THE COURT’S OBSERVATIONS THE COMMISSION’S REPLIES

INTRODUCTION

5.1. This Chapter presents the Court’s specific assessment of regional policy, energy and transport, which comprises policy areas 06 — Mobility and transport, 13 — Regional policy and 32 — Energy. Key information on the activities covered and spending in 2011 is provided in Table 5.1 .

Table 5.1 — Regional policy; energy and transport — Key information 2011 (million euro) Budget Title Policy area Description Payments made Management mode 06 Mobility and transport Administrative expenditure 71 Centralised direct Inland, air and maritime transport 150 Centralised direct and indirect Trans-European Networks (TENs) 833 Centralised direct and indirect Research related to transport 59 Centralised direct 1 113 13 Regional policy Administrative expenditure 84 Centralised direct European Regional Development Fund (ERDF) and other regional operations 25 841 Shared Cohesion Fund (CF) 6 450 Shared Pre-accession operations related to structural policies 351 Decentralised Solidarity Fund 269 Centralised indirect 32 995 32 Energy Administrative expenditure 74 Centralised direct Trans-European Networks (TENs) 18 Centralised direct Conventional and renewable energies 591 Centralised direct/centralised indirect/joint Nuclear energy 121 Centralised direct/centralised indirect/joint Research related to energy 159 Centralised direct 963 Total administrative expenditure (35) 229 Total operational expenditure 34 842 Of which: — advances 1 469 — interim/final payments 33 373 Total payments for the year 35 071 Total commitments for the year 42 964 Source: 2011 annual accounts of the European Union.

5.2. Regional policy is mostly financed through the European Regional Development Fund (ERDF) and the Cohesion Fund (CF). These funds are governed by the same rules (subject to exceptions in the specific regulations of each fund) and are often managed by the same authorities as the European Social Fund (ESF). The ESF, which is the subject of Chapter 6, is referred to in this Chapter where issues common to all the funds are discussed.

5.3. Regional policy accounts for 94 % of spending in this policy group while the remaining 6 % concerns the energy and transport areas.

Specific characteristics of the policy group

Policy objectives

Regional policy

5.4. Regional policy aims at strengthening economic and social cohesion within the European Union by reducing development disparities between different regions.

Energy and transport

5.5. Energy and transport policies aim to provide European citizens and businesses with secure, sustainable and competitive energy and transport systems and services and to develop innovative solutions that contribute to the formulation and implementation of these policies.

Policy instruments

Regional policy

5.6. The ERDF and CF are the main tools for the implementation of regional policy (1). The ERDF finances infrastructure works, the creation or preservation of jobs, regional economic development initiatives and activities supporting small and medium-sized enterprises (2). In Member States whose gross national income per capita is below 90 % of the EU average, the CF finances investments in infrastructure in the fields of environment and transport.

5.7. The ERDF (with payments of 26 billion euro) and the CF (with payments of 6 billion euro) accounted for 98 % of the expenditure under budget Title 13 in 2011 (3).

Management and control of spending by ERDF, CF and ESF

5.8. The ERDF, the CF and the ESF (4) are governed by common rules and are subject to shared management by the Commission and the Member States. Additional provisions for each fund are set in specific regulations. These funds are spent in multiannual programmes.

5.9. For each programming period, on the basis of Member States’ proposals, the Commission approves operational programmes (OPs) together with indicative financial plans which include the EU and national contributions (5). Projects implemented under the OPs are carried out by private individuals, associations, private or public undertakings or local, regional and national public bodies.

5.10. In the Member States responsibility for day-to-day administration lies with designated managing authorities and intermediate bodies (6). This includes selecting individual projects, implementing controls to prevent, detect and correct errors within the declared expenditure and verifying that projects are actually implemented (‘first level checks’). Certifying authorities verify that ‘first level checks’ are effectively carried out and, where appropriate, undertake additional checks prior to declaring expenditure to the Commission.

5.11. Audit authorities (AAs) in the Member States play a key role in ensuring that the expenditure reimbursed under the ERDF, ESF and CF is regular. They are responsible for carrying out system audits and audits of operations (i.e. projects or group of projects) in order to provide reasonable assurance on the effective functioning of the management and control systems of the programmes and on the regularity of the expenditure certified for each OP. They report on these audits to the Commission through annual control reports (ACRs) and annual opinions (7).

5.12. At the start of each programming period the Commission makes pre-financing payments to the Member States (8). The financing of a project generally takes the form of the reimbursement of costs on the basis of expenditure declarations by the project promoters. These individual declarations are aggregated into periodic expenditure declarations per OP certified by the Member State authorities and submitted to the Commission. The share cofinanced by the EU is then reimbursed from the EU budget.

5.13. The eligibility rules are laid down at national or sometimes regional level, subject to exceptions in the specific regulations for each fund. Member States bear primary responsibility for preventing or detecting and correcting irregular expenditure, and for reporting on this to the Commission. 5.13. The establishment of eligibility rules at national level (Article 56 of Council Regulation (EC) No 1083/2006) was one of the main elements of simplification introduced in the 2007-2013 programme period. It aimed at providing Member States with more flexibility in adapting eligibility rules to the specific needs of regions or programmes and to harmonise them with rules in force for other, national public schemes.

5.14. The Commission has to obtain assurance that the Member States have set up management and control systems which meet the requirements of the regulations, and that the systems function effectively (9). If the Commission finds that a Member State has failed to correct irregular expenditure which had been certified and declared or that there are serious failings in the management and control systems, it may interrupt or suspend payments (10). If the Member State does not withdraw the irregular expenditure (which may be substituted by expenditure which is eligible) or does not remedy any detected system failures, the Commission may apply financial corrections, leading to a net reduction in EU funding (11). 5.14. The Commission provided a detailed assessment of its assurance on the set up and subsequent functioning of management and control systems for each co-financed programme, as well as an overall assessment of national control systems in its 2011 Annual Activity Report. In case of systems deficiency, the Commission in its supervisory role does interrupt and/or suspend payments. It reports on the exercise of this responsibility in the annual activity report. For 2011, DG Regional Policy reports 70 interruptions of payment deadlines and initiation of suspension procedures for 10 programmes. DG Employment reports for 2011 the interruption of 21 interim payment requests and 3 further suspension decisions.

