# EUR-Lex - 52012DC0281 - EN

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# 52012DC0281

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE COURT OF AUDITORS Synthesis of the Commission's management achievements in 2011 /* COM/2012/0281 final */**

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1.           Introduction

Article 317 of the Treaty on the Functioning of the European Union
(TFEU) gives the European Commission responsibility for implementing the EU budget,
within the limits of the appropriations available and having regard to the
principles of sound financial management. It provides for Member States to cooperate
with the Commission to ensure that the appropriations are used in accordance
with these principles.

By adopting this Synthesis Report, on the
basis of the assurances and reservations made by its Directors-General and
Heads of Service in their AARs, the Commission takes overall political
responsibility for management of the EU budget.

In the Synthesis Report, the Commission also identifies the key
management issues to be addressed as a matter of priority and the action to be
taken to address identified weaknesses.

In 2011, for the fourth successive year, the Court gave an
unqualified positive opinion on the EU consolidated accounts for 2010. With
regard to the legality and regularity of payments, the Court estimated the
error rate[1] for payments as a whole between
2 % and 5 %, which compares well with the situation as late as 2006,
when the most likely error rate was still above 7 %. This demonstrates
that the measures taken over time to remedy identified weaknesses are working,
and bears witness to the continuous efforts made by the Commission.

The Commission understands that the Court has
decided to introduce methodological changes. These changes concern a
redefinition of the underlying transactions in its audit sample (excluding
pre-financing and including clearing) and the method for quantifying serious
irregularities in public tendering in all policy areas. The financial year 2011
will serve as a dry-run exercise for the Court’s new methodology. The new
approach which will be applied as of 2012 is likely to increase mechanically the
reported error rates as of 2012.

The Commission understands that these changes will be
clearly explained and the error rates will be presented in the annual reports
in such a way that the comparability with the previous years is preserved. The
Commission is however concerned by the impact that the increase in the
published error rates may have on the cost of control as this could lead stakeholders
to request supplementary controls putting additional administrative burden on
the beneficiaries and on the Commission services.

2.           Strengthening
the basis of assurance

2.1.        Chain of accountability

The College delegates the operational implementation of political and
management objectives to the Directors-General and Heads of Service, who, as
‘Authorising Officers by Delegation’ (AOD’s) receive the means to act. This decentralised management organisation is
characterised by a clear definition of the responsibilities of the different
actors. The AOD’s are fully empowered to define the most
appropriate and effective control system for ensuring sound and efficient
management of the resources for which they are responsible. The AAR is the main mean by which the AOD account for their
stewardship of the human and financial resources for which they are responsible.
The AOD’s report on the performance of their duties in the AARs,[2] which
include a signed declaration of assurance covering inter alia the legality and
regularity of financial transactions. The AAR is the report in which they document
any issues arising from their management which need to be brought to the
attention of the College for recognition at the political level. Each AAR
explicitly confirms that the responsible Commissioner(s) has (ve) been informed
of the main aspects of the AAR, including any reservations the AOD intended to
make, before the final signature of the declaration of assurance.

This Synthesis Report is adopted collegially after discussion at one
of the Commission’s weekly meetings.

2.2.        Quality of the Annual Activity Reports

AARs constitute a major source of information for the Court and for
the Discharge Authority. In its 2010 Annual Report, the Court assessed the
quality of twenty-one 2010 AARs out of forty-nine in total. In the Court’s opinion,
twelve audited 2010 AARs give a ‘fair assessment of financial management in
relation to regularity’ and nine audited 2010 AARs give a ‘partially fair
assessment’. For seven of those nine AARs, the Court was of the opinion that
the scope or scale of a reservation should have been wider. The 2011 AARs
explain how the relevant services have worked to address the issues highlighted
by the Court.

The Standing Instructions for the 2011 AARs have been fine-tuned to
further improve the quality of the evidence presented to support assurances
made, and to improve the readability of the reports. The Commission's
analysis shows that, on the whole, the revised instructions have been
adequately implemented throughout the Commission. All services have
reported regularity indicators covering all significant budget areas and
management modes and those reporting subsequent event have done so in
compliance with the revised guidelines.

The Commission notes major improvements towards a more objective and
accurate determination of the scope of the reservations and the resulting
financial exposure.  These improvements include better consistency in the use
of terminology, in the presentation of error rates, in the calculation of the
amount at risk and the application of materiality criteria as well as the use
of the best reliable information available in the shared management area.

In a constant quest for improvement, the Commission central services
continue to be involved at an early stage by supporting DGs in drafting the
AARs, discussing key issues with Directorates-General and Services and
providing the guidance needed to improve the quality of the final texts. Again,
(pre-)peer-reviews have proven to be an effective platform for the different services,
as peers, to share opinions on how to formulate a number of cross-cutting
issues in their AARs, how to ensure a coherent approach and how to adequately
tackle identified weaknesses.

The AARs are the main vehicle through which
the AOD’s document their accountability to the College and are a source of
evidence for the Statement of Assurance (DAS). The Commission is committed to
continuously improving the readability and comparability of the AARs. The
Commission instructs the Secretariat-General and the Directorate-General for
Budget to continuously provide guidance to Directorates-General and Services,
through a regular review of Standing Instructions, guidance notes, training
measures, a quality review of draft AARs and (pre-)peer-review meetings.

2.3.        Reporting on error rates

Directors-General include reservations in their declarations of
assurance based upon their assessment of the materiality of weaknesses and/or
observations regarding the building blocks of their AARs. A key element used to
determine whether a reservation is necessary is an evaluation of the detected
or reported error rates and the related financial exposure.

Commission departments have different approaches to considering and
calculating residual error rates, which take into account the specificities of
the policy areas for which they are responsible. Wherever possible, the
Secretary-General and the Director-General for Budget have encouraged the
harmonisation of different aspects, in particular the use of the residual error
rate. The Standing Instructions have thus been enhanced to ensure the consistent
use of terminology and criteria by all the services, as regards the residual
error rate, the use of a multiannual approach, and the notion of ‘subsequent
events’ (events occurring between year-end and the signature of the report by
the AOD at the end of March).

A large number of DGs have already embraced
the multiannual approach to error reporting. The Commission instructs the other
Services operating multiannual programmes to disclose in their AAR a cumulative financial risk under a multiannual control strategy, so that this will be the
only approach from 2012 onwards.

During the
reporting year, the Structural Fund DG’s worked on a new and common approach
for determining materiality. The decision on whether to make a reservation
is now based on a three-step approach:

-
assessing the national management and control
systems;

-
taking full account of the projected error rates
as detected by the national authorities and reported in Annual Control Reports,
when these could be validated, instead of using predefined estimated error
levels;[3] and

-
applying a cumulative residual risk for each
programme, to monitor the corrective capacity of multi-annual management and
control systems.

This approach also means that the AARs disclose the results of the Commission’s
assessment of all operational programmes control systems, taking into
account the various levels of assurance and national audit opinions. This is in
line with the Single Audit principle and also underlines the fact that Member
States are responsible for their own control environment.

The Commission considers these efforts to
harmonise the materiality criteria to be an important improvement contributing
to the coherence, readability and transparency of the AARs. It instructs the
Directorates-General for Regional Policy, for Employment, Social Affairs and
Inclusion, for Agriculture and Rural Development, for Maritime Affairs and
Fisheries to continue this harmonisation and to agree on a single set of
criteria and presentation for the 2012 AAR. The Directorate-General for Home
Affairs should, although having different legal bases, be associated as much as
possible to this harmonisation process.

2.4.        Internal Audit

The Audit Progress Committee (APC) continued to inform the College
on audit issues, including issues with a corporate dimension. The APC also
informed the College on the progress achieved in implementing accepted audit
recommendations by the end of 2011. 80 % of all recommendations accepted
in the period 2007-2011 had been implemented. Out of 118 very important
recommendations outstanding at the end of 2011, only 24 were overdue by more
than 6 months compared to the initially planned target date.

In May 2012, the Commission’s Internal Audit Service submitted the
2011 Annual Internal Audit Report for the year 2011 as stipulated under Article
86(3) of the Financial Regulation. It accompanied the Commission’s Internal
Audit Service’s second Overall Opinion. The opinion is based on work carried
out by the Internal Audit Capabilities and the Internal Audit Service during
the period 2009 to 2011 as part of the coordinated strategic audit plan. It focuses
on financial management.

The Overall Opinion provides a positive opinion on financial
management in the Commission with the exception of those areas over which reservations
have been expressed by Directors General in their Annual Activity Reports. The
estimated potential financial impact of these reservations is less than 2% of
the budget as a whole but not all reservations are quantifiable but represent
potential reputational risks.

The Commission also notes that in the Emphasis of Matter attached
to the Overall Opinion, the Internal Audit Service highlights a number of
issues that needs to be addressed by Commission services:

-
The need to further harmonise the calculation of
the residual error rate across the Commission;

-
Weaknesses identified in external aid in
relation to centralised and decentralised calls for proposals, and in particular,
the need to improve the planning, reporting and monitoring of the controls
exercised by EU Delegations in the area of grant management;

-
Policy areas where the risk of error is still
too high and the particular problems associated with shared management in the
Cohesion Policy area;

-
The need to better coordinate and harmonise
control strategies at policy family level, in particular the programmes
for on-the-spot controls in the research policy DGs;

-
Deficiencies with control systems in Member
States, in particular the first-level checks over claims by the services
responsible for implementing aid schemes;

-
Measures still in the process of being
implemented at end-2011 to address some significant risks , such as improving
governance, project management and accounting of fixed assets for the Global
Navigation Satellites Systems (GNSS); improving the effectiveness of ex-ante
checks on claims paid in the area of research; steering IT developments with
the objective of avoiding duplication; monitoring by several services of
payment deadlines and implementing an anti-fraud strategy.

3.           Assurance gathered through the AARs and
reservations made by the Directors-General

Having examined the AARs, and in particular
the declarations signed by each Director-General, the Commission notes that
they all give reasonable assurance regarding the use of resources for the
intended purpose, observance of the principles of sound financial management
and the fact that the control procedures used, give the necessary guarantees of
the legality and regularity of the underlying transactions. Some AOD’s have disclosed
residual weaknesses and made reservations in their AARs, without calling into
question the overall assurance given.

