THE COURT’S OBSERVATIONS THE COMMISSION’S REPLIES

INTRODUCTION

1. This annual report presents the Court’s assessment of the European Development Funds (EDFs). Key information on the activities covered and the spending in 2012 is provided in Table 1 .

Table 1 — European Development Funds — Key information 2012 (million euro) Budget title Policy area Description Payments 2012 Management mode European Development Funds Eighth EDF Operational expenditure Projects 22 Decentralised Projects 5 Centralised direct Projects 2 Centralised indirect Projects 0 Joint management Budget support 0 Centralised direct Administrative expenditure 0 29 Ninth EDF Operational expenditure Projects 383 Decentralised Projects 95 Joint management Projects 90 Centralised direct Budget support 16 Centralised direct Projects 15 Centralised indirect Administrative expenditure 0 599 10th EDF Operational expenditure Budget support 824 Centralised direct Projects 775 Joint management Projects 624 Decentralised Projects 299 Centralised direct Projects 45 Centralised indirect Administrative expenditure 97 2 664 Total operational expenditure (Projects) 2 355 Total operational expenditure (Budget support) 840 Total operational expenditure 97 Total payments 3 292 – advances 1 738 + clearings of advances 1 369 Audited population 2 923 Total individual commitments (37) 3 226 Total global commitments (37) 3 163

Specific characteristics of the European Development Funds

2. The EDFs are the main instrument for providing European Union aid for development cooperation to the African, Caribbean and Pacific (ACP) States and overseas countries and territories (OCTs). The partnership agreement signed in Cotonou on 23 June 2000 for a period of 20 years (‘the Cotonou Agreement’) is the current framework for the European Union’s relations with ACP States and OCTs. Its main focus is on reducing and eventually eradicating poverty.

3. The EDFs are funded by the Member States, governed by their own financial regulations and managed, by the European Commission, outside the framework of the EU general budget. The European Investment Bank (EIB) manages the investment facility, which is not covered by the Court's Statement of Assurance or the European Parliament's discharge procedure (1) (2).

4. The EDFs are managed almost entirely by the Commission’s Directorate-General for Development and Cooperation (EuropeAid), which also manages a wide range of expenditure from the EU budget (3) (4).

5. EDF interventions are implemented through projects and budget support (5) under three main arrangements. In 2012, 43 % of payments were made under centralised management, 30 % under decentralised management and 27 % under joint management (6) (see Table 1 ).

6. The expenditure covered in this report is made under a wide range of delivery methods, put into action in 79 countries. Rules and procedures are often complex, including those for tendering and the award of contracts. The Court has assessed the risk as inherently high.

7. In two areas — budget support (7) and EU contributions to multi-donor projects carried out by international organisations (8) such as the UN — the nature of the instruments and of the payment conditions limit the extent to which transactions are prone to errors as defined in the Court’s audit of regularity.

8. Budget support is paid in support of a state’s general budget or its budget for a specific policy or objective. The Court examines whether the Commission has respected the specific conditions for making budget support payments to the partner country concerned and has demonstrated that general eligibility conditions (such as progress in public sector financial management) have been complied with.

9. However the Commission has considerable flexibility in deciding whether these general conditions have been met. The Court’s audit of regularity cannot go beyond the stage at which aid is paid to a partner country. The funds transferred are then merged with the recipient country’s budget resources. Any weaknesses in its financial management will not generate errors in the Court’s audit of regularity.

10. The Commission’s contributions to multi-donor projects are pooled with those of other donors and are not earmarked for specific identifiable items of expenditure.

CHAPTER I — EIGHTH, NINTH AND 10TH EDFs

Implementation

11. EDF agreements are usually concluded for a commitment period of around five years, but payments can be made over a longer period. In 2012, payments were made from the eighth, ninth and 10th EDFs. The eighth EDF (1995-2000) amounts to 14 625 million euro and the ninth EDF (2000-2007) to 15 200 million euro.