Energy and transport

5.15. The European Union’s energy policy aims at contributing to provide citizens and business with affordable energy, competitive prices and technologically advanced energy services. It promotes sustainable energy production, transport and consumption, and a secure energy supply within the EU and its Member States. The main financial instrument is the European Energy Programme for Recovery (EEPR) which provides financing for projects, largely in the form of grants and subsidies.

5.16. Transport policies aim at developing the internal market, increasing competition and innovation and integrating transport networks. In this area, EU policies promote mobility, sustainable development and transport security. The Trans-European Network Programme for Transport (TEN-T) is the main financial instrument which provides funding for large infrastructure projects.

5.17. Payments in the field of energy and transport under budget Titles 06 and 32 were in the order of 2 billion euro in 2011 (12).

Management and control of energy and transport spending

5.18. The Commission (DG Mobility and Transport and DG Energy) implements energy and transport expenditure under direct and indirect centralised management (through two executive agencies and a joint undertaking (13)), and also through joint management arrangements (such as nuclear decommissioning funds or the European energy efficiency finance facility).

5.19. The Commission generally finances projects following formal calls for project proposals. Payments for approved projects are made directly by the Commission to beneficiaries, based on grant agreements or Commission financing decisions. The beneficiaries are usually Member State authorities but may also be public or private companies. Nearly all payments are made in instalments: an advance or pre-financing payment upon signature of the grant agreement or financing decision, followed by interim and final payments to reimburse eligible expenditure reported by beneficiaries.

5.20. The principal elements of control of the expenditure by the Commission include the evaluation of proposals against specified selection and award criteria, the provision of information and guidance to beneficiaries, and the monitoring and verification of the implementation of projects based on financial and technical progress reports submitted by beneficiaries. Where required by financing agreements, expenditure claims have to be certified by an independent external auditor or a relevant national body.

5.21. In addition, the Commission carries out ex-post audits in order to detect and correct errors which may not have been prevented by earlier controls and to provide reasonable assurance on the regularity of the expenditure.

Risks to regularity

Regional policy

5.22. For ERDF and CF expenditure the main risks relate to the funding of projects which do not comply with EU and national public procurement rules or which do not fulfil the eligibility conditions specified in the EU regulations or the OPs. In addition, the risk also exists that beneficiaries declare specific costs that are ineligible. 5.22. The Commission shares this assessment, as detailed in its Staff Working Document ‘Analysis of errors in the Cohesion Policy for the years 2006-2009’ (SEC(2011) 1179 of 5 October 2011). In this document, the Commission indicates specific actions to mitigate these risks (in particular additional guidance and training to managing authorities on the identified risks, timely implementation of financial corrections, interruptions and suspensions procedures, more targeted audit activity on the most risky areas).

5.23. In implementing the OPs, Member State authorities face competing priorities. On the one hand, spending has to be subject to appropriate controls of regularity, whilst, on the other hand, there is a need to ensure the timely absorption of the EU funds made available. In practice, the desire to implement the programme on a timely basis may militate against the consistent application of robust controls. 5.23. The Commission agrees that a sound management and control system is a system that allows certification of legal and regular expenditure while ensuring timely absorption of funds.

5.24. If cases of non-compliance are neither detected nor corrected by the different layers of control in a Member State or by the Commission, this results in ineligible expenditure being reimbursed from the EU budget. 5.24. Since the management and control system has a multiannual character, an overpayment detected in a payment claim reimbursed by the Commission may not have been yet subject to the entire control chain at national and EU level at the time of certification.

Energy and transport

5.25. For energy and transport expenditure the main risk is that ineligible costs declared by beneficiaries are not detected by the Commission before reimbursement. As under ERDF and CF, there are also risks related to non-compliance with public procurement rules. For TEN-T the potential impact of these risks on the EU budget is mitigated by the fact that eligible expenditure often exceeds the ceiling defined by the financing agreements.

5.26. A concentration of a significant proportion of payments in a limited period may adversely affect the effectiveness of supervisory and control systems and increase the risk of error (see paragraph 1.35). In 2011, 32 % of the EEPR payments by value occurred in the month of December. Moreover, the programme aims at rapidly disbursing funds which may also be detrimental to the application of adequate controls.

Audit scope and approach

5.27. Annex 1.1, part 2 , of Chapter 1 describes the Court's overall audit approach and methodology. For the audit of regional policy, energy and transport, the following specific issues should be noted: (a) the audit involved the examination of a sample of 180 interim and final payments (14) in Member States and at the Commission; (b) the assessment of systems covered: — audit authorities for ERDF, ESF and CF in the 2007-2013 programming period (15), — the procedures implemented at Commission and Member State level with regard to the programme closure for the 2000-2006 programming period, — a review of the Commission’s management representations contained in the Annual Activity Reports of DG Regional Policy, DG Mobility and Transport and DG Energy.

REGULARITY OF TRANSACTIONS

5.28. Annex 5.1 contains a summary of the results of transaction testing. The Court’s testing of its sample of transactions found 59 % of the 180 payments audited to be affected by error. The most likely error estimated by the Court is 6,0 % (16). 5.28. The Commission notes that for the third consecutive year, the level of error (MLE 6,0 %) remains well below those reported by the Court in the period 2006-2008. This positive development derives from the reinforced control provisions of the 2007-2013 programming period and its strict policy of interruptions/suspensions when deficiencies are identified, in line with its 2008 Action Plan. As shown in Table 1.3 of Chapter 1, the combined most likely error for regional policy, transport, energy and employment and social affairs also decreased considerably compared to 2010, from 7,7 % to 5,1 %. The Commission will continue to focus its actions on the most risky programmes and/or Member States.

5.29. For 62 % of the regional policy transactions affected by error, the Court considers that sufficient information was available for the Member State authorities to have detected and corrected at least some of the errors prior to certifying the expenditure to the Commission. 5.29. The Commission is strictly following up these cases to ensure that the concerned systems better prevent errors before certification in the future. Managing authorities are required to perform documentary checks on all claims submitted by beneficiaries, before certification of expenditure. However, on-the-spot verifications on operations may also intervene at a later stage of project implementation, after certification and up to closure, which explains why part of the errors in the Court’s sample could not be detected (see also Commission replies to paragraphs 5.22 and 5.24). The impact of the control system in reducing error rates is usually only seen in subsequent years, after all layers of controls have been implemented.

