2017. Furthermore, DEVCO will make sure that potential errors still detected in the future will be fully extrapolated to the untested population of recovery orders taken into account in the estimation of the corrective capacity.

  The system bug which caused the recording of recovery orders without recovery context field (none or qualified) will be resolved during 2017 and thus was a one-off event. This will be achieved through a correct use of the recovery context functionality in accordance with the instructions issued (e.g. recovery context manual) and via the implementation of necessary business rule in the Commission’s accounting system. |
| --- | --- |

36.

36.

Measures taken by DEVCO for preventing and correcting errors in the encoding of recovery context are presented in paragraph 14. These efforts will be pursued in 2017. Furthermore, DEVCO will make sure that potential errors still detected in the future will be fully extrapolated to the untested population of recovery orders taken into account in the estimation of the corrective capacity.

The system bug which caused the recording of recovery orders without recovery context field (none or qualified) will be resolved during 2017 and thus was a one-off event. This will be achieved through a correct use of the recovery context functionality in accordance with the instructions issued (e.g. recovery context manual) and via the implementation of necessary business rule in the Commission’s accounting system.

The system bug which caused the recording of recovery orders without recovery context field (none or qualified) will be resolved during 2017 and thus was a one-off event. This will be achieved through a correct use of the recovery context functionality in accordance with the instructions issued (e.g. recovery context manual) and via the implementation of necessary business rule in the Commission’s accounting system.

CONCLUSION AND RECOMMENDATIONS

CONCLUSION AND RECOMMENDATIONS

Conclusion

Conclusion

| 37. | The overall audit evidence indicates that the EDFs’ accounts for the financial year ending 31 December 2016 present fairly, in all material respects, their financial position, the results of their operations, their cash flows and the changes in net assets for the year then ended, in accordance with the provisions of the Financial Regulation and the accounting rules adopted by the accounting officer. |
| --- | --- |

37.

The overall audit evidence indicates that the EDFs’ accounts for the financial year ending 31 December 2016 present fairly, in all material respects, their financial position, the results of their operations, their cash flows and the changes in net assets for the year then ended, in accordance with the provisions of the Financial Regulation and the accounting rules adopted by the accounting officer.

| 38. | The overall audit evidence indicates that, for the financial year ending 31 December 2016:






  (a) | the revenue of the EDFs was not affected by a material level of error; |
| --- | --- | --- |

38.

The overall audit evidence indicates that, for the financial year ending 31 December 2016:

(a)

the revenue of the EDFs was not affected by a material level of error;

| (b) | EDF payment transactions were affected by a material level of error (see paragraphs 16 to 26). Our testing of transactions produced an estimated level of error of 3,3  % (see
  Annex 1
  ). |
| --- | --- |

(b)

EDF payment transactions were affected by a material level of error (see paragraphs 16 to 26). Our testing of transactions produced an estimated level of error of 3,3  % (see
  Annex 1
  ).

Annex 1

Recommendations

Recommendations

| 39. | Annex 3
  shows the findings of our follow-up review of the five recommendations we made in our 2013 annual report (40), all of which DG DEVCO had implemented in full (41). |
| --- | --- |

39.

Annex 3
  shows the findings of our follow-up review of the five recommendations we made in our 2013 annual report (40), all of which DG DEVCO had implemented in full (41).

Annex 3

40

41

| 40. | Based on this review and our findings and conclusions for 2016, we recommend that DG DEVCO: |
| --- | --- |

40.

Based on this review and our findings and conclusions for 2016, we recommend that DG DEVCO:

| — | Recommendation 1: strengthen the monitoring of old open expired EDF contracts in order to further reduce their number. |
| --- | --- |

—

Recommendation 1: strengthen the monitoring of old open expired EDF contracts in order to further reduce their number.

Recommendation 1:

The Commission accepts the recommendation.

The Commission accepts the recommendation.

| — | Recommendation 2: complete the revision of the terms of reference for all its audits and expenditure verifications by the end of 2017. |
| --- | --- |

—

Recommendation 2: complete the revision of the terms of reference for all its audits and expenditure verifications by the end of 2017.

Recommendation 2:

The Commission accepts the recommendation. Work is already under way.

The Commission accepts the recommendation. Work is already under way.

| — | Recommendation 3: extend the actions in its 2017 action plan to also cover grants and programme estimates under indirect management in the AAR reservation. |
| --- | --- |

—

Recommendation 3: extend the actions in its 2017 action plan to also cover grants and programme estimates under indirect management in the AAR reservation.