Fourteen Directors-General and two Directors of Executive Agencies
issued a total of twenty-seven reservations in their 2011 AARs.
Reservations have been made in 17 services, which together account for more
than 90% of the Commission financial operations (expenditure and revenue). These
included fourteen of the seventeen reservations already made in 2010 on which
action was still ongoing at the end of 2011, plus thirteen new reservations. Three
2010 reservations were lifted.

The total amount at risk as quantified in the reservations increased
significantly, from EUR 600 million in the 2010 AARs to a potential maximum
of EUR 3 564 million[4] the
2011 AARs. This increase in the number of reservations and in monetary exposure
in amounts at risk does not result from deterioration in the quality of
financial management at the Commission. It is rather due to the combined effect
of a number of technical and structural factors:

-
Among these twenty-seven reservations, six
concern the same issue and the same programme (FP7). This is because the
seventh Framework Programme (FP7), which gained momentum in 2011 (see chapter 3.5),
is managed by five Directorates-General and one Executive Agency and therefore leads
to multiple reservations.

-
The relative point of maturity in the
multi-annual budget implementation cycle:

·
in direct management, the 2007-2013 generation of
programmes have by now reached a level of implementation which, allows drawing
conclusions from ex-post audits (which explains the introduction of the
research FP7 reservation);

·
in shared management, Member States begin to
report audit results from an increased sample of on-going operational
programmes (which partially explains the increased scope of the reservations of
the Directorate-General for Regional Policy);

·
most of the 2007-2013 programmes are now fully
running. Increased level of implementation of 2007-2013 programmes lead to
higher volumes of payments and therefore bear a higher inherent risk of error
compared to previous years.

-
In Cohesion Policy, the replacement (see chapter
3.3) of flat-rate management estimations by the actual error data reported by
audit authorities in Member States has resulted in a better assessment of the
regularity risks, but has also meant that a higher number of programmes come
under reservation, with greater amounts at stake.

-
The newly issued guidelines on how to consider
pre-financing for the calculation of the residual error rates and the amounts
at risk require services to include the previous pre-financing that has been
cleared together with the interim and final balance payments, and thus prevents
them from averaging down error rates detected in interim and final payments
with the new pre-financing expenditure for which the error rate is still zero.

-
For a number of programmes, the regularity risk
is very close to the materiality threshold of 2 %. Slight, year-to-year variations
in the detected error rate around the threshold result in intermittent
reservations over time.

All Directors-General and Heads of Service have identified the main
reasons for his/her reservation(s) and set out remedial actions to address it/them.
Generally, the most common concerns stem from the complex eligibility rules
for grant beneficiaries (an issue which affects funds under direct
centralised management) and from the incorrect application of public procurement
rules (a frequent cause of errors for shared and indirectly managed funds).
The Commission has drawn operational conclusions from this experience and has made
proposals for major simplification (see chapter 4.5 below) in the next
generation of programmes.

After assessment of the control results, three reservations carried
over from previous years were lifted. To lift a reservation, AOD’s were asked
to present the measures put in place to address the weaknesses identified, to
show that the measures were effective and to demonstrate that the weaknesses
had been effectively addressed. In most cases, this requires audit evidence
that error rates have decreased to an acceptable level or that systems have
been strengthened and are now functioning properly.

3.1.        Revenue

Traditional own resources (TOR) represent 12.2 % of total
revenue for the 2011 EU budget. They are established and collected by the
Member States. Three quarters of these amounts are paid to the EU budget, the
remaining quarter being retained by the Member States to cover collection
costs. Given its geographical position, Belgium is a major contributor of TOR,
accounting for 9.45 % of total TOR in 2011. Inspections carried out by the
Commission and audits performed by the Court have highlighted a reconciliation issue
between the amounts transferred and underlying records. The Director-General
for the Budget has made a reservation concerning insufficient assurance as
to the reliability of the Belgian clearance and accounting systems. The
Commission has requested remedial action, including the enhancement of internal
controls and full-scale external audits of the accounting system. In the
meantime, there is uncertainty as to the correctness of the amounts of Belgian TOR
credited to the Commission’s account.

The Commission recalls the commitments undertaken by the authorities
of the concerned Member State with respect to the action plans drawn up to
remedy the deficiencies identified in its custom declaration processing
systems, and reiterates that it will closely and strictly monitor its
implementation.

3.2.        Agriculture
and Natural Resources

In its 2010 annual report, the Court concluded, based on the
estimated error rate[5] just above 2 %, that
the Agriculture and Natural Resources chapter was affected by material error. At
the same time, it indicated that the direct payments covered by the Integrated
Administration and Control System (IACS), which represent 91.4 % of total EAGF
expenditure, were free from material error.

In his 2011 AAR, the Director-General for Agriculture and Rural
Development made three reservations:

-
Given the importance of IACS for the management
and control of agricultural expenditure, and the serious deficiencies in
IACS in Bulgaria and Portugal, the 2010 reservation was carried over for
reputational reasons, even if the financial impact of the deficiencies did not
exceed the materiality threshold. In 2010, this reservation covered Bulgaria, Romania and Portugal. In 2011, the reservation for Romania was lifted as the Commission
audits determined that the Romanian action plan was completed and that the work
done was considered to be appropriate.

-
A new reservation on expenditure for rural
development measures as a whole was made because the residual error
rate (up to 2.36 %) was determined to be slightly above the materiality
threshold in 2011. This increase in the error rate is mainly because rural
development is subject to a high number and/or complex conditions foreseen in
the programmes that increase the risk of errors by beneficiaries and make
controls by the national authorities more difficult and costly.

-
A reputational reservation for deficiencies
in the supervision and control of certified organic products was made. Events
in 2011 showed that controls in the organic farming sector are considered as insufficient
and that there might be weaknesses in EU supervision of the control systems of Member States and third countries, including supervision of the control bodies certifying
organic products for import into the EU.

The Director-General for Maritime Affairs and Fisheries
maintained her reservation concerning the Financial Instrument for Fisheries
Guidance (FIFG) with regard to one programme in Germany, for which a
correction will be required but which is pending a valuation exercise.

The Director-General for Maritime Affairs and Fisheries issued a
new reservation concerning European Fisheries Fund management and control
systems and investments on board, as errors with regard to the eligibility
of expenditure had been identified, and it had been established that Member
States do not sufficiently verify whether investments on board increase the
ability of vessels to catch fish.

The Director-General for Climate Action maintained his previous
reservation on account of the reputational damage to the Commission
resulting from a significant security breach in the national registries of
the EU Emissions Trading System (ETS).

The Director-General for Health and Consumers issued a reservation
concerning the accuracy of Member States’ cost claims under the animal
disease eradication and monitoring programmes in the food and feed policy area.
The main sources of the detected errors are cost claims from Member States that
do not correctly apply the eligibility rules set out in the legislation. With a
view to reducing the error rate in the feed and food area, the Director-General
for Health and Consumers had already taken a number of steps in previous years.
For example, a more precise and restrictive definition of eligible expenditure
was introduced by a Commission decision for veterinary programmes starting on 1
January 2011. The introduction of lump sums as from 2012 will further reduce
the errors made in Member States’ cost claims in the coming years.

3.3.                  Cohesion, Energy and Transport

For many years, the Cohesion Policy has had an estimated error level
higher than the other policy areas. In 2010, the Court estimated the most
likely error rate for this chapter at 7.7 %. The detected error rate is subject
to year-on-year variations and is influenced by the relative stage in the
multiannual implementation cycle. 2010 was the first year in which most
programmes under the current regulatory framework were fully running, and most
national authorities had implemented projects and declared expenditure, thus
increasing the inherent risk of errors.

The Director-General for Regional Policy issued two reservations:
one reputational reservation on management and control systems for identified
operational programmes in Germany, Hungary, Ireland, Italy, Spain and for cross-border
programmes under the ERDF/Cohesion Fund for the 2000-2006 period; and another
on ERDF/Cohesion Fund management and control systems for identified operational
programmes in eighteen Member States[6], IPA management and control
systems in the former Yugoslav Republic of Macedonia and European Territorial
Cooperation programmes, and a programme for IPA[7]/cross-border
cooperation for the period 2007-2013.

The Director-General for Employment, Social Affairs and Inclusion
made two reservations: one concerns management and control systems for
identified operational programmes in Germany, France, Italy and Spain under ESF
2000-2006, and the other for identified operational programmes in Belgium, the Czech
Republic, Germany, Italy, Latvia, Lithuania, Romania, Slovakia, Spain and the
United Kingdom under ESF 2007-2013 as well as for the former Yugoslav Republic
of Macedonia IPA programme. Both reservations were made following serious
deficiencies in key aspects of the management and control systems of the
identified operational programmes.

Thes deficiencies linked to the reservations for both Directorates
General concern, for instance, certification activities, high error rates,
compliance with public procurement rules, eligibility rules, management
verifications or lack of audit trail.

The Commission will continue to rigorously exercise its supervisory
role by calling on Member States to immediately address the deficiencies
detected in their management and control systems and also by timely interrupting
or suspending payments as well as by making financial corrections whenever
necessary. The Commission will focus its efforts in these areas, through
concerted preventive and corrective action. In the triennial revision of the
Financial Regulation, as well as in the sector-specific proposals, the
Commission proposed that the national accredited authorities shall provide an
annual management declaration of assurance for all programmes under shared management
as is already the case for agricultural policy.

The Cohesion DG’s provide a quantification of the reservations by
reporting the overall estimated amount at risk and by estimating the financial
risk:

-
The overall estimated amount at risk (based
on the validated error rate) refers to the quantification of errors as a
percentage of the 2011 interim payments for all 2007-2013 programmes and is
calculated by the Commission on the basis of the audit of operations performed
by the Audit Authorities and the resulting error rates reported in their 2011
Annual Control Reports, after validation by the Directorates-General concerned.
The amount at risk is between 3.1% and 6.8% for the Directorate-General for
Regional Policy and is between 2% and 2.5% for the Directorate-General for
Employment, Social Affairs and Inclusion.

-
The estimated financial risk refers to
the impact of 2007-2013 programmes where the Directorates-General concerned did
not have reasonable assurance and therefore made a reservation. The estimated
financial impact of the reservations is between EUR 632 million and 1 427
million for the Directorate-General for Regional Policy and is EUR 59 million
for the Directorate-General for Employment, Social Affairs and Inclusion. These
amounts correspond to respectively 2.1% to 4.8% and 0.6% of the payments made
in 2011.