12. The 10th EDF (2008-2013) totals 22 682 million euro. Of this amount, 21 967 million euro are allocated to ACP countries and 285 million euro to OCTs. These sums include, respectively, 1 500 million euro and 30 million euro for the investment facility managed by the EIB for the ACP and OCT countries. Finally, 430 million euro are earmarked for the Commission’s expenditure on programming and implementing the EDF.

13. In 2012, total contributions from the Member States amounted to 2 600 million euro.

14. Table 2 shows the use, during 2012 and cumulatively, of EDF resources. Individual commitments were 27 % above the initial forecast, particularly due to the approval of the EU support to the Sustainable Energy for All initiative of 400 million euro, which had not been initially planned. Payments were 8 % more than initially forecast, mainly due to the higher than expected amount of commitments. Outstanding commitments remained stable compared with 2011.

The Commission’s annual report on the financial management of the eighth to 10th European Development Funds

15. The Financial Regulation applicable to the 10th EDF requires the Commission to report each year on the financial management of the EDFs (9). In the Court’s opinion, this report accurately presents relevant financial information.

Table 2 — Use of EDF resources at 31 December 2012 (million euro) Situation at end of 2011 Budgetary implementation during the financial year 2012 (net) (43) Situation at end of 2012 Global amount Implementation rate (39) Eighth EDF (40) Ninth EDF (40) 10th EDF Global amount Eighth EDF Ninth EDF 10th EDF Global amount Implementation rate (39) A — RESOURCES ( 38 ) 48 854 –79 – 102 246 66 10 584 16 450 21 885 48 920 B — USE 1. Global commitments ( 41 ) 40 827 83,6 % –64 – 297 3 524 3 163 10 576 16 157 17 258 43 991 89,9 % 2. Individual commitments ( 42 ) 34 833 71,3 % –46 – 187 3 460 3 226 10 448 15 504 12 107 38 059 77,8 % 3. Payments 29 208 59,8 % 15 539 2 655 3 209 10 345 14 566 7 507 32 417 66,3 % C — Outstanding payments (B1 – B3) 11 619 23,8 % 231 1 591 9 751 11 574 23,7 % D — Available balance (A – B1) 8 027 16,4 % 8 293 4 627 4 929 10,1 % Source: Court of Auditors, based on the EDF reports on financial implementation and financial statements at 31 December 2012.

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

The Court’s Statement of Assurance on the eighth, ninth and 10th European Development Funds (EDFs) to the European Parliament and the Council — Independent Auditor’s Report

Reliability of the accounts

Legality and regularity of the transactions underlying the accounts

Revenue

Commitments

Payments

5 September 2013

Vítor Manuel da SILVA CALDEIRA President

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

Information in support of the Statement of Assurance

Audit scope and approach

16. Observations regarding the reliability of the EDF accounts are set out in paragraph VI of the Statement of Assurance and are based on an audit of the financial statements (12) and the report on the financial implementation of the eighth, ninth and 10th EDFs (13). It involved the testing of amounts and disclosures and the assessment of the accounting principles used, significant estimates made by management and the overall presentation of the accounts.

17. Annex 1.1, part 2 , of chapter 1 of the 2012 annual report of the Court of Auditors on the implementation of the budget describes the Court’s overall approach and methodology. Observations regarding the regularity of EDF transactions are set out in paragraphs VII to X of the Statement of Assurance and are based on the following components: (a) the examination of all contributions from Member States and a sample of other types of revenue transactions; (b) the examination of a sample of 30 commitments (14); (c) the examination of a sample of 167 interim and final expenditure transactions approved by seven EU delegations or the Commission headquarters (15). Where necessary, implementing organisations and final beneficiaries were visited on the spot to verify the underlying transactions declared in financial reports or cost statements; (d) an assessment of the effectiveness of supervisory and control systems at EuropeAid’s headquarters and EU delegations, covering the following elements: (i) ex ante checks by authorising officers, external supervisors (for works contracts) or external auditors (for programme estimates (16), grants and fee-based service contracts). The Court analysed why the errors it detected had occurred; (ii) monitoring and supervision. This included an examination of EuropeAid’s study on the 2012 residual error rate (RER), which partly relied on the work carried out by the Commission’s Internal Audit Service (IAS) (17); (iii) internal audit; (e) a review of the annual activity report (AAR) by the Director-General of EuropeAid.