Recommendation 3:

The Commission accepts the recommendation. The fact of issuing a reservation concerning those two areas implies already the definition of specific actions for them.

The Commission accepts the recommendation. The fact of issuing a reservation concerning those two areas implies already the definition of specific actions for them.

| — | Recommendation 4: consider reducing the extent of the RER substantive testing of individual low-risk budget support transactions and reallocating the saved resources to increase the substantive testing of project-related transactions. |
| --- | --- |

—

Recommendation 4: consider reducing the extent of the RER substantive testing of individual low-risk budget support transactions and reallocating the saved resources to increase the substantive testing of project-related transactions.

Recommendation 4:

The recommendation is accepted. The Commission will consider the approach proposed by the Court and, if relevant, introduce it into the RER methodology.

The recommendation is accepted. The Commission will consider the approach proposed by the Court and, if relevant, introduce it into the RER methodology.

| — | Recommendation 5: further improve the calculation of the 2017 corrective capacity by addressing the shortcomings identified in this annual report. |
| --- | --- |

—

Recommendation 5: further improve the calculation of the 2017 corrective capacity by addressing the shortcomings identified in this annual report.

Recommendation 5:

corrective capacity

The recommendation is accepted.

The recommendation is accepted.

---

(1)  See Articles 43, 48-50 and 58 of Council Regulation (EU) 2015/323 of 2 March 2015 on the financial regulation applicable to the 11th European Development Fund (OJ L 58, 3.3.2015, p. 17).

1

(2)  In 2012, a tripartite agreement between the EIB, the Commission and the Court (Article 134 of Council Regulation (EC) No 215/2008 (OJ L 78, 19.3.2008, p. 1)) set out the rules for the audit of these operations by the Court. The Investment Facility is not covered by the Court’s statement of assurance.

2

(3)  With the exception of the 3 % of the 2016 EDF expenditure managed by the Directorate-General for Humanitarian Aid and Civil Protection (ECHO).

3

(4)  OJ L 210, 6.8.2013, p. 1.

4

(5)  Including 1 139 million euro managed by the EIB.

5

(6)  Reduction of old open prefinancing for the EDFs: 28 % achieved (25 % target); reduction of old unspent commitments for the EDFs: 36 % achieved (25 % target).

6

(7)  A contract is considered to have expired if it is still open more than 18 months after the end of its operational period. Delays in contract closure increase the risk of regularity errors as the supporting documentation might be difficult to retrieve if it has not been archived properly and key project staff have left. Late contract closure may also delay the recovery of unspent prefinancing and ineligible expenditure.

7

(8)  The share of expired contracts in DG DEVCO's portfolio fell from 18,62 % at the end of 2013 to 15,15 % at the end of 2016 (15 % target).

8

(9)  Of 1 896 expired contracts, 1 058 (56 %) concerned the EDFs. The ratio of expired contracts to all open EDF contracts was 19 %, compared with 12 % for the DG DEVCO portfolio as a whole. The operational period of 156 (323 million euro) of the 1 058 expired EDF contracts (14,7 % in number; 11,4 % in value) had expired more than 5 years ago.

9

(10)  Pursuant to Articles 43, 48-50 and 58 of the Financial Regulation applicable to the 11th EDF, this statement of assurance does not extend to the EDF resources managed by the EIB.

10

(11)  See Article 44 of Regulation (EU) 2015/323.

11

(12)  See Article 43 of Regulation (EU) 2015/323.

12

(13)  Barbados, Benin, Burkina Faso, Cape Verde, Democratic Republic of the Congo, Fiji, Gambia, Ghana, Ivory Coast, Niger, Nigeria, Madagascar, Rwanda, Senegal, Tanzania and Zambia.

13

(14)  DG DEVCO: 31 payments; ECHO: 4 payments for humanitarian aid.

14

(15)  We tested 15 recovery orders (total value 7,6 million euro) and found that 3 recovery orders (0,5 million euro) had been incorrectly recorded as revenue instead of the recovery of unspent prefinancing.

15

(16)  2,7 million euro of corrections identified by DG DEVCO, 0,5 million euro subsequently identified by ECA auditors.

16

(17)  We base our calculation of error on a representative sample. The figure quoted is the best estimate. We have 95 % confidence that the estimated level of error in the population lies between 1,0 % and 5,6 % (the lower and upper error limits respectively).

17

(18)  For 0,7 percentage points (one case) the Commission committed the error itself and for 0,2 percentage points (six cases) the error was made by the beneficiaries.