5.30. In regional policy, weaknesses in verifications by national authorities were detected in particular in the ‘first level checks’ carried out by managing authorities and intermediate bodies.

Failures to respect public procurement rules identified in one quarter of transactions

5.31. Previous years' audits have shown that public procurement procedures are particularly prone to error (17). In 2011, the Court audited 298 public procurement procedures for works and services underlying the expenditure for the 180 transactions certified to the Commission (18). The combined estimated contract value for the public procurements audited amounts to 6,7 billion euro (19). 5.31. Public procurement errors relate to non-compliance with internal market rules, and are not specific to cohesion policy, as shown in other chapters of this report.

5.32. The Court identified instances of non-compliance with EU and national public procurement rules in 25 % of the 180 transactions audited. Serious failures to respect these rules were identified in 9 % of the transactions audited (see example 5.1). These errors account for 44 % of all quantifiable errors and make up approximately 58 % of the estimated error rate for this policy group. 5.32. While the Commission and the Court audit compliance with public procurement rules in the same way, the Commission applies proportionate flat-rate corrections in cohesion policy thereby addressing the risk of damage to the EU budget and taking into account the nature and gravity of the irregularities. These flat rates are applied by the Commission and by most national authorities when imposing financial corrections for infringements of public procurement rules, including when following up all public procurement errors reported by the Court.

Example 5.1 — Serious failures to respect public procurement rules (a) Use of direct award without justification: In the case of an EEPR project concerning the construction of a gas pipeline, the contracts related to the works in the second and third stage of the project were awarded without tendering to the consortium that had been awarded a contract for the first stage of the pipeline five years earlier. This is not in line with the applicable EU and national public procurement laws. (b) Direct award of additional works in the absence of unforeseeable circumstances: In the case of a CF project related to road construction, additional works relating to amendments made subsequent to the approval of the original plan were awarded directly to the same contractor. These additional works were not due to unforeseeable circumstances, therefore a breach of public procurement rules occurred. (c) Contract awarded to single bidder without obtaining intended price reduction during negotiations: In the case of a CF project related to the construction of a sludge treatment facility, only one offer was received. The beneficiary judged the offer to be unacceptable due to its high price, which was more than double the estimated budget. The beneficiary then initiated negotiations with the sole bidder. Following these negotiations, the contract was awarded with only a 1 % decrease in the offered price. Given the lack of success of the negotiations to secure a better price, the beneficiary should have concluded that the tender procedure had been unsuccessful. (d) Artificial split of tenders: In the case of an ERDF project related to the provision of advisory services to a national ministry, several small-scale contracts were directly awarded for similar or identical services. In accordance with EU and national procurement laws, these services should have been procured together as a single service and, because the aggregate value would then have exceeded a certain threshold, a contract should only have been awarded following a public tendering procedure, allowing more bidders the possibility to submit an offer. (e) Significant changes in scope of the contracted works: In the case of a CF project related to the construction of a new metro line, the scope and budget of a related service contract was changed significantly through the involvement of experts who initially had not been foreseen. The additional tasks to be carried out were not due to unforeseeable circumstances, but rather to the way the contracting authority had planned the project.

5.33. Moreover, the Court found other non-quantifiable errors related to tendering and contracting procedures in a further 16 % of the 180 transactions audited. These errors include cases of non-compliance with the information and publicity requirements (such as late publication of award notices), shortcomings in the tender specification and procedural weaknesses in the evaluation of offers. These errors do not contribute to the error rate estimated by the Court (see paragraph 5.28) (20). 5.33. The Commission will follow up all errors reported by the Court and will apply financial corrections where appropriate and legally possible.

Ineligible costs account for more than half of all quantifiable errors detected by the Court

5.34. The Court found that ineligible costs had been declared in 12 % of the transactions audited. These account for 56 % of all quantifiable errors and make up approximately 42 % of the estimated error rate for this policy group (see example 5.2). 5.34. The Commission seeks to ensure that beneficiaries and programmes managing authorities are well aware of eligibility rules. This can be through training and guidance and, for regional policy, managing authorities should carry over this knowledge to all bodies in charge of managing the funds. For regional policy, when the Commission identifies complex rules at programme level, it also makes recommendations to the Member State to simplify the rules. The Commission will continue to focus its actions on programme authorities where risks have been identified (see also replies to paragraphs 5.24 and 5.28).

Example 5.2 — Ineligible costs (a) Non-compliance with project approval decision: A Financial Engineering Instrument funded by the ERDF to grant financial support to SMEs provided also funding to large enterprises. This was not permitted under the national approval decision for this project. (b) Revenue from the sale of old machinery that was replaced using ERDF funding was not taken into account: In the case of an ERDF project related to the purchase of metal processing machines, the revenue resulting from the disposal of the old machines that were replaced should have been taken into account and this would have reduced the expenditure declared for the purchase of the new machines. (c) Non-compliance with specific provisions in national eligibility rules: In the case of a CF project related to the construction of a motorway, costs related to financial and insurance services were reimbursed. Such costs are, however, not eligible according to the national eligibility rules. (d) Declaration of multiple ineligible costs for a project: In the case of a TEN-T project related to preparatory studies for the building of a tunnel, an invoice had been declared twice. In addition, key documentation relating to public procurement procedures (such as the report by the evaluation committee and the applicant’s winning offer) was missing. Nevertheless, since the overall costs declared were significantly higher than the maximum EU contribution, this over-declaration had no impact on the EU budget (see paragraph 5.25).

EFFECTIVENESS OF SYSTEMS

Audit authorities

5.35. The regulations defining the rules for the ERDF, ESF and CF for the 2007-2013 programming period introduced important changes with regard to the role and responsibilities of audit authorities (AAs) in the Member States (21). 5.35. The audit authorities indeed play a central role in the assurance building process, as from the beginning of the programming period and set-up of systems. Thereafter, they report each year an audit opinion on the functioning of management and control systems to the Commission, based on audits on management and control systems and on statistical samples of operations carried out in accordance with an audit strategy. For this reason the Commission is closely cooperating and coordinating with them, and has started reviewing their methodologies and audit results as early as 2009, as described below. This contributed to capacity building by providing advice, guidance and recommendations to audit authorities through the Commission's reperformance work. The regulation provides the Commission the possibility to rely on the work of an audit authority for its assurance under certain conditions (Article 73).