18. As indicated in paragraph 4, EuropeAid implements most of the external assistance instruments financed from the general budget and the EDFs. The Court’s observations concerning both the effectiveness of supervisory and control systems and the reliability of the AAR and the Director-General’s declaration for 2012 refer to EuropeAid’s entire area of responsibility.

Reliability of the accounts

19. The economic outturn account includes as revenue interest on pre-financing in respect of pre-financing payments to beneficiaries of more than 250 000 euro. In order to recover interest on larger pre-financing payments from beneficiaries (i.e., those over 750 000 euro), the Commission is required to issue recovery orders on an annual basis (18). However, such recoveries are rarely done. In addition, interest generated by pre-financing payments is sometimes netted off against claims for reimbursement of costs incurred: this interest is not recognised as revenue in the financial statements. 19. The Commission acknowledges that despite a reminder to the sub-delegated AOS in the annual preclosure note, the recoveries for interest on PFs over 750 000 euro are not always made annually. However, DEVCO wants to emphasise that interest gained by pre-financing is always taken into account when establishing the financial situation before contracts are closed. In 2013 DEVCO will carry out a specific action on this issue: — note reminding AOS of FR rules on this issue, — detailed review of all contracts with open PFs of over 750 000 euro at year end 2012. For PFs which are more than 250 000 euro but smaller than 750 000 euro the local CRIS FED system at this moment only allows recovery orders to be re-imputed to the original line of the expense, thus not allowing recognition of the interest. DG DEVCO has foreseen a development of the CRIS system to allow recognition which is scheduled to be available no earlier than October 2013.

20. As in previous years, the Court frequently identified transactions that had been incorrectly recorded (19). A study carried out by EuropeAid in 2012 also found that the transactions were frequently recorded incorrectly in the Common RELEX Information System (CRIS). While the Court did not find any material errors in this connection for the reliability of the accounts, these mistakes remain a source of concern as they affects the accuracy of the data used for the preparation of the annual accounts, in particular with respect to the cut-off exercise at the end of the year (20). 20. As the Court mentioned, the Commission has made important efforts in 2012 which resulted in a considerable improvement of data quality. The Commission stresses its intentions to continue its efforts to improve data quality. Following the extensive study made in 2012, an Action Plan has been elaborated and is being finalised (adoption targeted by mid July 2013), with several elements already being investigated and/or implemented. Together with this Action Plan, the Commission is now working to further improve data quality through several axes amongst which are: (a) improvement of CRIS in order to ensure that less errors are made by users (for example action 4.0 in the ‘Master plan’, targeting an improved CRIS user interface, revision of the CRIS documentation as well as the creation of a data dictionary); (b) continued CRIS data monitoring by Headquarters, via automated checks, targeted accounting quality tests and launch of studies on specific items following a risk assessment; (c) improvements to the information provided to users through the CRIS knowledge database and specific courses; (d) establishment of more targeted KPIs to increase the awareness of importance of good and complete data quality.

Regularity of transactions

21. Annex 1 contains a summary of the results of transaction testing.

Revenue

22. The Court’s audit of revenue transactions found them to be free from material error.

Commitments

23. The Court’s audit of commitments found them to be free from material error.

Expenditure transactions

24. Out of the 167 transactions audited by the Court, 44 (26 %) were affected by error. The Court estimates the most likely error to be 3,0 % (21).

Projects

25. Of the 127 expenditure transactions sampled, 41 (32 %) were affected by errors, of which 28 (68 %) were quantifiable errors. Of the 28 transactions affected by quantifiable errors, 20 were final transactions that had already been checked by the Commission.

26. Errors were more frequently found in transactions related to programme estimates, grants and contribution agreements between the Commission and international organisations than in other forms of support: of the 71 transactions of this type that were tested, 31 (44 %) were affected by error.