18

(19)  Contributing 1,4 percentage points to the estimated level of error.

19

(20)  Budget support payments financed by the EDFs in 2016 amounted to 644 million euro.

20

(21)  EDF payments to multidonor projects carried out by international organisations in 2016 amounted to 914 million euro. We cannot state the proportion of this sum to which the notional approach applied, since the Commission does not monitor it separately.

21

(22)  Efficiency and effectiveness of budget support is addressed in the Court’s special reports, the latest ones being SR 32/2016 on ‘EU assistance to Ukraine’, SR 30/2016 on ‘The effectiveness of EU support to priority sectors in Honduras’ and SR 13/2016 on ‘EU assistance for strengthening the public administration in Moldova’.

22

(23)  We did not perform checks on underlying items of expenditure if the Commission’s contribution was below 75 % of the action’s budget. In cases where such contributions laid between 75 % and 90 %, we assessed the need to perform checks on underlying items of expenditure on a case by case basis.

23

(24)  The figure quoted is the best estimate based on a representative sample of 124 transactions. We have 95 % confidence that the rate of error in the population lies between 1,8 % and 7,1 % (the lower and upper level error limits respectively).

24

(25)  (a) Risk analysis made compulsory for the preparation of annual audit plans by EU delegations and DG DEVCO departments; (b) grant contract templates revised so that DG DEVCO can select or contract auditors directly; (c) raising awareness of the most common types of error, training and strengthening the financial and control skills of DG DEVCO staff and beneficiaries; (d) quality grid to assess the quality of an audit or expenditure verification.

25

(26)  In paragraph 41 of the 2015 annual report, we also reported on measures aimed at improving document management and procurement procedures for both the Commission and beneficiaries.

26

(27)  By December 2016 for indirect management via international organisations and by June 2017 for grants under direct management, as set in the 2016 action plan.

27

(28)  EDFs and the EU general budget.

28

(29)  Footnote 24 of the 2016 AAR.

29

(30)  2014: 2,8 %; 2015: 2,2 %; 2016: 1,7 %.

30

(31)  2014: 14 estimates; 2015: 10; 2016: 6. According to the RER methodology, estimates should only be used if there is a valid legal or logistical reason for documentation not being available before the deadline for completion of the RER work by the end of the study. Transactions for which documentation has not been provided present an inherently enhanced risk of susceptibility to error and the estimate should be calculated with this in mind.

31

(32)  2014: 35 budget support transactions; 2015: 50; 2016: 73, sampled according to their respective weight in the population.

32

(33)  This includes a risk analysis of the past RER and ECA errors.

33

(34)  Best conservative estimate of the amount of expenditure authorised during the year but not compliant with the contractual and regulatory provisions applicable at the time payment is made.

34

(35)  See DG DEVCO’s 2016 annual activity report, p. 50.

35

(36)  The 2016 corrective capacity was calculated as the average annual amount of recovery orders issued for errors and irregularities between 2010 and 2016.

36

(37)  DG DEVCO checked a large sample of 2016 recovery orders and concluded that approximately 50 % of all recovery orders affecting the corrective capacity had been wrongly booked. The 2010-2015 recovery orders used in the calculation were thus adjusted by the same percentage. During our review, we found other errors that had not been taken into account, which would increase the percentage of wrongly booked recoveries to at least 62 %.

37

(38)  The population of 2016 recovery orders did not include recovery orders without any recovery context due to a technical problem in the Commission’s accounting system.

38

(39)  The maximum potential impact of these shortcomings does not affect our opinion on the reliability of the EDF accounts.

39

(40)  We chose our 2013 report for this year’s follow-up exercise as, typically, enough time should have elapsed for the Commission to have implemented our recommendations.

40

(41)  The aim of this follow-up was to verify whether corrective measures had been introduced in response to our recommendations, and not to assess the effectiveness of their implementation.

41

(42)  Contribution from the EDFs to cover expenditure incurred both at the Commission and in EU Delegations for the administrative support needed to manage operations financed under the EDFs.

42

(43)  Global commitments relate to financing decisions. Individual commitments relate to individual contracts.

43

Source: European Court of Auditors, based on the 2016 consolidated accounts of the 8th, 9th, 10th and 11th EDFs.

Source:

(44)  Include initial allocations to the 8th, 9th, 10th and 11th EDFs, co-financing, interest, sundry resources and transfers from previous EDFs.

44

(45)  As a percentage of resources.

45

(46)  Negative amounts correspond to decommitments.