5.36. Within the 27 Member States, 112 AAs have been set up for the 434 OPs of the 2007-2013 programming period. More than half of these AAs are responsible for auditing OPs for all three funds within their region (i.e. ERDF, CF and ESF), whilst the remaining AAs audit specific OPs (22) under one fund.

5.37. ACRs and annual opinions provide information on the regularity of EU spending under the ERDF, ESF and CF for the 2007-2013 programming period (23). An effective verification of the accuracy and reliability of the information is necessary so that the results reported by the AAs in the ACRs can be used by the Commission as one of the main sources of assurance. In 2011, a total of 204 ACRs and annual opinions (24) for ERDF and CF and 117 ACRs and annual opinions for ESF were submitted to the Commission. 5.37. In their 2011 Annual Activity Report, DG Regional Policy and DG Employment, provided a detailed assessment of the accuracy and reliability of the audit information and results reported by audit authorities in their 2011 annual control reports, (see pages 63 to 66 of DG Regional Policy's 2011 AAR and pages 42 to 45 of DG Employment's 2011 AAR).

5.38. For 2011, the Court carried out its own examination of seven AAs and assessed the work done by the Commission to supervise AAs (25). 5.38. In the area of regional policy, the Commission carried out audits fully or partially to review the work of 34 audit authorities by end of 2011 (29 AA completed, 5 on-going) following a 2009 risk analysis that is updated every year.

The Court’s examination of seven AAs

5.39. Annex 5.2 contains the results of the individual key requirements tested and the overall assessment of the AAs examined. In drawing an overall conclusion, the Court paid particular attention to the ACRs and annual opinions and the parts of the AAs' work which had a direct and important effect on the conclusions reported in them (26). 5.39. The Commission takes the Court's findings into account for its assessment of the national audit authorities, with a view to encourage improvements, where still necessary and in order to ensure conditions for single auditing in the coming years.

5.40. For each of the seven AAs sampled the Court reviewed: (a) their organisational arrangements and audit methodology; (b) their working documents for up to four system audits; (c) their working documents for a sample of up to 25 audits of operations, including a re-performance of at least five of those 25 audits; and (d) their 2011 annual control reports and annual opinions, together with the related working papers. 5.40. The Commission notes that its audit methodology to review the work of the audit authorities is consistent with that of the Court.

5.41. Of the seven AAs examined, the Court assessed four to be ‘effective’. For these four AAs, the annual control report and annual opinion is considered to be reliable and all or most of the key requirements were fulfilled. 5.41. The Commission shares the Court's assessment for these four audit authorities and reached similar conclusions through its own audits.

5.42. For the three other AAs: 5.42. The Commission agrees with the Court’s assessment and is taking corrective and preventive actions.

(a) two AAs were assessed as ‘partially effective’ because problems were observed with some key requirements and the error rate reported in the annual control report was understated; and (a) For the two AAs assessed as partially effective, the Commission accepted in one case the reported audit opinion for its own assurance as it was qualified. In the other case the Commission identified and corrected the incorrect extrapolation of errors for its assurance process, as indicated in the Annual Activity Reports.

(b) one AA was assessed as ‘not effective’ because important problems were observed for nearly all the key requirements and, as a result, the error rate reported in the annual control report is considered to be unreliable. The Commission has observed the same problems for this AA as well as other aspects of the management and control systems for the operational programmes covered by the AA (see paragraph 5.49(b)).

5.43. The Court identified the following areas for improvement: 5.43.

(a) for four AAs, the audit checklists used did not sufficiently cover the main risks to the regularity of expenditure. This concerns in particular the scope of verifications and the extent of checks with regard to public procurement, state aid rules, revenue generating projects and project selection procedures. For financial engineering instruments, guidance issued by the Commission had not yet been incorporated into the AAs’ audit checklists; (a) The Commission also identified as a result of its extensive review of audit authorities during 2009-2011 the need to reinforce, in some cases and on particular issues, the existing checklists used by national audit authorities for the audit of operations. As a follow-up, the Commission shared its own checklist for audits on operations with the Member States audit authorities in October 2011. These check lists cover the issues raised by the Court: public procurement, state aid rules, revenue generating projects and project selection procedures. As far as public procurement is concerned, the Commission has shared with Member States an analysis of the types of errors detected in cohesion by EU audits in the previous years and has launched an exercise to collect best practices and possible answers by Member States to remedy such errors and reduce their occurrence (see also paragraph 6.29(a)).

(b) for two AAs, the quality control of audits of systems and/or operations was not in line with their own audit manual and for another two AAs it was not documented; and

(c) for two AAs, the methodology used to sample projects to be audited was not appropriate in view of the guidance specified by the Coordination Committee of the Funds (27) (COCOF) or the sampling methodology had been incorrectly applied by the AA, which meant that the results of their audits could not be extrapolated as required. (c) The Commission has found similar weaknesses during its audits and is intensifying its efforts to provide guidance on sampling.

Assessment of the Commission’s supervision of AAs

5.44. In 2011, the Commission carried out enquiries for a sample of AAs (28) and assessed, through a desk review, the implementation of their audit strategy and the reliability of the error rates reported in ACRs. 5.44. During the period 2009-2011 the Commission has carried out 127 audit missions covering 34 ERDF/CF AAs and 78 audit missions covering 67 ESF AAs. At the end of 2011 the audit work both desk review and on the spot work covering review of systems audits, audit methodology, reperformance of systems audits and of audits on operations on the spot had been completed for 29 ERDF/CF audit authorities and 67 ESF audit authorities. The Commission has also assessed, through desk review completed by on-the-spot fact-finding missions where necessary, the implementation of the audit strategy and the reliability of the error rates reported in ACRs for all audit authorities.

Assessment of the Commission’s enquiries for a sample of AAs

5.45. The Court reviewed the Commission’s working papers and supporting documentation for DG Regional Policy in relation to 14 AAs covering 39 OPs and for DG Employment, Social Affairs and Inclusion in relation to seven AAs covering seven OPs (29).