27. The main types of quantifiable errors found in transactions related to projects concerned (see box 1): (a) eligibility: expenditure related to activities not covered by the contract (12 transactions), non-compliance by the beneficiary with procurement procedures (four transactions), and expenditure incurred outside the implementation period (two transactions) or exceeding budget set (affecting two transactions); (b) occurrence: absence of invoices or other supporting documents to justify expenditure (two transactions), services not delivered or works not carried out (two transactions) and expenditure not incurred by beneficiaries (one transaction); (c) accuracy: incorrect calculation of expenditure claimed (three transactions).

Works not carried out The Court examined an interim payment of 464 640 euro under a contract for road maintenance in Senegal. Works concerning the consolidation of the lower part of an embankment invoiced by the contractor, certified by the supervisor and paid for by the Commission had not been carried out. The Commission subsequently launched a comprehensive technical audit of the contract. Works not carried out The technical audit report of April 2013 indicates that in total 39 095 euro (0,94 % of the total contract price) charged for the road banks' reinforcements, had not been realised. The works contractor meanwhile executed the road banks' reinforcements, which had been invoiced. The decentralised contracting authority will, at the moment of the final statement of account, decide on the possible imposition of recovery orders and contractual penalties upon the works contractor and service contractor who supervised the works.

Contract value increased above the allowable limit The Court examined the clearance of an advance of 305 738 euro under a health sector support programme in the Democratic Republic of the Congo. The value of two contracts had been increased by 58 % and 68 % respectively for additional works that were necessary to complete the original contract. The project management unit in the national government department was not aware that there was a limit of 50 % of the value of the initial contract for such additional works. Contract value increased above the allowable limit A complementary audit to identify any other ineligible amounts is ongoing. The EU Delegation reminded the NAO of the applicable rules. The NAO sent out a circular note, the content of which had been previously agreed upon with the EU Delegation.

28. The most frequent types of non-quantifiable errors concerned insufficient supporting documents (five transactions) and shortcomings in procurement procedures (five transactions).

Budget support

29. For the 40 budget support transactions tested, three (8 %) were affected by errors, of which two (67 %) were quantifiable errors. 29. The Commission does not share the Court’s analysis of one quantifiable error.

30. The quantifiable errors detected by the Court in budget support transactions concerned incorrect application of the scoring method for determining whether recipients had met the conditions for performance-related payments, or failure to assess compliance with specific conditions for payments (two transactions) (see box 2). The Court also identified non-quantifiable errors: the Commission failed to demonstrate satisfactorily that recipients had complied with the general eligibility conditions for budget support payments (22). The Commission did not compare recipient countries' progress in implementing specific policies or public finance management reform with the objectives set for the period under review (two transactions). 30. Budget support is a policy instrument based on a long-term relationship of trust between the Commission and the partner countries. When deciding upon the release of a payment the Commission takes into account the progress made with regard to the individual indicators and conditions. The Commission is pleased to note the significant decrease in the number of non-quantifiable errors over recent years. The Commission considers that the achievement of values of indicators, which had been jointly agreed with the partner government, should not be evaluated in too strict a manner. While conditions for performance related payments play an important role in the process of stimulating countries to make progress on essential political objectives, the Commission considers that the indicators have to be evaluated taking into account the objectives they measure and the context in which the country’s development takes place.

Failure to set a specific payment condition The Court examined a payment of 600 000 euro related to the support for the 2007-2010 Economic Reform Programme in Vanuatu, including a performance-based variable tranche of 200 000 euro. According to the financing agreement, the Commission was required to select specific performance indicators set in the annual development report in respect of public finance management, but it did not do so. The Commission considered that it was sufficient for it to rely on an assessment of Vanuatu’s overall progress in public finance management reform (a general eligibility condition) to disburse the variable tranche. This was in contradiction with the financing agreement, which provides that the Commission will only make the payment if both specific and general conditions are achieved. Failure to set a specific payment condition In line with the Commission Decision, both the general and specific PFM conditions in the FA are essentially the same and relate to progress in overall public finance management reform. The Commission positively assessed Vanuatu's overall progress in public finance management reform up until 2010. The relevant indicators on public finance management in the government's annual development report confirm this positive trend. Furthermore, the Delegation confirmed that this positive trend and effort was sustained, in line with the 2008 PFM Reform Strategy, during the politically difficult year of 2011.