In general, the quantification of reservations in the AARs of the Director-General
for Regional Policy and the Director-General for Employment, Social Affairs and
Inclusion are not directly comparable with the consolidated error rates for
Cohesion Policy as estimated by the Court in its Annual Report. The main
differences relate to:

-
The mix of programmes being tested can
have an impact on the test results: The Court is basing its calculation on a
representative sample of transactions (payments) and is extrapolating this to
all expenditures under Cohesion Policy whilst the rates calculated by the
Commission are Fund specific and cover each programme or groups of programmes
running under identical management and control systems.

-
The time difference: the amount at risk
is calculated by the Commission at a later stage in the control cycle compared
to the error rate reported by the Court. In accordance with the relevant
regulations, the Annual Control Reports submitted by Member States relate to
2010 expenditure whilst the error-rate reported annually by the Court is
calculated on the basis of errors identified in the year concerned.

-
The Commission implements multiannual
control strategies, so the AOD’s assess the functioning of the control systems accordingly.
In contrast, the Court is required to express an annual audit opinion. While
the risk of irregularities in a number of programmes can be considered
manageable on a multiannual basis, it could be higher than the estimated
averages in a number of programmes and Member States when measured on an annual
basis. For this reason, it is fully justified that the amount at risk
reported in the AARs by the Commission services for structural actions takes
into account the various mitigating and corrective actions in place under the
multiannual management and control systems (allowing corrections to be made
some years after the disbursement of funds by the Member State to the
beneficiaries and by the Commission to the Member State). Therefore, the error
rate in the Court’s DAS is typically higher, as it includes errors that can be
corrected in subsequent years once all actors in the control chain have
intervened.

-
The quantification of error rates is sometimes
based on different assumptions especially where the real value of the
error is unknown. For instance, unlike the Commission services, the Court quantifies
serious infringements of public procurement rules at the full value of the
contract, whereas the real economic loss to the EU budget is limited to the
additional profit margins for contractors benefiting from such infringements.

The Commission services have analysed the errors detected by the
Court for the years 2006-2009 and presented their analysis in a working paper.[8]
This paper demonstrates that non-compliance with eligibility criteria and
errors in public procurement rules or procedures are the most common types of
errors detected in Cohesion Policy. Inadequate audit trails and incorrect
calculation of the co-financing rate for revenue-generating projects are also sources
of error. The analysis carried out shows that the selection of projects and
ineligible costs are the main eligibility errors, while in public procurement
the main sources of error are assessment of bids, use of inappropriate tendering
procedures, and publication issues.

In 2011, the Commission made proposals for the
next multiannual financial framework, including a number of significant
enhancements, in particular in shared management (which constitutes some 80 %
of the budget), with a view to improving the design of funding schemes, addressing
the risk of error, limiting the administrative burden for beneficiaries and
other stakeholders and reducing the operating costs of controls. As part of the
revision of the Financial Regulation, the Commission has proposed the introduction
of annual management declarations of assurance by the accredited bodies for all
programmes under shared management as is already the case for agricultural
policy.

In its proposals for cohesion policy for 2014-2020 the Commission
also proposed to further improve financial management and regularity of budget
expenditure through 10 % retention of payments to Member States during the year
and an annual clearance of accounts once Member States provide certified annual
accounts for each programme.

The provision of reliable and complete financial information and
audit data by the Member States is one example of an area where improvements
are necessary. This is why the Commission will from this year onwards, transmit
the annual summaries of the Member States with an analysis of their content to
the Discharge Authority in accordance with the provisions of Article 319 of the
Treaty. Where appropriate, the Commission will recommend to the national
authorities how to further improve the reporting instruments notably on
national audit results and opinions so they can better contribute to the
Commission's assurance process.

The Commission calls on the Member States to
demonstrate their commitment to improving accountability and transparency by
reinforcing control measures where necessary, for the remainder of the current
programming period, in particular as regards first-level management checks,
before certifying expenditure to the Commission.  It also calls on them to follow
its guidance on the treatment of errors and annual control reports, as well as
on annual summaries, to make them a valuable additional source of assurance for
the Commission and a useful source of information for the discharge authority. The
Commission encourages all Member States to follow the example of the 15 Member
States[9] that have included
assurance statements in their annual summaries and to take other measures to
demonstrate their commitment to the sound financial management of EU funds and
transparency.

3.4.                  External aid, Development and Enlargement

Following the
creation of the European External Action Service, the rules for administering
and accounting for the EU budget have been clarified. EEAS staff and Commission
staff were allocated separately in Delegations with the aim of distinguishing
between Commission and EEAS core tasks within Delegations, while keeping a
degree of flexibility.  To ensure that staff (and other administrative
resources) were being used for the purposes for which they were intended;  Heads
of Delegation have been given joint EEAS/Commission instructions and guidance[10]
on the management of staff in Delegations.

Following the
revision of the Financial Regulation on 24 November 2010, the Heads of EU
Delegations have for the first time accompanied their annual Authorising
Officer by sub-delegation report with a declaration of assurance.

Furthermore, Heads
of Delegation have been provided with a jointly agreed EEAS/Commission framework[11]
concerning the management of delegations of the European Union. For this
purpose, the Steering Committee for Delegations ('EUDEL') (composed of
representatives of the EEAS and of the Commission) has been set up.

As recommended
by the European Court of Auditors, in order to further underpin the declaration
of assurance in the AAR, the Directorate-General for Development and
Cooperation developed a key indicator for the estimated financial impact of
residual errors once all compliance controls have been implemented. Following
the launch of the audit work, such an indicator is now expected to be available
for the reporting year 2012. For the Directorate-General for Enlargement, such
an indicator is already available for funds under decentralised management. A
pilot work plan has been implemented in order to extend coverage to include
funds under centralised management.

As stressed in
the Internal Auditor overall opinion, the assurance provided by the controls
over external aid, exercised by the deconcentrated delegations, needs to be
improved through better planning and supervision.

3.5.                  Research
and other internal policies

The Research DGs’ common audit strategy (including an intensive
audit campaign with extrapolation of systemic errors) for the Sixth Framework
Programme (FP6) (2002-2006) has proved successful in terms of audit
coverage and audit results achieved. At the end of the period, the multiannual
residual error rate[12] had fallen
substantially, reaching a level very close to the 2 % target. Although the
FP6 reservations have been maintained, the cost of controls would not justify
additional efforts to get below 2 %.

As regards FP6, the error rate detected in 2011 by the Director-General
for the Information Society and Media (below 2%) confirmed the approach already
taken in 2010 of not further qualifying the declaration of assurance, as the
multiannual error rate (i.e. measured for the whole FP6) was expected to drop
below the target in the course of 2011.

The Seventh Framework Research Programme (FP7) (2007-2013)
gained momentum in 2011 as the programme passed its halfway point and the
first projects, launched at the beginning of the programme, started to be
concluded. As already indicated last year in the provisional error rates,
representative audit samples showed that the error rate for the entire
population exceeds the 2 % threshold. Consequently, the Research DGs and
the Research Executive Agency[13] introduced reservations
on FP7 as from 2011.

The simplification measures introduced in 2011 should have a
positive impact on the error rate in future. The remaining scope to reduce
errors will be addressed in particular through the following actions: improving
guidance and feedback to participants and auditors on the most common errors;
improvement of the ex-ante control strategy; and carrying out an appropriate
number of ex-post audits to reduce, together with recovery actions, the
residual error rate over a multiannual perspective. Even with these measures, the
FP7 controls strategy will probably lead to a residual error rate at the end of
the FP7 lifecycle of between 2 % and 5 %.

Under the current procedures, seven Authorising Officers by
Delegation are responsible for the management of the Research budget. Each aims
at establishing a representative error rate for his/her part of the budget.
This leads to considerable planning constraints and multiple audits of the same
beneficiaries by different services. For that reason, it was agreed that, as of
2012, a Common Representative Audit Sample (CRAS) would be introduced
across the Research family. In particular, this will reduce the audit burden on
beneficiaries by reducing the number of repeat audits.

The Director-General for Communication maintained
the reputational reservation, introduced for the first time in 2008, on
potential non-compliance with applicable legislation on intellectual property rights
by Commission services. Most corrective action detailed in the action plan
has been taken, but the constant evolution in the media field (such as the
Media Monitoring System or the extensive use of new media) is creating new
compliance challenges that have to be dealt with before this reservation can be
lifted, something which is excepted to occur next year.

The error rate for actions managed centrally[14]
by the Director-General for Education, Audiovisual and Culture dropped below
2 % and the 2010 reservation on centralised direct management could be
lifted following the implementation of effective mitigating actions and the use
of a more representative sample.

The Director of the Education, Audiovisual
and Culture Executive Agency reported progress in the implementation of action
plans to improve the control systems for management grants. The Education,
Audiovisual and Culture Executive Agency lifted last year’s reservation
relating to the Culture and Youth programme following the reduced error rates.
However, the Executive Agency decided to issue a new reservation for the Life
Long Learning (LLP) programme. In order to deal with the aforementioned
reservations, the Agency had already adopted an action plan following the AAR
2010 which foresaw mitigating measures for all programmes managed by the
Agency, including the LLP programme. The agency will continue its efforts to
help beneficiaries comply with the requirements, in particular as concerns the provision
of supporting documents.

The Director-General for Home Affairs made two reservations
in the 2011 AAR, one concerning reputational risks due to delays in
implementing a large-scale IT system, the SIS II project. For this project,
significant progress was made in 2011 towards the successful deployment of this
large scale IT system. The detailed action plan was fully implemented, but new
events caused additional delays, such as the inability of the responsible Member State to provide one of the test tools originally envisaged for the testing and the
emergence of new delays in national developments in certain Member States or
delays at the level of the central system. The second, and new, reservation
concerns the financial risk resulting from the residual error rate in the non-audited
population of grants in the financial programmes ‘Prevention, preparedness and consequence
management of terrorism and other security-related risks’ (CIPS) and
‘Prevention of and fight against crime’ (ISEC). These programmes target
relatively new policy areas and new beneficiaries, and the Director-General for
Home Affairs is confident that an increase in the number of audits combined
with more and better information to beneficiaries will help reduce error rates
in the near future.