5.46. The Commission found similar weaknesses to those observed by the Court in its own audits of AAs (see paragraphs 5.42 and 5.43). 5.46. The Commission shares the Court’s assessment on the compliance and effectiveness of the work of audit authorities.

5.47. The Court found that in all cases where the Commission identified specific weaknesses the Member States were notified about the corrective action to be taken. 5.47. In the course of its extensive review of audit authorities, the Commission indeed notified targeted recommendations to audit authorities to remedy the identified weaknesses, when needed. This contributed to an extensive capacity building exercise that allowed to improve the work and to raise the quality of audit results overall for the audited audit authorities, thus allowing in some cases the Commission to enter into Article 73 agreements and to draw further lessons and disseminate good practices for all audit authorities.

Assessment of the Commission’s desk reviews of ACRs

5.48. For all 112 AAs, the Commission checked that the ACRs and annual opinions complied with the requirements of the regulation in terms of content and format. It did this by analysing relevant information reported by the AAs on the functioning of the management and control systems and by checking the calculation of the reported error rate. This review also took account of other information regarding the supervisory and control systems for OPs which was available to the Commission. 5.48. The analysis of annual control reports (ACR) and audit opinions is an extensive exercise at the beginning of each year. It takes indeed into account all national audit results received by audit authorities during the year, as well as other Commission and ECA audit results. In addition, in 2012 the Commission services carried out fact finding missions on the spot in 11 Member States, to collect further evidence/obtain clarifications on the submitted ACR and in particular on the methodology for calculating the error rates. The results of this analysis is a main source of the assurance building process, as explained in the AAR.

5.49. For 2011, the Commission considered that the error rates reported in the ACRs by the AAs are: 5.49.

(a) reliable for 363 of the 434 OPs (84 %). These 363 OPs account for 67 % of the estimated expenditure under the 2007-2013 programming period;

(b) not reliable for 71 OPs (16 %). These 71 OPs account for 33 % of the estimated expenditure under the 2007-2013 programming period. For these OPs, on the basis of its own assessment of the functioning of the management and control systems, the Commission recalculated the error rate or applied a fixed error rate. These adjusted error rates were then used for the estimation of the amount of ‘payment at risk’ disclosed by DG Regional Policy and DG Employment, Social Affairs and Inclusion in their AARs (30) (see paragraphs 5.66 and 6.24). (b) When the Commission could recalculate the error rate, it means that it obtained additional, reliable information either in the text of the ACR itself or after communicating with the audit authority. The Commission communicated these recalculated rates to the concerned audit authorities that will thus be able to provide more reliable information in the next exercise. For this reason the Commission presents separately in the respective Annual Activity Reports the error rates that it could recalculate and the ones that it considered unreliable. Only for these unreliable error rates the risk was estimated based on flat rates, This represented 9 % and 7 % of payments made in 2011 in total respectively for DG Regional Policy and DG Employment.

5.50. Overall, the Court considers that the approach applied by the Commission is in principle appropriate. The possibility for the Commission to validate and, where necessary, adjust the error rates disclosed by national AAs in their ACRs is however limited since the AAs are not required by the regulations to provide information about their audits of operations to the Commission. For the 2011 ACRs, DG Regional Policy therefore organised fact-finding missions to 12 AAs in 11 Member States to clarify how the error rate reported in the ACR was calculated. Similarly, DG Employment, Social Affairs and Inclusion carried out additional examinations for 12 OPs following its review of ACRs. 5.50. The Commission welcomes the Court's assessment for the second consecutive year, since the analysis of ACR and audit opinions constitute a key part of the assurance building process in the Annual Activity Reports. The fact-finding missions organised by DG Regional Policy and DG Employment, on the basis of doubts or risks identified, allowed to improve reliance on error rates reported, or in some cases to provide a sound basis for a recalculation of the error rates jointly agreed with the Audit Authority.

5.51. The Court is of the opinion that the Commission drew appropriate conclusions from its reviews of ACRs and that the Commission, based on its assessment, had adjusted the reported error rates where necessary.

Assessment of programme closure for the 2000-2006 programming period

5.52. Payments relating to each programming period usually continue for some years beyond the end of the period. For the programming period 2000-2006, final beneficiaries were permitted to incur expenditure up to the end of June 2009 (with some exceptions).

5.53. The closure of an OP is the financial settlement of any outstanding EU budgetary commitments towards the programme, through payment of the final balance due to the Member State or by decommitment of any unused balance or by recovery of any amount unduly paid.

5.54. The Court noted in a recent special report that, for those programmes where the Commission cannot fully rely on the effective functioning of the management and control systems, the final assessment of the remaining risk of error in programmes has to be made by the Commission during the ongoing closure process (31). 5.54. The Commission's assurance for 2000-2006 programmes was built up over the years namely through substantial audit work carried out by the Commission services. As a result, the Commission services acquired an extensive knowledge of the audit results and risks related to each Member state, which provides a substantive basis for analysing the winding-up declarations.

5.55. Member States are required to submit three documents to the Commission for the closure of each programme: (a) a final implementation report provided by the managing authority on the extent to which the programme met its objectives and on the financial resources used; (b) a declaration by the winding-up body, summarising the conclusions of checks carried out during the programming period, and assessing the validity of the application for final payment and the regularity of the transactions covered by the certified statement of expenditure; (c) a certified statement of expenditure, drawn up by the paying authority, together with an application for final payment if the final balance is in favour of the Member State.

5.56. After approval of the final implementation report and review of the winding-up documents, the Commission decides the final amount to be paid, recovered or decommitted. Where the final error rate validated by the Commission exceeds 2 % of total eligible expenditure, the Commission imposes financial corrections before paying the final balance or requesting a recovery. 5.56. In the 2000-2006 regulatory framework, the Member States had to audit a sample of operations based on risks and ensuring representativity of the main bodies and beneficiaries. Therefore, the error rate reported at closure by the winding-up body has to be carefully analysed: all corrective actions taken by the Member States and the Commission during implementation have to be taken into account to conclude on the frequency of errors and residual risks, before evaluating possible additional corrections (see Commission Guidelines on Closure, paragraphs 3.6, 3.7 and 4.2 of Annex 2). If based on this analysis the Commission determines a residual risk above 2 %, a financial correction is applied.