Effectiveness of systems

31. Annex 2 contains a summary of the results of the Court’s examination of supervisory and control systems.

Ex ante checks

32. Given the high risk environment (see paragraph 6), EuropeAid relies mainly on ex ante checks (checks by Commission staff, external supervisors or external auditors before project payments are made) in order to prevent or detect and correct irregular payments. As in previous years, the frequency of errors found by the Court, including some affecting final claims which had been subject to external audits and expenditure verifications, point to weaknesses in these ex ante checks. A study carried out by EuropeAid in 2012 also found that a significant number (one-third) of audit reports received in 2011 were of insufficient quality. 32. The Commission attaches the greatest importance to the quality of audits and is developing tools to help audit managers in the Commission better assess the quality of audit reports.

33. Two EU delegations visited by the Court did not properly follow-up audit reports. The AAR acknowledges that a main cause of error is that ineligible amounts are not recovered, or that there is no explanation for non-recovery, following audit or expenditure verification reports (23). 33. In the working plan referred to in the Commission’s reply to paragraph 38, it is foreseen to develop through the CRIS Audit module a specific tool that will enable the Commission to make a proper follow up of the audit reports.

34. The Court’s audit showed that late clearance and contract closure affect the quality of ex ante checks and significantly increase the risk of a broken audit trail or lack of supporting documents (24). In both EDF and EU budget transactions, the Court found old contracts, for which expenditure was cleared late. Consequently, the corresponding individual financial commitments are either still open or were closed a long time after the end of the contract implementation period. 34. As part of an external study in 2012 the Commission has put in place a procedure that reviews all contracts for which the activity period has expired for more than 18 months. The services are requested to comment on the reason for the contracts still being open and their plan to ensure the contracts can be closed as soon as possible. This has led to a decrease in open contracts at year end for the EDF of 1 038 contracts (from 7 470 at year end 2011 to 6 432 at year end 2012). A similar exercise has been launched in April 2013 so as to continue this effort.

Monitoring and supervision

Management information system

35. As indicated in past annual reports (25), there are shortcomings in EuropeAid’s management information system on the results and the follow-up of external audits, expenditure verifications and monitoring visits. These make it difficult for the Director-General to hold heads of unit or heads of EU delegation accountable for the timely follow-up and correction of system weaknesses and errors identified. 35. The audit module of the external aid management information system (CRIS) was designed to plan, and record the results of external audits rather than track audit follow-up made by the Commission. However the Commission has planned to develop this functionality in the medium term, resources permitting. The Commission developed a work plan tool for planning of missions. Additionally, the Commission is setting up a reform of monitoring and reporting to be implemented in early 2014.

Monitoring visits

36. All of the seven EU delegations visited by the Court had a good overview of the operational implementation of projects, chiefly through monitoring visits. However, only one of the seven EU delegations selected and planned these visits on the basis of a risk assessment. EuropeAid is developing a tool to help EU delegations better screen their portfolio of projects and prioritise visits to those in particular need of monitoring based on risk assessments. The Court also found weaknesses in the way two out of the seven EU delegations monitored project implementation or followed up the results of these visits. 36. In one case, the EU Delegation has followed-up on the main finding of the monitoring report. The difficult security-situation was the main cause of the problems in the road works execution, identified in the mission report. In the second case, the Delegation has taken measures to monitor more closely the implementation of the second phase of the project.

2012 RER study

37. As previously recommended by the Court (26), EuropeAid carried out its first residual error rate (RER) study to assess the level of error which has evaded all management checks to prevent, detect and correct errors. The study involved examination of a representative sample of transactions from closed contracts in order to determine whether expenditure had taken place for the purposes intended, was in accordance with the relevant rules and was correctly calculated. The errors found were used to estimate the most likely error in the population of closed contracts.