The Director-General for Enterprise and Industry extended his reservation
relating to the reliability of financial reporting by the European Space Agency
(ESA). During 2011, the Commission’s monitoring and control strategy for ESA was
further strengthened: it will continue auditing the financial reports provided
by ESA and will encourage and support ESA in implementing its action plan,
developed to address the recommendations made by ESA’s external Audit Committee
and to improve the quality of financial reporting to the Commission. Given the
actions currently under way, the Commission expects the issues to be corrected
soon which will enable reducing and finally lifting this reservation.
Additionally, the use of external experts has helped to ensure the reliability
of the fixed assets amounts included on the EU balance sheet in 2011.

The Commission is satisfied with the work
undertaken to address the issue of respect for intellectual property rights by all
its services and encourages them to take the necessary steps so that this
reservation can be lifted in 2012. It welcomes the guidelines[15]
on managing intellectual property rights in the Commission.

The Commission welcomes the low residual error
rate at the end of the Research FP6 lifecycle and takes note of the
expectations and limitations set for the FP7 audit strategy.

The Commission notes the reservation for the
LLP programme managed by the EAC Executive Agency, despite work done to better
inform beneficiaries of the requirements. It invites the Agency to step up its efforts.

The Commission recognises that developing and
managing large-scale IT systems such as SIS II presents particular challenges. It
has put in place strong goverance mechanisms and will continue to give top
priority to maintaining effective governance and close cooperation with
stakeholders as far as SIS II is concerned.

4.           Cross-cutting
issues and solutions

4.1.        The
added value of the EU budget

Reporting on the Commission’s management achievements is
not only limited to reporting the compliance with financial rules and error
rates. The quality of spending and the added value of the EU budget are
important factors to be demonstrated. In their AARs, the Authorising Officers
by Delegation explain how they have used the financial and human resources
allocated to them to achieve the policy objectives set by the College, showing
how policies have generated added value for EU society. The Standing
Instructions for preparing the Annual Activity Reports call for more attention
to this type of reporting.

In February 2012, based on Article
318 TFEU, the Commission reported[16] for the first
time on the evaluation of the EU’s finances based on
the results achieved. It report seeks to provide an
overview of the objectives of EU programmes, and the impacts and results
achieved depending on the stage reached in the programmes at the time of
evaluation. By covering each year a limited number of programmes for which
relevant evaluations are available, this report can cover in the medium term a
broad range of financial programmes under the different management methods. The
report covers two main areas of EU direct financial intervention: Education and
Culture and Research.

Also, the Internal
Audit Service has made major efforts to define its performance audit framework
and to develop an in-house training programme for auditors on this matter.

The Commission instructs the
Secretariat General to explore opportunities for making the Annual Evaluation Report
based on Article 318 TFEU more inclusive, covering the full range of activities
financed by the budget, including the appropriate indications in relation to
the discharge recommendations, while relying extensively on the available
performance-related information such as evaluation reports, the AARs and the Activity
Statements to the Draft Budget.

4.2.        Transparent reporting on interruptions
and suspension of payments, financial corrections and recoveries in shared management[17]

4.2.1.     Information on interruption
and suspension of payments by the Commission

In line with its commitment towards the discharge authority in its
2008 Action Plan to strengthen its supervisory role for structural actions, the
Commission has encouraged its services to interrupt payments procedures and to
propose suspension procedures as soon as the legal conditions are met.
Regarding shared management, the Commission interrupts or suspends payment
procedures as soon as there is evidence suggesting a significant deficiency in
management and control systems of Member States.

The services carrying out transactions in shared management mode
have reported all interruption/suspension decisions in their AARs. This
information includes the operational programmes concerned, the Member States
affected, the type of weaknesses, the main facts triggering each decision and
the budgetary impact of the decision. This information constitutes an important
dimension of reasonable assurance and accountability.

Following the introduction of the new interruption
instrument for the 2007-2013 programming period, the Directors-General
operating in shared management took, in 2011, formal decisions to interrupt
payment deadlines to 91 programmes totalling EUR 2 634 million. The College
also adopted four[18] decisions suspending
payments to 2007-2013 programmes.  Payments are not resumed until AOSD's
obtain clear audit evidence that reasons for interruptions and/or suspensions
have been remedied on the field, that the necessary financial corrections were
carried out and that there is no further risks for future expenditure to be
certified to the Commission.

The Commission confirms that AOD’s should systematically
interrupt payment procedures and propose to the College that procedures should
be suspended as soon as the applicable conditions are met and until the
necessary corrective measures have been implemented by the relevant national
authorities.

4.2.2.     Financial corrections imposed
by the Commission on Member States

The other reported financial corrections were those imposed
by the Commission on Member States. The Directorate-General for Regional Policy
reported cumulative financial corrections resulting from EU audits in the
period 2000-2011 of EUR 7.13 billion. The Directorate-General for Employment,
Social Affairs and Inclusion reported EUR 1.8 billion and the Directorate-General
for Agriculture and Rural Development reported EUR 7.7 billion.

The notes to the annual accounts of the European Union contain more
extensive information on the financial corrections decided by the Commission
and implemented in the course of the year as well as on recoveries.

4.2.3.     Information from Member
States on financial corrections and recoveries

Correcting amounts unduly paid is an important aspect of sound financial management. In 2011,
continued efforts were made to impose financial corrections when necessary,
improve the quality of Member State data on financial corrections and
recoveries and promote the use of best practices so as to improve recovery
mechanisms at Member State and EU level.

Regarding shared management, the AARs provide detailed information
on the financial corrections implemented and reported by Member States to the
Commission and an assessment of the national control systems. In the area of
Cohesion Policy, Member States implement financial corrections resulting from their
own audit work and from EU audits. These are reported with a one-year delay by
31 March, so in 2011 they reported on their 2010 corrections. Nevertheless, the
AOSD’s reported the most updated figures known till the date of signing their
AARs.

Regarding Regional Policy, Member States reported that, by the end
of 2010, they had made cumulative financial corrections of EUR 5.1 billion to
the 2000-2006 programmes. Member States reported that these financial
corrections were implemented through withdrawals (some EUR 4 billion or 78 %
of the total amount of recoveries) or recoveries from individual beneficiaries
(some EUR 1.1 billion or 22 %).

For 2007-2013 ERDF/CF programmes, Member States reported that in
2010 financial corrections of EUR 212 million were made (EUR 156 million as
withdrawals, EUR 31 million as recoveries and EUR 25 million as pending
recoveries). For 2011, as the date of signature of the AAR, Member States
reported corrections for a total of EUR 342 million for ERDF/CF programmes.

For 2007-2013 ESF programmes, Member States reported for 2010
financial corrections of EUR 52 million (EUR 33 million as withdrawals, EUR 4
million as recoveries and EUR 15 million as pending recoveries.)

4.3.        Use
of pre-financing

The Commission notes that the provisional
2011 annual accounts show a slight reduction in the amount of pre-financing.
This amount is composed of three main elements:

-
First, the traditional pre-financing in various
programmes to ensure the necessary ‘float’ for beneficiaries to start their programmes
and actions. The normal spending profile of multiannual programmes is
characterised by higher amounts of pre-financing in the early years of the
programming period. With several such programmes gaining momentum in 2010/2011,
the proportion of pre-financing is thus losing in importance compared to final
payments.

-
Second, the Financial Instruments (FIs), which
are increasingly used as a complementary means of funding in the Structural
Funds and the EAFRD. By their nature, FIs entail a big share of up-front
payments and are therefore assimilated to pre-financing. The Commission is
strengthening monitoring in this domain as explained below in section 4.4.

-
Finally, pre-financing paid to Member States
under shared management and complemented by additional pre-financing as part of
the package of measures adopted to fight the effects of the economic crisis. This
pre-financing is also closely monitored against implementation.

While pre-financing in the various programmes
is necessary to allow beneficiaries to start their projects, the financial
interests of the EU need to be safeguarded and operational and cost-effectiveness
constraints have to be taken into account. The Commission has proposed changes[19] to the Financial
Regulation to improve the follow-up of pre-financing.

4.4.        Financial instruments

Financial instruments (FIs)
have a multiplier effect: they are a way of attracting additional resources
from national or regional budgets, public or private banks and other investors
so that the overall amount available for investment is increased. This
multiplier effect differs according to the type of financial instrument, but
early evaluation has found that each euro invested in an FIs could leverage
between EUR 3.4 to 7.5 in additional funds.

The increased use of
financial instruments constitutes a new challenge from an internal control and
accountability perspective. The Commission monitors and reports on such
instruments under Article 49 of the inter-institutional Agreement[20] for instruments
implemented under centralised indirect management and for joint initiatives
with the EIB and the EIF under Regional Policy.

The
Directorates-General using FIs cover the policy and governance-related
aspects in Parts 1 and 2 of their AARs, and mention in Part 3 their monitoring
of these instruments.

The Commission services have prepared a dedicated Staff Working
Document[21] outlining the situation as regards the use of FIs in Member States
as of the end of 2010 for Structural Funds. Furthermore, the applicable legal
basis[22] has been amended so as to make reporting on financial and
implementation issues a regular, standardised and compulsory procedure under
the annual reporting on the implementation of programmes. This will considerably
improve the information available to the Commission as from mid-2012. On this
basis, the Commission will deliver, by October 2012, a first report on FIs.

The
Directorate-General for Economic and Financial Affairs has included in its AAR
a table listing all the FIs for which it has been designated Policy or
Implementing DG as well as information on the monitoring and control
arrangements and the responsibilities of all the partners involved, together
with a description of the reporting requirements and accountability chains.

The Directorate-General for Agriculture and Rural Development has
amended the applicable legal basis by improving the required conditions for
setting up of certain financial instruments and for strengthening their
implementation and use of resources returned to the instruments[23].

The Commission has launched an evaluation exercise to provide, by
the end of 2012, an analysis per Member State as well as an overall evaluation
of the use of financial instruments.

The Commission is also carrying out a thematic audit on the
implementation of a sample of FIs, in order to assess the assurance that can be
given on the implementation of these instruments, down to the level of
individual recipients.

The Commission instructs all services to
report on their FI activities in their AARs. It also instructs the services in
charge of the Structural and Rural Development Funds to report on the results
of the evaluation and the audit work undertaken in this area in their AARs for
the year 2012.

The Commission calls on the other institutions
to react positively to its proposal for the next programming period, where it
proposes further enhancing the monitoring mechanisms for FIs.

4.5.        The way forward: Cost-benefit of controls and internal control systems proportional
to risk

The Commission has the responsibility,
through robust controls and effective performance measurement, not only to
ensure that funds are well spent but also to take measures to respond to the
need to simplify its spending programmes in order to reduce the administrative
burden and costs for beneficiaries of funds and for all actors involved, in
line with the Commission’s Smart Regulation agenda.[24] While progress has been made with current programmes,[25] the Commission
has proposed more ambitious simplifications for the future.