5.57. If closure is to be effective, winding-up declarations should be reliable and the Commission should address any significant weaknesses in these documents. The Court assessed whether the closure documents submitted by Member States were reliable and whether the Commission dealt appropriately with the documents. 5.58. The Court’s examination covered the initial phase of the closure process and was based on: (a) a review of procedures, manuals, checklists, monitoring and reporting tools within DG Regional Policy and DG Employment, Social Affairs and Inclusion; (b) an examination of the Commission’s assessment of closure documents for a sample of 31 OPs (both ERDF and ESF) in eight Member States (32), none of which had been formally closed at the time of the audit; (c) visits to nine winding-up bodies in two Member States, covering 14 of the 31 sampled programmes, and including analysis of the data underlying the information reported in their closure documents. 5.57 and 5.58. The Court examined the initial assessment the Commission made on closure documents submitted by Member States in the sample of the Court, as the closure process for those programmes was only starting at the time of the Court’s audit. The weaknesses in winding up declarations reported by the Court had been identified and analysed by the Commission before the Court’s audit. These weaknesses were addressed by the Commission during the closure process subsequently to the Court’s audit and additional audit work has been or is currently being performed after the initial assessment of the closure documents, where necessary, to conclude on the residual risk. Financial corrections were applied where appropriate.

5.59. The Court found that the Commission, in cooperation with the Member States, had taken steps such as the early issue of guidelines and regular discussion of closure issues, which meant that the closure process was better prepared than in previous programming periods. 5.59. The Commission also closely monitored the management and control systems and audit work during implementation of the 2000-2006 programming period up to the closure process. With a view to improving the closure process for 2000 to 2006 programmes, the guidelines to Member States on the closure of Structural Funds were published in August 2006, in due time for the beginning of the closure process. The Commission discussed closure issues with the control authorities of the Member States during their regular annual bilateral meetings. The Commission organised closure seminars with the Member States in September 2008 and December 2009, developed a list of ‘frequently asked questions’ and held technical meetings with the bodies responsible for drawing up the closure declarations.

5.60. However, the Court identified weaknesses undermining the reliability of some of the closure documents submitted by Member States to the Commission and highlighted weaknesses in the Commission’s procedures for the initial assessment of the closure documents. The submission of unreliable documents by Member States places additional pressure on the Commission by increasing the work which it has to carry out in order to ensure that programmes are closed without remaining material error. 5.60. The Commission considers to have assessed all cases according to international auditing standards before the Court’s audit and addressed appropriately all risks identified.

5.61. Some of the closure documents audited by the Court were affected by the following problems: 5.61.

(a) the second level checks in the Member States, which are fundamental to the winding-up declarations, were affected by a number of specific weaknesses; (a) The Commission agrees with the Court’s assessment regarding 5 cases out of 10 cases underlying the Court’s observation. The Court’s observation was generally based on the Commission’s analysis of the winding up declarations at the time of the audit. The Commission subsequently took appropriate actions to tackle the issues and mitigate the residual risks in these cases. In the remaining cases, the Commission considers that second level checks were adequately performed and reported in the winding up declarations.

(b) winding-up declarations contained incomplete information; (b) The Commission identified the same issues for two cases underlying the Court’s observation in its audits. Appropriate financial corrections will be proposed at closure. For the two remaining cases, the Commission services assessed the completeness of information in the winding-up declaration after a thorough analysis.

(c) the winding-up bodies in some Member States submitted declarations which contained unjustified reductions of final error rates and opinions, which were not in line with the results of checks (see Table 5.2 ). (c) For three cases quoted in Table 5.2 , the Commission considers that the reductions of error rates have been duly justified. The Commission services assessed the audit opinions provided by the winding-up bodies according to International Auditing Standards, taking into account all available audit results and evidence, as well as the application of self-corrections by Member States going beyond individual errors detected in the audited sample. In all cases, the Commission services took the necessary measures to address the issues including the interruption of the closure process, the request of additional information and the launch of a process leading to the application of financial corrections where necessary.

Table 5.2 — Effect of unjustified reductions of final error rates reported in winding-up declarations Operational Programme Total certified amount (euro) Error rate before withdrawing atypical errors Error rate reported Steiermark, Objective 2, ERDF 1 643 131 021 2,9 % 0,7 % West Midlands, Objective 2, ERDF 2 131 670 207 10,6 % 6,47 % Merseyside, Objective 1, ERDF 2 495 941 228 2,8 % 1,1 % Sicily, Objective 1, ERDF 5 557 834 587 11,0 % 1,2 % Spain Local Development, Objective 1, ERDF 1 644 137 526 6,7 % 1,2 % Note: In two further cases (France, Objective 3, ESF and UK West Wales and the Valleys, Objective 1, ERDF), the impact of the decrease could not be quantified from the information in the closure documents. The reduction in the Spanish ERDF programme concerns the part implemented by the local administration, representing around 25 % of the total programme expenditure.

5.62. The problems identified by the Court in the winding-up declarations submitted by the Member States make it difficult for the Commission to assess the declarations and the underlying information. For the audited cases, the Commission’s assessment was affected by procedural weaknesses regarding in particular the use of interservice liaison and the monitoring and reporting of the closure process, as well as by some shortcomings in the Commission’s checks. 5.62. The Commission considers that its closure procedure has allowed identifying remaining material risks at closure, and addresses it by performing additional audit work and/or by applying appropriate financial corrections. Consultations between Commission services, in line with agreed established procedures, were consistently carried out with the exception of a few cases where non-disclosure identified to other services did not entail any risk. The Commission underlines that the quality of reporting increased with time, as more qualitative information on the ongoing analysis was available. The Commission notes that the checks reported as missing by the Court were actually carried out by different services within the directorates-general.

5.63. The Court also noted that in four out of six audited programmes that were subject to financial corrections in the course of the programming period, error rates continued to be high afterwards, thus showing the persistence of weak management and control systems. This would require the Commission to perform additional work in order to obtain sufficient assurance at closure. 5.63. The Commission regrets that, for the four programmes mentioned, despite financial corrections during the programming period, the residual risk at closure might remain high. Therefore, regardless of financial corrections already implemented, the Commission systematically assesses the residual risk at closure for all programmes and performs additional checks to mitigate this risk. Furthermore, the Commission has included in its closure audits programmes for which some issues remain, thus allowing to reach high assurance at closure for these programmes as well.