38. The results of the 2012 RER study are presented in the AAR (27). The study estimates the RER at 3,63 %, i.e. above the 2 % materiality level set by the Director-General of EuropeAid. The main types of errors identified in the study are: (a) errors in transactions with international organisations (38,0 % of the RER); (b) amounts not recovered (or amounts lacking an explanation for non-recovery, other than international organisations) following audit or verification mission reports (26,7 % of the RER); (c) errors related to funds managed indirectly by beneficiaries other than international organisations (20,1 % of the RER); (d) lack of documentation concerning procurement procedures (15,2 % of the RER). 38. As foreseen in the Commission’s procedures, an Action Plan has been set up to further improve the internal control system. It includes, inter alia, awareness raising actions, training and guidance, reinforcement of the accountability of Delegations, an increased cooperation with international organisations and streamlining the control system.

39. The design of the RER methodology was in general appropriate, and the study has provided interesting and potentially useful results. However, there is scope for further refinement in the methodology in a number of respects, relating to: 39. The results of the 2012 RER study fed directly into the 2012 AAR assurance process and therefore were actually very useful to the Commission. The 2012 RER study was the first one implemented and the lessons learned from this first exercise will allow for refinements in the methodology.

(a) the degree of reliance placed upon previous audit or verification reports; (a) The Commission will discuss this issue with the contractor.

(b) the method of calculation of error rates on individual transactions; (b) The Commission will discuss this issue with the contractor.

(c) the treatment of transactions where there was no readily obtainable documentation. (c) The steps to be undertaken to perform estimations are set out in detail in the revised RER instruction manual which will be applied for the 2013 RER exercise.

Internal audit

40. In its 2011 annual report (28), the Court indicated that the Commission reorganisation that took place in 2011 had a major impact on the activity of the Internal Audit Capability (IAC) (29). In its reply to the Court’s 2011 annual report, the Commission committed itself to assess the capacity of the IAC and to consider strengthening it if necessary (30). This has not been done. There was no improvement in 2012: implementation of the IAC’s annual work plan was again significantly and adversely affected (31). 40. Since 2013, due to several measures taken in this respect, the functioning of the IAC has been improving.

Review of annual activity report

41. In his declaration of assurance, the Director-General makes a reservation concerning the legality and regularity of transactions, since the amount considered at risk (259,5 million euro) represents more than 2 % of payments authorised in the reporting period.

42. However, the Director-General also states that ‘the control procedures put in place give the necessary guarantees concerning the legality and regularity of the underlying transactions’ (32). The AAR also indicates that the RER figure of 3,63 % is an estimate of the ‘maximum amount at risk’ (33), ‘does not put into question the overall control system’ and shows that ‘most errors are linked to a limited number of weaknesses concerning mainly the implementation of controls, which can and will be subsequently addressed by DG DEVCO during 2013’ (34).

43. The Court considers that this is a misleading presentation of the results of the RER study: 43.

(a) the RER is not a ‘maximum amount’ but a best estimate (or most likely estimate). The true level of error could be higher; (a) The Commission agrees that the amount at risk mentioned in DG DEVCO’s 2012 AAR is the most likely estimate, in accordance with the Standing Instructions for the Annual Activity Reports for 2012. The true level of error could be higher, but also lower.

(b) the RER is not an estimate of the amount ‘at risk’ but an estimate of the error which remains undetected and uncorrected at the end of the management cycle and is thus definitive (35); (b) The concept of ‘amount at risk’ is applied in the AAR in full compliance with the Commission’s standing instructions for the preparation of the AAR. These instructions define the ‘amount at risk’ as the financial impact of the errors in terms of actual budgetary financial exposure during the calendar year. The Commission agrees that the results of the RER study are not an estimate of the amount at risk.

(c) supervisory and control systems are not effective when they fail to detect and correct material error; (c) Most errors are linked to a limited number of weaknesses concerning mainly the implementation of controls. The design of the control system therefore appears to be sound and does not need to be modified.

(d) the AAR describes the main types of errors occurring in EuropeAid expenditure (36) but, with the exception of weaknesses in the recovery process, it does not analyse why they occurred and which aspects of EuropeAid’s supervisory and control system failed. (d) The Commission will undertake for the next Annual Activity Report the analysis requested in the standing instructions. The Action Plan referred to in paragraph 38 addresses all types of errors identified by the control system and the Court of Auditors. The Action Plan was preceded by a thorough analysis of the origins of these errors. In addition, it also included definitions of the ways in which errors — outlined in the Action Plan — are tackled. The analysis concluded that the control design as such was sound and that the errors which occurred were primarily due to implementation issues.