Sound financial management requires that controls
are effective, efficient and economical. Control strategies should target
controls on more risky areas: such targeted controls would provide reasonable
assurance to the European taxpayer while enabling beneficiaries to concentrate
on the achievement of policy objectives to a greater extent than today.

4.5.1.     Revision
of the Financial Regulation

The
Financial Regulation contains the common financial rules and principles
applicable to all policy areas. As a first step, in May 2010,[26] the Commission
launched a process for revision of the Financial Regulation. The proposal
reinforces the need to align control systems with the identified risks and the
cost-effectiveness of controls. It sets out a clear general implementation
framework, covering all modes of management (including a common framework for
shared management) and establishing dedicated rules for innovative financial
instruments and prizes. In the field of grants directly managed by the
Commission, the proposal specifically promotes the use of simplified methods to
‘calculate’ eligible costs (such as lump sums, flat rates and standard scales
of unit costs), facilitates the acceptance of costs declared according to the
beneficiary’s ‘usual accounting practices’, and introduces lighter procedures
for small grants.

The current draft revised Financial
Regulation will include provisions which will require services to provide
information on the internal control system set up, an estimation of the costs
and benefits of controls implied by such system and an assessment of the
expected level of risk of error, when new or revised spending proposals are
being presented to the legislative authority. The revised regulation will
furthermore require the AOD to take account of the cost-effectiveness when
setting up internal control systems and to provide an overall assessment of the
costs and benefits of controls in the annual activity report.

In June 2011 and in anticipation of these
requirements, Directorates-General included in the legislative proposals for
the post-2013 spending programmes an estimation of the costs and benefits of
controls implied by the control systems and an assessment of the expected level
of risk of non-compliance with the applicable rules.

Given the central role of the Financial Regulation as a reference
for the sector-specific legislation, the Commission urges the European
Parliament and the Council to reach an agreement before the summer break.

4.5.2.     Simplification
Agenda for the MFF 2014-2020

The wider possibilities under the revised
Financial Regulation have enabled the Commission to table proposals for more
ambitious simplification measures adapted to beneficiaries and other
stakeholders, ensuring that EU funds can be disbursed in a way that is clear,
easy to understand, and simple to apply. The Commission has made a number of
proposals to make controls more proportionate and cost-effective. For example
in the Common Agricultural Policy, the proposed Small Farmer’s Scheme would
reduce the administrative burden on a significant number of farmers, without
increasing the financial risk to the EU. Another example is the possibility for
beneficiaries of research funds to use their normal accounting practices for preparing
cost claims.

To ensure that simplification does not open
the door to increased risk of error, the Commission has been mindful of the
need to propose balanced measures taking account of the costs and benefits of
control and the expected level of non-compliance with regulatory requirements,
as suggested by the Court in its Opinion 1/2010. In particular, the Commission
has delivered on the following challenges identified by the Court: improvement of
the design of funding schemes to strengthen management and control mechanisms;
simplification of grant schemes while still achieving policy objectives; and
appropriate benchmarks for assessing the management of risk which take account
of the costs and benefits of controls.

These simplification
elements would enable the Commission to better align its control systems with
the identified risks and would reduce the probability of error.

4.6.        Commission
Anti-Fraud Strategy (CAFS)

Following the adoption of the new Commission Anti-Fraud
Strategy,[27] an internal Action Plan has been prepared.[28] This will require all Directorates-General to develop an anti-fraud
strategy at local level by 2013. Measures in this area (such as specific risk
analysis of beneficiaries, close monitoring of selected projects or contracts,
or any other measures to mitigate fraud risks) are already outlined in some of
the Annual Activity Reports, together with the specific results of anti-fraud
actions taken during the reporting year and any elements of assurance that can
be drawn from them. This will be further generalised in the 2012 and 2013 AARs.

The Commission
instructs the Services to include in their AARs information on fraud prevention
as part of the assessment of their internal control systems, reflecting the
implementation of the sectoral strategy and describing measures to mitigate
fraud risks.

[1]               The
most likely error estimated by the Court, for payments as a whole was 3.7 %
in 2010. (OJ C326 of 10 November 2011, paragraph 1.16).

[2]               Article 60 of the Financial Regulation.

[3]               The so-called ‘flat-rates for financial corrections’

[4]               This is the sum of all quantified amounts in the
reservations (EUR 1 982 million maximum) and an estimated amount at risk (EUR 1
582 million) for the DG BUDG’s reservation regarding Traditional Own Resources.
For those Directorates-General who reported a minimum and a maximum range, the
maximum amount was considered.

[5]               The Court of Auditors estimates the most likely error
rate at 2.3 %. (OJ C 326 of 10 November 2011, Annex 3.1).

[6]               Austria, Bulgaria, the Czech Republic, Estonia,
France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, the Netherlands,
Poland, Romania, Slovenia, Slovakia, Spain, and the UK.

[7]               Instrument for Pre-Accession Assistance

[8]               ‘Analysis of Errors in Cohesion Policy for the Years
2006-2009, Actions taken by the Commission and the way forward’, SEC(2011) 1179 final.

[9]               For the ESF and ERDF, 15 Member States provided a
voluntary ‘Overall level of assurance statement’ in their Annual Summary:
Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Greece, Finland,
France, Hungary, Portugal, Romania, Slovakia, Slovenia, Sweden and the United
Kingdom.

[10]           Note from C.
Day and D. O'Sullivan dated 20/12/2011 on the Management of staff in
delegations.

[11]              JOIN(2012)
8 final, Joint decision of the Commission and the High Representative of the
Union for Foreign Affairs and Security Policy of 28.03.2012 on cooperation
mechanisms concerning the management of delegations of the European Union.

[12]             The multiannual residual error rate gives the real
impact of errors on the EU budget, taking into account corrections and
recoveries over the entire period of the framework programme.

[13]             REA for the ‘Space’ and ‘Security’ sub-activities only

[14]             The actions managed centrally represent 11% of the
funds managed by the Director-General for Education Audiovisual and Culture

[15]             ‘Practical guidelines for EC staff on dealing with IP-,
Copyright- and Trademark-protected works’, November 2010.

[16]             COM(2012) 40 final.

[17]             The figures mentioned in this paragraph are provisional
as they are pending the audit by the Court of Auditors of the provision 2011
accounts.

[18]             One suspension decision concerning the ERDF programme
in Calabria (Italy) and three suspension decisions concerning the ESF in the Baleares
(Spain), Calabria (Italy) and Paca (France).

[19]             Proposed Article 87(4) of the reviewed Financial
Regulation.

[20]             Inter-institutional agreement between the European
Parliament, the Council and the Commission on budgetary discipline and sound
financial management (2006/C 139/01)

[21]             SWD(2012) 36 final.

[22]             Regulation No 1083/2006 establishing general rules for
the Structural Funds.

[23]              Regulation No 679/2011 of 14.7.2011 amending the
implementing regulation No 1974/2006 on the rural development fund (EAFRD)

[24]             COM(2010) 543.

[25]             For example in the Seventh Research Framework
Programme, where dedicated simplification measures were introduced in 2011 and
the time to grant has fallen by nearly 30 days.

[26]             COM(2010) 815 final.

[27]             COM(2011) 376 final.

[28]             SEC(2011) 787 final.

Annex 1: Reservations 2007 – 2011[1]

Chapter — Revenue

DG || || Reservations 2011 || || Reservations 2010 || || Reservations 2009 || || Reservations 2008 || || Reservations 2007

BUDG || 1 || 1. Reliability of the Belgian clearance and accounting systems for processing custom declarations || || || || || || || ||

Chapter —
Agriculture and Natural Resources

DG || || Reservations 2011 || || Reservations 2010 || || Reservations 2009 || || Reservations 2008 || || Reservations 2007

AGRI || 3 || 1. Serious deficiencies in the IACS in Portugal and Bulgaria. 2. Rural development expenditure. 3. Deficiencies in the supervision and control of certified organic products || 1 || 1. Serious deficiencies in the IACS in Portugal, Bulgaria and Romania. || 2 || 1. Serious deficiencies in the IACS in Bulgaria and Romania. 2. Expenditure for rural development measures under Axis 2 (improving the environment and the countryside) of the 2007-2013 programming period || 2 || 1. Management and control system for SAPARD in Bulgaria and Romania. 2. Expenditure for rural development measures under Axis 2 (improving the environment and the countryside) of the 2007-2013 programming period. || 2 || 1. Insufficient implementation of the IACS in Greece. 2. Exactitude of rural development control data of Member States giving a first indication of the error rate in this policy area.

CLIMA || 1 || 1. Significant security weakness identified in the national registries of the EU Emissions Trading System (ETS). || 1 || 1. Significant security weakness identified in the national registries of the EU Emissions Trading System (ETS). || || || || || ||

MARE (former FISH) || 2 || 1. Management and control systems for one FIFG operational programme in Germany. 2. European Fisheries Fund management and control systems and investments on board: eligibility of expenditure. || 1 || 1. Management and control systems for one FIFG operational programme in Germany. || 2 || 1. Management and control systems for FIFG operational programmes in two Member States and specific measures in another three Member States. 2. Eligibility of payments made to Member States to compensate additional costs in the marketing of certain fishery products from the Outermost Regions. || 1 || Reservation on direct centralised management concerning the eligibility of costs reimbursed for expenditure in the area of control and enforcement of the Common Fisheries Policy, where the annual error rate detected by ex-post controls is higher than the 2% of the annual payments made for the MS programmes and on a multiannual basis represents more than 2% of sample payments. || ||

SANCO || 1 || 1. High error-rate (10,4%) detected during on-the-spot controls of the Food and Feed activity. || 0 || || || || || || ||

ENV || 0 || || 0 || || 1 || Eligibility of expenditures declared by beneficiaries of grants || 0 || || 1 || Eligibility of expenditures declared by the beneficiaries of action grants

Chapter — Cohesion

DG || || Reservations 2011 || || Reservations 2010 || || Reservations 2009 || || Reservations 2008 || || Reservations 2007