46

(47)  Global commitments relate to financing decisions.

47

(48)  Individual commitments relate to individual contracts.

48

(49)  Net commitments after decommitments. Net payments after recoveries.

49

Source: European Court of Auditors, based on the 2016 consolidated accounts of the 8th, 9th, 10th and 11th EDFs. The figures presented do not cover the EDF part managed by the EIB.

Source:

---

ANNEX 1

RESULTS OF TRANSACTION TESTING FOR THE EUROPEAN DEVELOPMENT FUNDS

| | 2016 | 2015 |
| --- | --- | --- |
| |
| SIZE AND STRUCTURE OF THE SAMPLE |
| |
| Total transactions | 143 | 140 |
| |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| | | |
| Estimated level of error | 3,3  % | 3,8  % |
| | | |
| | Upper error limit (UEL) | 5,6  % | |
| | Lower error limit (LEL) | 1,0  % | |

2016

2015

SIZE AND STRUCTURE OF THE SAMPLE

Total transactions

143

140

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Estimated level of error

3,3  %

3,8  %

Upper error limit (UEL)

5,6  %

Lower error limit (LEL)

1,0  %

---

ANNEX 2

OVERVIEW OF ERRORS WITH AN IMPACT OF AT LEAST 20 %

| THE COURT’S OBSERVATIONS | THE COMMISSION’S REPLIES |
| --- | --- |
| Introduction |
| Applying the general audit methodology set out in Annex 1.1 to chapter 1 of the Court’s 2016 annual report on the implementation of the budget, we tested a representative sample of transactions to estimate the level of irregularity within the population for the EDFs. The errors we detected in testing do not constitute an exhaustive list — either of individual errors or of possible error types. The findings outlined below concerning errors with an impact of at least 20 % of the transaction value examined are presented by way of example (1). These errors were found in transactions worth between 128 000  euro and 11,8  million euro, with a median (2) value of over 4,8  million euro. | |
| Examples of error
   (3) |
| Non-compliance with procurement rules |
| Example 1 — Incorrect evaluation of tender for constructions works |
| We examined the Commission’s clearance of spending on construction works of a polyclinic in the Caribbean. The procurement for this project did not comply with the principles of transparency and equal treatment, nor did it follow the Commission’s own procurement rules. Even though in our view the lowest bid fulfilled all selection criteria, it was rejected, because of concerns about the bidder’s technical capacity to perform the work. We did not see proper justification for this decision. The notification letter gave the bidder the wrong reason for rejection. At the time of our examination, the Commission explained that the lowest bidder had not provided sufficient evidence of the minimum financing to carry out the work. However, the second lowest bidder, to whom the contract was awarded, also fell 10 % short of the minimum credit requirement. The evaluation committee gave the second lowest bidder the opportunity to provide more information on this selection criterion. This possibility was not given to the first bidder. Taken together, all these flaws constitute a serious public procurement error (quantification 100 %). | According to the conclusions of the evaluation report, the evaluation committee considered the lowest bid to be non-compliant, as it did not have sufficient technical capacity to execute the contract along with the other two contracts already awarded by the contracting authority. The lowest bid also fell short of the minimum credit requirement. |
| Example 2 — Lack of documentation on the public procurement procedure |
| We examined the Commission’s final clearance of spending on a project providing technical assistance to improve the administration of EU-funded projects in Grenada. The payment claim included several items relating to a consultancy service contract. We did not receive the full procurement files for this contract and were thus unable to verify that the procurement rules had been followed as laid down in the project’s general conditions. The ineligible costs resulted in an error rate of 30 % of the total costs tested. | The Commission is following up on the ECA’s finding. |
| Expenditure not incurred |
| Example 3 — Expenditure not incurred by the beneficiary |
| We examined the Commission’s clearance of spending on a project implemented by an international organisation to support private sector development in ACP countries. When verifying the full amount of the accepted expenditure, we noticed that it consisted of letters of guarantee issued by the international organisation and management fees for the full duration of the contribution agreement. The bank guarantees had not been enforced by the investors, meaning the beneficiary incurred no actual costs. In addition, the contract’s execution period is 20 years, and future management fees cannot be charged in advance. The ineligible costs resulted in an error rate of 98 % of the total costs tested. | The Commission has taken relevant remedial measures: the contested clearance has been cancelled. |
| Essential supporting documentation not provided |
| Example 4 — Insufficient supporting documentation |
| We examined the Commission’s interim clearance of spending on a project supporting trade and agriculture in Tanzania. For the majority of the expenditure items tested, either we did not receive any supporting documentation or the documents provided were insufficient, for example they did not cover the full amount of the item. We were therefore unable to verify the eligibility of these items. The ineligible costs resulted in an error rate of 45 % of the total costs tested. | Following the Court's visit, the Commission is still in the process of obtaining additional documentation before the final amount due is established. |
| Example 5 — Insufficient supporting documentation, ineligible costs |
| We examined the Commission’s final clearance of spending under a grant agreement to provide financial services to rural areas, implemented by a non-profit organisation in Malawi. We noted several issues in the payment claim. Not all supporting documents (such as payslips or proof of payment) were provided for the audit of salary payments, and ineligible costs, namely import duties, had been included in the claim. In addition, in some cases the procurement procedure did not observe the principles of transparency and non-discrimination. The ineligible costs resulted in an error rate of 44 % of the total costs tested. | The Commission will take the required actions in order to recover those amounts that are considered ineligible. |
| Incorrect calculation of expenditure claimed |
| Example 6 — Errors in the calculation of the fees charged |
| We examined the Commission’s spending on a trust fund administered by an international body. The cost claim included technical consultant fees. The contract for these services specified that the consultancy company should convert daily working hours to months on the basis of a 30 working-day month. Instead, the company used a 21 working-day month, which resulted in an increase in the fees charged. In addition, travel time and overtime were charged, in breach of the contract terms. The ineligible costs resulted in an error rate of 25 % of the total costs tested. | The Commission will take the required actions in order to recover the amounts that are considered ineligible. |