5.64. In view of the problems found by the Court, in particular with regard to the unjustified reductions of final error rates, the Court considers that for five of the 31 programmes audited there is a risk that, unless the Commission takes the necessary action during subsequent stages, the closure might be based on unreliable closure documents. 5.64. The Commission considers that in all cases referred to quoted by the Court’s assessment the remaining risks are being adequately covered during the ongoing closure process. The Commission services have made a thorough assessment of the closure documents and have taken the necessary measures to address the issues identified, including the interruption of the closure process, the request of additional information, the performance of closure audits and eventually for some programmes the application of financial corrections (see also Commission reply to paragraph 5.61(c)).

Reliability of Commission management representations

5.65. The Court assessed the 2011 annual activity reports (AARs) and accompanying declarations of the Directorates-General for Regional Policy, Mobility and Transport, and Energy. In particular, with regard to the regularity of payments authorised during 2011, the Court: (a) assessed the reservations made in the AARs; (b) checked the consistency and accuracy of the Commission’s calculation of the residual error rate and the amounts of ‘payments at risk’.

DG Regional Policy

5.66. DG Regional Policy estimated that between 3,1 % and 6,8 % of the interim payments for the 2007-2013 programming period authorised during 2011 (the latter amounted to approximately 29,8 billion euro in total) were at risk of error. This assessment of the ‘payments at risk’ includes all OPs; those under reservation as well as those not under reservation. The number of OPs subject to reservation by DG Regional Policy increased in 2011 compared to 2010 from 98 to 123. This was due to a stricter assessment by the Commission. In total, the scope of the financial reservations made by DG Regional Policy represented 31 % of the total payment appropriations authorised during the year. According to the AAR, the impact of these reservations represented between 1,9 % and 4,3 % of the payments authorised by DG Regional Policy during 2011. 5.66. The Commission welcomes the Court’s reference to the Commission’s stricter assessment of the amounts at risk, which was intended to address observations made by the Court in its former Annual Reports.

5.67. The Court notes that DG Regional Policy issued reservations for those OPs of the 2000-2006 programming period for which the Member State had not yet adequately corrected weaknesses identified during the closure process. The Commission did not quantify these reservations (which are referred to by the Commission as reservations for ‘reputational reasons’). As shown by the Court’s work there remains a risk that the closure might be based on unreliable closure documents leading to insufficient financial corrections (see paragraphs 5.60 to 5.61 and Special Report No 3/2012, paragraphs 65 to 67). 5.67. As indicated in its reply to paragraph 5.62, the Commission considers that its closure procedure has allowed identifying remaining material risks at closure. The Commission has mitigating actions in place to address the risks identified at closure. Based on its risk assessment, the Commission carries out specific closure audits to verify and validate the quality of the winding-up declaration. The information provided by the winding-up body (WUB) is based on the cumulative audit information originating from all audit sources (national, Court and Commission audits), including from additional audits carried out at clo¬sure by the winding-up body when necessary.

DG Mobility and Transport and DG Energy

5.68. DG Mobility and Transport and DG Energy estimated that approximately 4,5 % of payments authorised during 2011 in relation to the sixth and the seventh framework programmes for research and technological development were affected by errors. Accordingly, reservations were issued for each of these two expenditure programmes by both DGs. In total, the reservations made by DG Mobility and Transport and DG Energy cover respectively 25,7 % and 18,8 % of the total payment appropriations authorised during the year. The combined impact of these two reservations represented 0,9 % and 0,8 % of the payments authorised by DG Mobility and Transport and DG Energy, respectively.

5.69. The Court noted the following issues: 5.69.

(a) for both DG Mobility and Transport and DG Energy the Court considers that the amount of ‘payments at risk’ is understated for the part of expenditure related to the seventh framework programme. In both cases the reservation concerning the seventh framework programme (FP7) is based on the results of the audits carried out by DG Research and DG Information Society. Audits by DG Mobility and Transport and DG Energy for FP7 projects had however shown error rates significantly above the estimated error rate for the framework programme as a whole; (a) The Commission considers that both Directorates-General followed the standing instructions when quantifying the amount at risk for FP7 by using the best information available. Since Energy DG and Mobility and Transport DG manage a small number of FP7 projects, they conducted a small number of FP7 audits. As this was found to be not sufficiently representative, the Commission considered it appropriate to use the results of the considerably larger number of random, representative FP7 audits conducted by Research and Innovation DG and Information Society and Media DG. From 2012, the Commission DGs managing research projects will have a Common Representative Audit Sample for FP7.

(b) for DG Energy, the Court considers that the scope of the audit work carried out in relation to the EEPR in 2011 is insufficient concerning public procurement. (b) The Commission will take into account the Court’s observation in its audit of each of the 65 beneficiaries of EEPR funds during the lifetime of the EEPR.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

5.70. Based on its audit work, the Court concludes that the interim and final payments for the year ended 31 December 2011 for the policy group regional policy, energy and transport were affected by material error. 5.70. The Commission notes the considerable decrease in the error rate compared to last year which confirms a positive development for the third consecutive year. The Commission considers that this is in particular a result of its strict policy of interruptions/suspensions when deficiencies are identified, in line with its 2008 Action Plan. The Commission is taking measures to correct the errors detected by the Court including by applying financial corrections where appropriate, and focuses its actions on the most risky programmes and/or Member States (34).

5.71. Based on its audit work on the examined supervisory and control systems, the Court found that: 5.71.

(a) audit authorities were partially effective in ensuring the regularity of operations for the ERDF, ESF and CF of the 2007-2013 programming period; (a) The Commission underlines that the effectiveness and quality of the work of audit authorities differs by programme and Member State, as shown by the Court’s assessment in paragraph 5.41 and by the results of the Commission’s audit work. In accordance with Article 73 of Regulation (EC) No 1083/2006, the Commission is as from July 2012 formally relying on the work of 13 audit authorities for ERDF/CF and 9 audit authorities for ESF. The Commission will continue to review the work of the remaining audit authorities and to monitor the situation for programmes for which an Article 73 letter was granted.