REGIO || 2 || 1. Reservation on ERDF/Cohesion Fund management and control systems for several programmes in the period 2007-2013 in Austria, Bulgaria, the Czech Republic, Estonia, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, the Netherlands, Poland, Romania, Slovenia, Slovakia, Spain and the UK; for IPA management and control systems in the former Yugoslav Republic of Macedonia and European Territorial Copporation programmes and a programme for IPA/cross-border cooperation. 2. Reservation on ERDF/Cohesion Fund management and control systems for some programmes in the period 2000-2006 in Germany, Hungary, Ireland, Italy, Spain and for cross-border programmes. || 2 || 1. Reservation on ERDF management and control systems for certain programmes in the period 2007-2013 in Bulgaria, Czech Republic, Germany, Greece, Italy, Latvia, Lithuania, Spain, Romania, United Kingdom, 13 European Territorial Cooperation programmes) and 6 IPA-Cross-borders programmes). 2. Reservation on ERDF management and control systems for certain programmes in the period 2000-2006 in Bulgaria, Germany, Hungary, Italy, Latvia, Lithuania, The Netherlands and concerning 9 Interreg programmes || 2 || 1. Reservation on ERDF management and control systems for certain programmes in the period 2007-2013 in Germany, Italy, Spain, Bulgaria, 15 European Territorial Cooperation programmes 2. Reservation on ERDF management and control systems for certain programmes in the period 2000-2006 in Bulgaria, Italy, Germany, and UK and concerning 15 Interreg programmes || 2 || 1. Reservation on ERDF management and control systems for the period 2000-2006 in certain programmes in: Belgium,  Germany, Italy Spain and 21 Interreg programmes 2. Management and control system for the road sector in Bulgaria in 2008. || 2 || 1. Reservation concerning the ERDF management and control systems for certain programmes in the period 2000-2006 in: the Czech Republic, Finland, Germany, Greece, Ireland, Italy, Luxembourg, Poland, Slovakia, Spain and 51 Interreg programmes. 2. Reservation concerning the management and control systems for the Cohesion Fund (period 2000-2006) in: Bulgaria, Czech Republic, Slovakia, Hungary and Poland.

EMPL || 2 || 1. Management and control systems for identified operational programmes under ESF 2000-2006 in Germany, France, Italy and Spain. 2. Management and control systems in ESF in Belgium, the Czech Republic, Germany, Italy, Lavia, Lithuania, Roumania, Slovakia, Spain and the United Kingdom for certain programmes in the period 2007-2013 as well as for the former Yugoslav Republic of Macedonia IPA programme. || 2 || 1. Management and control systems for identified operational programmes under ESF 2000-2006 in Germany, France, Italy and Spain. 2. Management and control systems in ESF in Austria, Belgium, Bulgaria, Germany, Finland, Hungary, Ireland, Italy, Sweden, Slovakia, Spain and the United Kingdom for certain programmes in the period 2007-2013 || 2 || 1. Management and control systems for identified operational programmes under ESF 2000-2006 in Belgium, Germany, France, Italy and Spain. 2. Management and control systems in ESF in Belgium, Germany, Italy, Luxembourg, Romania and Spain; for certain programmes in the period 2007-2013 || 1 || Management and control systems for identified ESF Operational Programmes in Spain, United Kingdom, France, Italy, Poland, Belgium and Luxembourg (quantification: 41 million EUR, 0.6%) || 1 || Management and control systems for identified ESF Operational Programmes in - Spain, - United Kingdom, - France, - Italy, - Slovakia, - Portugal, - Belgium and - Luxembourg.

Chapter — External Aid,
Development and Enlargement

DG || || Reservations 2011 || || Reservations 2010 || || Reservations 2009 || || Reservations 2008 || || Reservations 2007

ELARG || 0 || || 0 || || 0 || || 1 || Potential irregularities in the management of PHARE funds under extended decentralised management by two Bulgarian Implementing Agencies (named). || 1 || Potential irregularities in the management of PHARE funds under extended decentralised management by the following Bulgarian Implementing Agencies: - Central Finance and Contract Unit (CFCU) - Ministry for Regional Development and Public Works (MRDPW).

DG RELEX || 0 || || 0 || || 1 || Lack of capacity to carry out adequate ex-post controls for CFSP and Stability Instrument || 0 || || 0 ||

Chapter — Research, Energy and Transport

DG || || Reservations 2011 || || Reservations 2010 || || Reservations 2009 || || Reservations 2008 || || Reservations 2007

RTD || 2 || 1. Accuracy of cost claims under FP6 (error rates above materiality threshold of 2%) 2. Accuracy of cost claims under FP7 (error rates above materiality threshold of 2%) || 1 || 1. Accuracy of cost claims under FP6 (error rates above materiality threshold of 2%) || 1 || 1. Accuracy of cost claims under FP6 (error rates above materiality threshold of 2%) || 1 || 1. Rate of residual errors with regards to the accuracy of cost claims in FP6 || 1 || Reservation concerning errors relating to the accuracy of the cost claims and their conformity with the provisions of the Fifth Research Framework Programme (FP5).

INFSO || 1 || 1. Accuracy of cost claims under FP7 (error rates above materiality threshold of 2%) || 0 || || 1 || Accuracy of cost claims under FP6 (error rates above materiality threshold of 2%) || 1 || Rate of residual errors with regards to the accuracy of cost claims in FP6 || 1 || Rate of residual errors with regard to the accuracy of cost claims in FP6 contracts.

ENTR || 3 || 1. Accuracy of cost claims under FP6 (error rates above materiality threshold of 2%) 2. Accuracy of cost claims under FP7 (error rates above materiality threshold of 2%) 3. Reservation concerning the reliability of the financial reporting by the delegated body about the implementation of actions under joint and centralised indirect management. || 2 || 1. Accuracy of cost claims under FP6 (error rates above materiality threshold of 2%) 2. Reservation concerning the reliability of the financial reporting by the delegated body about the implementation of actions under joint and centralised indirect management. || 2 || 1. Accuracy of cost claims under FP6 (error rates above materiality threshold of 2%) 2. Reservation concerning the reliability of the financial reporting by the delegated body about the implementation of the joint programme. || 1 || Rate of residual errors with regards to the accuracy of cost claims in FP6 || 2 || 1. Rate of residual errors with regard to the accuracy of cost claims in FP6. 2. Unsatisfactory functioning of the financing of European Standardisation

MOVE (former TREN) || 2 || 1. Accuracy of cost claims under FP6 (error rates above materiality threshold of 2%) 2. Accuracy of cost claims under FP7 (error rates above materiality threshold of 2%) || 1 || 1. Accuracy of cost claims under FP6 (error rates above materiality threshold of 2%) || 1 || Accuracy of cost claims under FP6 (error rates above materiality threshold of 2%) || 1 || Rate of residual errors with regards to the accuracy of cost claims in FP6. || 1 || Rate of residual errors with regards to the accuracy of cost claims in FP6.

ENER (former TREN) || 2 || 1. Accuracy of cost claims under FP6 (error rates above materiality threshold of 2%) 2. Accuracy of cost claims under FP7 (error rates above materiality threshold of 2%) || 1 || 1. Accuracy of cost claims under FP6 (error rates above materiality threshold of 2%)

REA || 1 || 1. Accuracy of cost claims for funding Research for Space and Security themes of the Cooperation Specific Programme financed under FP7 (error rates above materiality threshold of 2%) || || || || || || || ||

Chapter — Education and
Citizenship

DG || || Reservations 2011 || || Reservations 2010 || || Reservations 2009 || || Reservations 2008 || || Reservations 2007

EAC || 0 || || 1 || Too high error rate in centralised direct management, due to lack of justifying documents for cost claims, concerning projects from the previous generation of programmes || 1 || Too high error rate in centralised direct management, due to lack of justifying documents for cost claims, concerning projects from the previous generation of programmes || 0 || || 0 ||

EACEA || 1 || Accuracy of cost claims under Life Long Learning (LLP) programme (error rates above materiality threshold of 2%). || 1 || Accuracy of cost claims under Culture and Youth programmes (error rates above materiality threshold of 2%). || 0 || || 0 || || 0 ||

HOME (former JLS) || 2 || 1. Reputational damage due to new risks likely to further delay the completion of the Schengen Information System II (SIS II) project. 2. Financial risk corresponding to the residual error rate of 2,33% in the non audited population of grants in the programmes for Security and safeguarding liberties || 2 || 1. Reputational damage due to new risks likely to further delay the completion of the Schengen Information System II (SIS II)  project. 2. Reputational damage due to delays in the entry into operations of the VIS project. || 2 || 1. Reputational damage due to delays in the completion of the Schengen Information System II (SIS II) project. 2. Reputational damage due to a delay in the completion of the VIS project. || 1 || Delays in the implementation of the Schengen Information System II (SIS II), || 2 || 1. Faiblesse des systèmes de contrôle et de gestion du Fonds européen pour les Réfugiés en Italie, pour les périodes de programmation 2000-2004, et 2005-2007 2. Mise en œuvre incomplète des mécanismes de supervision de la Commission en gestion partagée pour le Fonds européen pour les réfugiés 2005-2007.

JUSTICE (former JLS) || 0 || || 0 || || 1 || Residual error rate in non-audited population of grants under programmes for fundamental rights and citizenship. || 0 || || 0 ||

COMM || 1 || Potential non-compliance with applicable legislation on Intellectual Property Rights. || 1 || Potential non-compliance with applicable legislation on Intellectual Property Rights. || 1 || potential non-compliance with applicable legislation on Intellectual Property Rights. || 2 || 1. Reservation on the quality failings revealed by the controls. 2. Possible infringement of Intellectual Rroperty Rights by Commission departments. || 1 || Ex-post control system

Chapter — Economic and Financial
Affairs

DG || || Reservations 2011 || || Reservations 2010 || || Reservations 2009 || || Reservations 2008 || || Reservations 2007

ECFIN || 0 || || 0 || || 0 || || 1 || Possibility that new mitigating controls put in place following an ex-post control report on funds managed by an external body entrusted with indirect centralized management are not effective. || 1 || Possibility that additionality requirements are not sufficiently met.

Chapter — Administrative and
other expenditure

DG || || Reservations 2011 || || Reservations 2010 || || Reservations 2009 || || Reservations 2008 || || Reservations 2007

DIGIT || 0 || || 0 || || 0 || || 0 || || 1 || Inadequacy of the Data Centre building infrastructure in Luxembourg.