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Introduction

Applying the general audit methodology set out in Annex 1.1 to chapter 1 of the Court’s 2016 annual report on the implementation of the budget, we tested a representative sample of transactions to estimate the level of irregularity within the population for the EDFs. The errors we detected in testing do not constitute an exhaustive list — either of individual errors or of possible error types. The findings outlined below concerning errors with an impact of at least 20 % of the transaction value examined are presented by way of example (1). These errors were found in transactions worth between 128 000  euro and 11,8  million euro, with a median (2) value of over 4,8  million euro.

Examples of error
   (3)

Non-compliance with procurement rules

Example 1 — Incorrect evaluation of tender for constructions works

We examined the Commission’s clearance of spending on construction works of a polyclinic in the Caribbean. The procurement for this project did not comply with the principles of transparency and equal treatment, nor did it follow the Commission’s own procurement rules. Even though in our view the lowest bid fulfilled all selection criteria, it was rejected, because of concerns about the bidder’s technical capacity to perform the work. We did not see proper justification for this decision. The notification letter gave the bidder the wrong reason for rejection. At the time of our examination, the Commission explained that the lowest bidder had not provided sufficient evidence of the minimum financing to carry out the work. However, the second lowest bidder, to whom the contract was awarded, also fell 10 % short of the minimum credit requirement. The evaluation committee gave the second lowest bidder the opportunity to provide more information on this selection criterion. This possibility was not given to the first bidder. Taken together, all these flaws constitute a serious public procurement error (quantification 100 %).

According to the conclusions of the evaluation report, the evaluation committee considered the lowest bid to be non-compliant, as it did not have sufficient technical capacity to execute the contract along with the other two contracts already awarded by the contracting authority. The lowest bid also fell short of the minimum credit requirement.

Example 2 — Lack of documentation on the public procurement procedure

We examined the Commission’s final clearance of spending on a project providing technical assistance to improve the administration of EU-funded projects in Grenada. The payment claim included several items relating to a consultancy service contract. We did not receive the full procurement files for this contract and were thus unable to verify that the procurement rules had been followed as laid down in the project’s general conditions. The ineligible costs resulted in an error rate of 30 % of the total costs tested.

The Commission is following up on the ECA’s finding.

Expenditure not incurred

Example 3 — Expenditure not incurred by the beneficiary

We examined the Commission’s clearance of spending on a project implemented by an international organisation to support private sector development in ACP countries. When verifying the full amount of the accepted expenditure, we noticed that it consisted of letters of guarantee issued by the international organisation and management fees for the full duration of the contribution agreement. The bank guarantees had not been enforced by the investors, meaning the beneficiary incurred no actual costs. In addition, the contract’s execution period is 20 years, and future management fees cannot be charged in advance. The ineligible costs resulted in an error rate of 98 % of the total costs tested.

The Commission has taken relevant remedial measures: the contested clearance has been cancelled.