(b) the procedures of the Commission and Member States have been partially effective in carrying out the initial phase of the closure process for the 2000-2006 programming period. (b) The Commission considers to have established robust procedures and guidance for the closure process, and considers that most Member States have carried out important and professional work to enable the closure of programmes and to increase assurance at closure. The Commission also considers to have made a comprehensive work at closure, analysing thoroughly all closure documents, carrying out additional audits and enquiries where necessary, which has led in many cases to additional financial corrections being applied at closure to address remaining risks.

5.72. The Court’s audits have shown that there is no assurance that financial correction mechanisms compensate for all OPs in an adequate manner the errors uncovered and that all material issues are resolved. There is equally no evidence that financial correction mechanisms necessarily translate into lasting improvements to systems which will prevent recurrence of the errors uncovered (33). 5.72. The multiannual nature of expenditure and control cycle includes the closure process, where final checks are performed on the legality and regularity of expenditure and final corrections are made where necessary. The closure process for 2007-2013 programmes will be further strengthened compared to the 2000-2006 period considering in particular reinforced requirements for the audit of a representative statistical sample on a yearly basis and the annual opinions. Moreover, for a limited number of OPs, the Commission’s audits also demonstrated that programmes authorities still need to improve their management and control systems despite corrections applied. In such cases additional actions by the Commission, such as interruptions or suspensions are applied. The Commission has proposed in the 2014-2020 legal framework to increase the possibility to make net financial corrections.

Recommendations

See joint reply to paragraphs 1.12 and 1.13.

5.73. The Court recommends that the Commission: 5.73.

— Recommendation 1: makes sanction systems more effective by increasing the impact of financial corrections and by reducing the possibility of replacing the ineligible expenditure with other expenditure, as proposed by the Commission in the area of cohesion for the next programming period. There should be a presumption that any irregularity detected subsequent to presentation of the annual accounts will lead to a net financial correction. The Commission considers that Member States should have the right to substitute ineligible expenditure they detect with legal and regular one in order to optimise the use of Cohesion spending, which contributes to its added value and to ensure efficient controls at Member State level. The Commission’s proposal for the 2014-2020 regulatory framework provides that ‘Where irregularities affecting annual accounts sent to the Commission are detected by the Commission or by the European Court of Auditors, the resulting financial correction shall reduce support from the Funds to the operational programme (Article 137(6))’ thereby limiting the possibilities of withdrawal/replacement to the ongoing financial year. This provision is intended as an incentive for expenditure included in the annual certified accounts to be legal and regular.

— Recommendation 2: requires strict compliance with the eligibility requirements for EU funding, in particular the correct application of EU and national public procurement rules. The Commission has made considerable efforts to ensure strict compliance with eligibility requirements and the correct application of public procurement rules. For example: — For regional policy, it has provided training and guidance on eligibility rules to programme managing authorities to ensure they transmit this knowledge to all bodies in charge of managing the funds. Moreover, when it identifies complex rules at programme level, the Commission makes recommendations to simplify the rules. It has also shared with Member States an analysis of the types of procurement errors detected by EU audits in cohesion policy during previous years and has launched an exercise to collect best practices and possible answers by Member States to remedy such errors and reduce their occurrence. — For the TEN-T programme, strict compliance with the eligibility requirements is insisted upon throughout the funding process, for example, the guide for applicants contains clear instructions on the respect of these requirements. The respect of these rules is then checked through the sampling controls when making intermediate and final payments.

— Recommendation 3: addresses weaknesses in ‘first level checks’ at the level of managing authorities and intermediate bodies for ERDF and CF, where appropriate through training measures and specific guidance material. The Commission has been giving guidelines to the Member States on the way managing authorities should define and implement their management verifications. Moreover, the Commission developed in 2009 comprehensive guidelines for the first level checks and a self-assessment tool for managing authorities, which they can use to improve their functioning. The Commission has also developed and disseminated in 2011 to audit authorities checklists for the audit of management verifications which can be used by the managing authorities themselves, as a benchmark.

— Recommendation 4: regarding the control system for audit authorities in the cohesion area:

— provides further guidance to AAs for the current programming period, in particular on sampling, the scope of verifications to be undertaken for audits of projects and quality control, — Since the beginning of the programming period, the Commission has provided detailed and technical guidance, offered training and conducted technical meetings with auditors of national audit authorities. Furthermore, guidance on the scope and extent of audits on operations that was delivered under the 2000-2006 programming period is still valid since such audits do not differ significantly between both programming periods. As far as sampling is concerned, a specific workshop was organised by the Commission in June 2012.

— encourages AAs to carry out specific system audits concerning ‘first level checks’ done by managing authorities and intermediate bodies. — The Commission is actively implementing this recommendation and will continue to do so. When the Commission identifies weaknesses in management verifications (through various audit results at national or Community level), it requests the audit authority to review its audit strategy and audit plan to include targeted audits on management verifications or, alternatively, following revised risk assessments, it carries out directly such audits (under its audit enquiry ‘bridging the assurance gap’). Moreover, based on an assessment of the functioning of management verification across all co-financed programmes based on all audit results available, the Commission has encouraged audit authorities in October 2011 to pay particular attention in their systems audits to first level checks (cf. Homologues Group, dedicated workshop on the role of audit authorities to contribute to improvement of management verifications).

— Recommendation 5: in order to make the procedure for closing multiannual programmes in the area of cohesion more efficient:

— reminds the Member States to ensure that the final declarations submitted for the 2007-2013 programmes are reliable, — The 2007-2013 regulatory framework foresees quite different requirements for the audit of representative, statistical sample on a yearly basis, that support formal audit opinions of the audit authorities. This will form a more solid basis for closure declarations, which will allow identifying the residual risk after all corrections were taken during programme implementation. It should also be noted that guidelines for closure 2007-2013 were already presented to Member States during the COCOF meeting in June 2012.

— examines the specific weaknesses identified by the Court in the winding-up declarations for closures of 2000-2006 programmes, — These weaknesses were identified and addressed by the Commission.

— considers whether these problems have also occurred for other OPs, and apply financial corrections where necessary, — More generally, the Commission analyses thoroughly each winding-up declaration and draws conclusions, including application of financial corrections where necessary.