Total

|| || Reservations 2011 || || Reservations 2010 || || Reservations 2009 || || Reservations 2008 || || Reservations 2007

TOTAL || 27 || || 17 || || 20 || || 16 || || 17 ||

Annex 2: Agencies

In line with the practice in most Member
States, using agencies to deliver key implementing tasks (but not any
policy-related activities) has become an established part of the way the European
Union works.

A. Executive
agencies

Executive agencies operate within a clear institutional framework, governed by a
single legal base[2]. Their tasks must relate
to the management of Community programmes or actions, they are set up for a
limited period and they are always located at the place where the Commission
and its services are located. The Commission's responsibility for executive
agencies is clear: the Commission creates them (after prior information of the
budgetary authority, a cost-benefit-analysis and based on the decision taken by
the Regulatory Committee for the executive agencies), maintains ‘real control’
over their activity, and appoints the Director. Their Annual Activity Reports
(AARs) are annexed to the AAR of their parent[3]
Directorate(s) General[4]. The annual discharge in
respect of implementation of operational appropriations is covered by the
general discharge given to the Commission[5]. Together with
this, the Director of the agency receives discharge from Parliament, acting on
a recommendation of the Council, in respect of the agency's operating (i.e.
administrative) budget. A standard Financial Regulation adopted by the
Commission, governing the establishment and implementation of the operating
budget of an executive agency, applies to all executive agencies.

There are
currently six executive agencies:

–
the Executive Agency for Competitiveness and
Innovation (EACI – formerly known as IEEA);

–
the Executive Agency for Health and Consumers  (EAHC
– formerly known as PHEA);

–
the Education, Audiovisual and Culture Executive
Agency (EACEA);

–
the European Research Council Executive Agency (ERCEA);

–
the Research Executive Agency (REA);

–
the Trans-European Transport Network Executive
Agency (TEN-TEA).

No new
executive agencies were created during the year. Their AAR reported that three of the executive agencies were fully
compliant with all requirements of all the internal control standards, whereas
three agencies had not yet fully implemented all the requirements of a few standards
(this concerned four standards for two agencies and one standard for one
agency) by the end of 2011. This was a notable improvement compared to 2010,
when none of the executive agencies reported full compliance with all
standards. The central services encourage the agencies and their parent DGs
to make further efforts in this area with a view to the agencies reaching full
compliance within the near future.

The importance of the executive agencies to the Commission
can be seen by the fact that 90 % of DG MOVE's budget, 48 % of DG
EAC's budget and 24 %[6] of DG RTD's
budget is currently managed indirectly, in each of these cases involving two
executive agencies. In view of this, the Commission's supervisory
arrangements over the executive agencies become even more important. These
are ensured by the Commission's representation on the Steering Committee,
monitoring of the agency's set-up of its internal control system, the follow-up
of audits carried out by various bodies, periodic coordination meetings between
the agencies and their parent DGs as well as other measures.

The breakdown
of staff actually employed on 31/12/2011 by the executive agencies was as
follows:

|| Temporary agents (officials seconded by the Commission and agents recruited by the agency) || Contract agents || Total || Total Authorised under the EU budget

EACI || 33 || 123 || 156 || 156

EAHC || 11 || 38 || 49 || 50

EACEA || 102 || 309 || 411 || 416

ERCEA || 97 || 253 [7] || 350 || 360

REA || 103 || 351 || 454 || 468

TEN-TEA || 33 || 66 || 99 || 99

Total || 379 || 1140 || 1519 || 1549

The executive
agencies' high occupation rate of the posts authorised in 2011 (98 %) was
noted. This demonstrates that most agencies (except for REA and ERCEA) reached
"cruising speed" in 2011. Thus, the overall vacancy rate fell from
5 % in 2010 to 2 % in 2011.

A 2009 special
report[8] by the European Court of
Auditors examined the executive agencies. The report concludes that agencies
provide better service delivery than the Commission (reduced contracting time,
more rapid approval procedures, and shorter payment times) and also offer the
advantages of simplified processes and increased external visibility for EU
actions. The report confirms that externalisation to Executive Agencies has
effectively resulted in cost-savings. As part of its proposals for the
2014-2020 multiannual financial framework[9], the
Commission proposes to make more extensive recourse to the existing executive
agencies, in view of their service delivery and accessibility in the management
of EU programmes.

B. Regulatory
agencies and joint undertakings

The 32 decentralised
bodies are independent legal entities. 27 of these receive funds from
the European Union budget and are therefore granted discharge by the European
Parliament in individual discharge decisions. The remaining five do not receive
EU funding and thus do not receive discharge by the European Parliament (two of
these agencies[10] are fully self-financed,
and three[11] are funded on an
intergovernmental basis and financed directly by the participating Member
States).

The Court
of Auditors emitted a qualified opinion on the accounts of the ENIAC[12]
Joint Undertaking and the European GNSS Agency.

The two
agencies that had been given a qualified opinion by the European Court of
Auditors on the legality and regularity of their underlying transactions in
2009 (the European Police College, CEPOL, and the European Medicines Agency,
EMA), received a non-qualified opinion on their 2010 underlying transactions.

In May 2012,
the European Parliament did grant discharge to the directors of all agencies
for 2010, with the exception of the European Medicines Agency (EMA), the
European Food Safety Authority (EFSA) and the European Environment Agency (EEA)
for which the discharge decisions for the financial year 2010 were postponed
for these three agencies.

In a
Communication of March 2008 entitled "EU agencies: the way
forward"[13] the Commission drew
attention to the lack of a common vision on the role and functions of
regulatory agencies. Further evaluation did point out that there is no single
legal framework governing the establishment and closure of EU de-centralised
agencies, and that alternatives to creating agencies were given limited
attention until impact assessments came into practice. Furthermore, a number
of chosen location sites for the agencies were assessed as inefficient. As
regards agencies' effectiveness, the activities of the majority of agencies were
considered coherent with their mandate, and in general there was clear evidence
that agencies have achieved the planned outputs. Analysis indicated that that in
order to operate efficiently with regards to the administrative tasks, an
agency needs to reach a certain critical size, somewhere between 50 and 100
staff. Finally, it was found that monitoring was not very well developed in
terms of the use of quantifiable objectives and indicators.

The 2008
Communication has lead to the set up of an inter-institutional Working Group with
a view to assessing the existing situation and in particular the coherence,
effectiveness, accountability and transparency of these Agencies and find a
common ground on how to improve their work. The technical and political work
carried out since then has continued throughout 2011, with a view to reaching a
common agreement on the way forward in 2012.

Annex 3:
Report on negotiated procedures 2011

1. Legal basis

Article 54 of the
Implementing Rules of the Financial Regulation requires authorising officers by
delegation to record contracts concluded under negotiated procedures.
Furthermore, the Commission is required to annex a report on negotiated
procedures to the summary of the annual activity reports (AAR) referred to in
Article 60.7 of the Financial Regulation.

2. Methodology

A distinction has been
made between the 45 Directorates-general, services, offices and executive
agencies which normally do not provide external aid, and those three
Directorates-general (DEVCO, ELARG and FPI) which conclude procurement
contracts in the area of external relations (different legal basis:
Chapter 3 of Title IV of Part Two of the Financial Regulation) or
award contracts on their own account, but outside of the territory of the
European Union.

These three Directorates-general
have special characteristics as regards data collection (decentralised
services, ...), the total number of contracts concluded, thresholds to be applied
for the recording of negotiated procedures (€ 10 000), as well as the
possibility to have recourse to negotiated procedures in the framework of the
rapid reaction mechanism (extreme urgency).  For these reasons, a separate
approach has been used for procurement contracts of these three Directorates-general.

3. Overall results of negotiated procedures recorded

3.1.        The 45 Directorates-general,
services or offices, excluding the three "external relations" Directorates-general

On the basis of the
data received, the following statistics were registered: 104 negotiated
procedures with a total value of € 300 million were processed out of
a total of 727 procedures (negotiated, restricted or open) for contracts
over € 60,000 with a total value of € 1983 million.

For the Commission, the
average proportion of negotiated procedures in relation to all procedures
amounts to 14.3% in number (14.6% in 2010), which represents some 15.2%
of all procedures in value (8.6% in 2010).

An authorising service
is considered to have concluded a "distinctly higher" proportion of
negotiated procedures "than the average recorded for the Institution"
if it exceeds the average proportion by 50%, or if the increase from one year
to the next is over 10%. Thus, the reference threshold for this year is fixed
at 21.5% (21.9% in 2010).

Some 12 Directorates-general
or services out of the 45 exceeded the reference threshold, and another 2
increased their number of negotiated procedures by more than 10% compared to
the previous year. Among those 14 services, it should be noted that 6 Directorates-general
concluded only one to four negotiated procedures, but because of the low number
of procedures conducted by each of them (less than 8), the average was
exceeded. In addition, 20 out of 45 Directorates-general have not used any
negotiated procedure, including 7 services that awarded no contract at all.

The assessment of
negotiated procedures compared with the previous year shows a slight decrease
in the order of 0.3 percentage points in relative number and an increase of 6.5
percentage points in terms of relative value.

3.2.        The three "external
relations" Directorates-general

On the basis of the
data received, the following statistics were registered: 179 negotiated
procedures for a total value of contracts € 137 million were
processed out of a total of 641 procedures for contracts over € 10 000
with a total value of about € 1002 million.

For the three
"external relations" Directorates-general, the average proportion of
negotiated procedures in relation to all procedures amounts to 27.9 % in
number, which represents some 14% of all procedures in value terms. Only one Directorate-general
exceeds the reference threshold of 42% (average + 50%).

If compared with previous
years, these Directorates-general have registered an increase of
9 percentage points in number of negotiated procedures in relation to all
procedures compared to the previous year.

4. Analysis of the justifications and corrective
measures

The following
categories of justifications have been presented by those Directorates-general
who exceeded the thresholds:

-
Statistical deviations due to the low number of contracts awarded under all procedures. Indeed
8 out of the 14 DGs over average have carried out less than 15 procurement
procedures.

-
Objective situations of the economic
activity sector, where the number of operators
may be very limited or even in a monopoly situation (for reasons of
intellectual property, specific expertise, etc.) for instance in the nuclear
area or for financial databases. Situations of technical captivity may also
arise especially in the IT domain (proprietary software or maintenance of complex
servers hosting critical information systems, etc).

-
Situations of emergency that cannot be foreseen by the contracting authority, for instance
on the impact of E. Coli attack on fruit and vegetable crops.