Essential supporting documentation not provided

Example 4 — Insufficient supporting documentation

We examined the Commission’s interim clearance of spending on a project supporting trade and agriculture in Tanzania. For the majority of the expenditure items tested, either we did not receive any supporting documentation or the documents provided were insufficient, for example they did not cover the full amount of the item. We were therefore unable to verify the eligibility of these items. The ineligible costs resulted in an error rate of 45 % of the total costs tested.

Following the Court's visit, the Commission is still in the process of obtaining additional documentation before the final amount due is established.

Example 5 — Insufficient supporting documentation, ineligible costs

We examined the Commission’s final clearance of spending under a grant agreement to provide financial services to rural areas, implemented by a non-profit organisation in Malawi. We noted several issues in the payment claim. Not all supporting documents (such as payslips or proof of payment) were provided for the audit of salary payments, and ineligible costs, namely import duties, had been included in the claim. In addition, in some cases the procurement procedure did not observe the principles of transparency and non-discrimination. The ineligible costs resulted in an error rate of 44 % of the total costs tested.

The Commission will take the required actions in order to recover those amounts that are considered ineligible.

Incorrect calculation of expenditure claimed

Example 6 — Errors in the calculation of the fees charged

We examined the Commission’s spending on a trust fund administered by an international body. The cost claim included technical consultant fees. The contract for these services specified that the consultancy company should convert daily working hours to months on the basis of a 30 working-day month. Instead, the company used a 21 working-day month, which resulted in an increase in the fees charged. In addition, travel time and overtime were charged, in breach of the contract terms. The ineligible costs resulted in an error rate of 25 % of the total costs tested.

The Commission will take the required actions in order to recover the amounts that are considered ineligible.

---

(1)  These errors account for more than half of the overall estimated level of error.

(2)  I.e. half of all errors with an impact of at least 20 % were found in transactions worth less than 4,8 million euro, and the remainder in transactions worth more than this amount.

(3)  Two further examples of error are presented in
  Box 5
  of the main text.

---

ANNEX 3

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR THE EUROPEAN DEVELOPMENT FUNDS

| Year | Court recommendation | Court's analysis of the progress made | Commission reply |
| --- | --- | --- | --- |
| Fully implemented | Being implemented | Not implemented | Not applicable | Insufficient evidence |
| In most respects | In some respects |
| 2013 | Recommendation 1: EuropeAid should ensure that all authorising officers by sub-delegation recover interest generated by pre-financing over 750 000 euro annually (2013 annual report, paragraph 51, recommendation 1). | x | | | | | | |
| Recommendation 2: EuropeAid should, by the end of 2014, complete the development of the CRIS system to allow interest on pre-financing of between 250 000 and 750 000 euro to be recognised as financial revenue (2013 annual report, paragraph 51, recommendation 2). | x | | | | | | |
| Recommendation 3: EuropeAid should revise the quantification of benefits of controls implemented (2013 annual report, paragraph 51, recommendation 3). | x | | | | | | |
| Recommendation 4: EuropeAid should report in the AAR on progress in the implementation of the action plan to address weaknesses in the control system (2013 annual report, paragraph 51, recommendation 4). | x | | | | | | |
| Recommendation 5: EuropeAid should disclose in the AAR the scope of the RER study and the estimated lower and upper error limits (2013 annual report, paragraph 51, recommendation 5). | x | | | | | | |

Year

Court recommendation

Court's analysis of the progress made

Commission reply

Fully implemented

Being implemented

Not implemented

Not applicable

Insufficient evidence

In most respects

In some respects

2013

Recommendation 1: EuropeAid should ensure that all authorising officers by sub-delegation recover interest generated by pre-financing over 750 000 euro annually (2013 annual report, paragraph 51, recommendation 1).

x

Recommendation 2: EuropeAid should, by the end of 2014, complete the development of the CRIS system to allow interest on pre-financing of between 250 000 and 750 000 euro to be recognised as financial revenue (2013 annual report, paragraph 51, recommendation 2).

x

Recommendation 3: EuropeAid should revise the quantification of benefits of controls implemented (2013 annual report, paragraph 51, recommendation 3).

x

Recommendation 4: EuropeAid should report in the AAR on progress in the implementation of the action plan to address weaknesses in the control system (2013 annual report, paragraph 51, recommendation 4).

x

Recommendation 5: EuropeAid should disclose in the AAR the scope of the RER study and the estimated lower and upper error limits (2013 annual report, paragraph 51, recommendation 5).

x

---