-
Similar services/works as provided for in the initial tender specifications. Some services
in charge of large inter-institutional procedures are faced with estimations of
needs at the beginning of (usually framework) contracts that do not always
match the consumption trend of the contract during its execution. The leading
service must then use a negotiated procedure on behalf of all institutions
party to the contract.

-
Unsuccessful open or restricted procedure, leading to a negotiated procedure.

Besides
it should be highlighted that the number of negotiated procedures in 2011
compared to 2010 has continued decreasing in absolute terms (from 125 to 104),
and the overall number of procurement procedures has also carried on decreasing
(from about 856 to 727), so this explains the relative stability in proportion
of negotiated procedures compared to the total number of procedures. The
increase in value from € 214 million to € 300 million
remains quite below the level registered in 2009 (€578 million).

Several corrective
measures have already been proposed or implemented by the Directorates-general
concerned:

-
Regular update of standard model documents and
guidance documents.

-
Training and improved inter-service
communication. The Central Financial Service provides regular practical
training sessions on procurement.

-
Improvement of the system of evaluation of needs
of Directorates-general/services and an improved programming of procurement
procedures. The Commission' horizontal services will continue their active
communication and consultation policy with the other DGs, institutions,
agencies and other bodies along the following axes:

§
permanent exchange of information via regular
meetings including with agencies;

§
ad-hoc surveys prior to the initiation of
(inter-institutional) procurement procedures for the evaluation of needs;

§
a new approach is introduced for
inter-institutional framework contracts, including semester consumption reports
from each participating institution or agency, to improve procurement planning.

Annex 4:
Summary of Waivers of recoveries of established
amounts receivable in 2011

(Article
87.5 IR)

In accordance with Article 87(5) of the
Implementing Rules, the Commission is required to report each year to the
budgetary authority, in an annex to the summary of the Annual Activity Reports,
on the waivers of recovery involving 100.000 € or more.

The following table shows the total amount
and the number of waivers above 100.000 € per Directorate-General/Service for
the EC budget and the European Development Fund for the financial year 2011.

EC budget:

Directorate-General/Service || Amount of waivers in € || Number of waivers

AGRI || 692.398 || 2

COMP || 18.854.917 || 5

DEVCO || 1.552.627 || 5

EAC || 916.333 || 5

EACEA || 808.571 || 6

EMPL || 384.000 || 1

ENV || 304.644 || 1

INFSO || 1.196.334 || 5

RTD || 927.970 || 3

Total: || 25.637.794 || 33

European Development Fund:

Directorate-General/Service || Amount of waivers in € || Number of waivers

EDF || 1.019.551 || 3

Annex 5:
Compliance with payment time-limits and
suspension of time-limits

(Article
106.6 IR)

The statutory time limits for
payments are laid down in the Implementing Rules of the Financial Regulation[14]
(hereinafter IR), and exceptionally in sector-specific regulations. Under
Article 106 IR, payments must be made within no more than 45 calendar days from
the date on which an admissible payment request is registered or 30 calendar
days for payments relating to service or supply contracts, save where the contract
provides otherwise. Commission standard contracts are in line with the time
limits provided for in the IR. However, for payments which, pursuant to the
contract, grant agreement or decision, depend on the approval of a report or a
certificate (i.e. the interim and/or final payment), the payment time starts
running when the report or certificate in question has been approved[15].
Under Article 87 of the Regulation of the European Parliament and the Council
laying down general provisions on the European Development Fund, the European
Social Fund and the Cohesion Fund, a specific rule applies: payments have to be
made within two months[16].

Following the revised Implementing Rules
which entered into application on 1 May 2007, compliance with payment time limits
was reported for the first time by the Services in the 2007 Annual Activity
Reports[17].

In accordance with the applicable rules,
the payment times reported in this annex have been calculated as follows:

-
Where the payment is contingent upon the
approval of a report, the time from approval of the report until payment;

-
where no report is required, the time from
reception of the payment request until payment.

The Commission's global average payment
time has developed as follows over the last few
years:

|| 2009 || 2010 || 2011

Global average payment time || 26,1    days || 25,8 days || 25,7 days

The data shows that the global average
payment time of the Commission services has stabilised around 26 days during
the last three years (i.e. in 2009, 2010 and 2011). This stagnation comes
after a significant drop in 2009, when the global average payment time fell
from 34 days (in 2008) to 26 days (in 2009). On the one hand, it is encouraging
to see that the considerable reduction in the global average payment time reached
in 2009 has been consolidated, so that the payment time remains on a stable
level. Nevertheless, there is scope for reducing the global payment
time further, and services are encouraged to take further action in this area.

The table
below provides the evolution of payments made after expiration of the
statutory time limit ("late payments") during the three last
years, based on data extracted from the ABAC accounting system:

|| 2009 || 2010 || 2011

Late payments in number || 14,0 % || 15,9 % || 12,3 %

Late payments in value || 6,8 % || 6,0 % || 7,3 %

Average number of overdue days[18] || 39,2 days || 34,2 days || 42,3 days

Overall, the
situation as regards late payments did not change significantly in 2011. In terms of the number of payments, late payments were further
reduced (from around 16 % to around 12 %). However, in terms of their
value there was an increase (from around 6 % to around 7 %). Also,
the average number of overdue days rose again (from around 34 days in 2010 to
around 42 days in 2011; slightly higher than the 39 days reported in 2009 but still
lower than the 48 days reported in 2008). The figures show the need for
services to intensify their efforts towards meeting the statutory payment time
for every payment.

In its April 2009 Communication[19],
the Commission announced its intention to reduce its payment times further
beyond the statutory time limits, setting the following ambitious targets:

–
first pre-financing payments within 20 days
from the signature date of the grant agreement, compared to the statutory time
limit of 45 days;

–
all other payments within 30 days,
compared to the statutory time limit of 45 days.

In 2011 – the second full year of application of these targets – only
a slight improvement was noted; around 80 % of payments (in terms of
their number) met the targets in 2011 compared to around 78 % in 2010.
The required efforts towards a further reduction in the global overall payment
time, called for above, would of course also have a positive effect on
compliance with these targets.

As regards interest
paid for late payments (see figures in the table below) the total
amount paid by the Commission more than doubled in 2011 compared to
2010, reaching the highest amount since the introduction in 2008 of automatic
payment of interest for late payments[20]. This was the result of
the rise in the number of days overdue and in the value of late payments.

|| 2009 || 2010 || 2011

Interest paid for late payments (rounded amounts) || 808 000 € || 810 000 € || 1 734 000 €

The causes of late payments include
inter alia the complexities of evaluating supporting documents, in particular the
technical reports that in some cases require external expertise, difficulties at
efficiently coordinating the financial and operational checks of payment requests,
and issues with the management of payment suspensions.

The 2009
Communication establishing Commission-internal payment targets provided a clear
incentive to services to reduce their payment times, in particular in 2009 when
the global average payment time fell significantly; from 34 to 26 days.

In 2011, the global average payment time remained around 26 days; the
same level as that reported in 2009 and 2010. Yet, there is scope for reducing
it further. When setting up action plans in this area, services' should
focus on further reducing late payments from their current level of 7 % of
payments in terms of their value. The aim should be to meet the statutory
payment time for every payment.

The minor
improvement reported in 2011 as regards the compliance with the
Commission-internal payment targets also points to the need to look for
organisational improvements that would allow for a further reduction in payment
times.

[1]    This table presents a summary of reservations; it is not
intended to offer an exhaustive description of them. For details of the
reservations, please consult the AAR of the relevant Commission department on
http://ec.europa.eu/atwork/synthesis/aar/index_en.htm

[2]               Council Regulation (EC) No 58/2003 of 19 December
2002 laying down the statute for executive agencies to be entrusted with
certain tasks in the management of Community programmes (OJ L 11, 16.1.2003).

[3]               EACI (parent DGs: ENTR, ENV, ENER, MOVE); EAHC (parent
DG: SANCO); EACEA (parent DGs: EAC, COMM, DEVCO); ERCEA (parent DG: RTD); REA
(parent DGs: RTD, ENTR, EAC); TEN-TEA (parent DG: MOVE).

[4]               i.e. the Directorates General which have delegated
the implementation of programmes (or parts of it) to the executive agency.

[5]               i.e. unlike the discharge process of the
'independent' Joint Technology Initiatives / Joint Undertakings, which is
separate from the Commission's discharge.

[6]               Up to 33 % of FP7
budget is foreseen to be managed indirectly (via 2 EAs and 5 JUs).

[7]               This figure is relates to 245 contract agents and 8
seconded national experts.

[8]               Special report 13/2009: "Delegating implementing
tasks to Executive Agencies: a successful option?"

[9]                  COM(2011)500,
29.6.2011, point 6.1.3.

[10]             The Office for Harmonisation in the Internal Market
(OHIM) and the Community Plant Variety Office (CPVO)

[11]             The European Institute for Security Studies (ISS), the European
Union Satellite Centre (EUSC) and the European Defence Agency (EDA).

[12]             The European Joint Undertaking for the implementation
of the Joint Technology Initiative on Nanoelectronics

[13]             Communication from the Commission to the European
Parliament and the Council: European Agencies – the way forward - COM(2008)135.

[14]             Commission Regulation (EC) No 2342/2002 of 23 December
2002 (OJ L 357, 31.12.2002, p. 1) as last amended by Regulation (EC) No
478/2007 of 23 April 2007 (OJ L 111, 28.4.2007, p. 13).

[15]             Pursuant to Article 106(3) IR, the time allowed for
approval may not exceed:          
(a) 20 calendar days for straightforward contracts relating to the supply of
goods and services;        (b) 45 calendar days for other contracts and grants
agreements;    
(c) 60 calendar days for contracts and grant agreements involving technical
services or actions which are particularly complex to evaluate.

[16]             Regulation (EC) No 1083/2006 of the European Parliament
and of the Council laying down general provisions on the European regional Development
Fund, the European Social Fund and the Cohesion fund and repealing Regulation
(EC) No 1260/1999 (OJ L 210, 31.7.2006, p. 25).

[17]             Based on available data in ABAC as of end of the
financial year 2007

[18]             i.e. above the statutory time limit.

[19]             Communication: "Streamlining financial rules and
accelerating budget implementation to help economic recovery", SEC(2009) 477 of 8.4.2009.

[20]             i.e. no longer conditional upon the presentation of a
request for payment (with the exception of amounts below 200 Euros).