44. In 2012, the IAS performed a limited audit of EuropeAid’s AAR process. It found that the AAR does not provide sufficient information on how the directorate-general built up reasonable assurance about the legality and regularity of expenditure on a multi-annual basis. These findings concur with those of the Court.

Conclusions and recommendations

Conclusions

45. Based on its audit work, the Court concludes that the EDFs' accounts for the financial year ending 31 December 2012 present fairly, in all material respects, the financial position of the EDFs as of 31 December 2012, and the results of their operations and cash flows for the year then ended, in accordance with the provisions of the EDF Financial regulation and the accounting rules adopted by the accounting officer.

46. Based on its audit work, the Court concludes that, for the financial year ending 31 December 2012: (a) the revenue of the EDFs was free from material error; (b) the commitments entered into by the EDFs were free from material error; (c) EDF expenditure transactions were affected by material error (see paragraphs 24 to 30).

47. Based on its audit work, the Court found that the examined supervisory and control systems of EuropeAid were partially effective (see paragraphs 18 and 31 to 44). 47. The Commission agrees that, while the design of the control system is broadly consistent and sound, progress still has to be made on the implementation of the control mechanisms.

Recommendations

48. Annex 3 shows the result of the Court’s review of progress in addressing recommendations made in previous annual reports. In the 2009 and 2010 annual reports, the Court presented 16 recommendations. EuropeAid fully implemented five recommendations, while three were implemented in most respects and eight were implemented in some respects.

49. As regards the recommendations implemented in some respects only, EuropeAid is taking action but more time is needed for the recommendations to be satisfactorily implemented: (a) EuropeAid has joined a working group headed by DG Budget to review the cost-effectiveness of its overall control architecture; (b) it is developing tools and guidance for EU delegations to better prioritise their monitoring visits to projects and assess the quality of audit reports; (c) it is developing new functions within of the audit module of its CRIS information system to improve the follow-up of audit reports.

50. Insufficient progress has been made in respect of the quality of data in the CRIS information system. Despite efforts made by EuropeAid to raise awareness among EU delegations, this remains a source of concern (see paragraph 20). 50. The Commission has defined a ‘Master plan’ for Data Quality that includes various Action Plans, including those for the training of staff and the communication towards the Delegations. This will ensure that the Commission's staff is better trained and more aware of best practices and guidelines when encoding data in CRIS. An extensive project on the CRIS User Interface improvement has also been launched to reduce encoding errors.

51. Following this review and the findings and conclusions for 2012, the Court recommends that EuropeAid should:

— Recommendation 1: review its RER methodology; The Commission agrees to a refinement of the RER methodology on the basis of the lessons learnt from this first exercise The Commission has already taken measures in this regard. At the start of the 2013 exercise the contractor has been requested to elaborate a revised methodology and a manual which will take into account the lessons learnt during the first RER exercise in 2012. This refined methodology will be applied during the 2013 RER exercise.

— Recommendation 2: provide an accurate description, in the AAR of the results of RER studies; The 2012 AAR contained a description of the RER exercise that was as detailed as possible and followed the drafting instructions. The Commission agrees that in the 2013 AAR a clear distinction should be drawn between the RER study results and their use for the purpose of assurance.

— Recommendation 3: ensure the timely clearance of expenditure; The Commission accepts this recommendation and action has recently been taken with a view to ensuring clearance of expenditure is done without delay.

— Recommendation 4: promote better document management by implementing partners and beneficiaries; The Commission agrees with the recommendation.

— Recommendation 5: take effective measures in order to enhance the quality of expenditure verifications carried out by external auditors; The Commission accepts this recommendation and, in the framework of the Action Plan referred to in paragraph 38, it has planned to examine in 2013 the possibilities of enhancing the quality and effectiveness of audits and verifications. This will be carried out notably with regard to audits and verifications conducted by local audit firms hired by the beneficiaries.

— Recommendation 6: ensure the correct application of specific conditions for budget support payments; The Commission will continue to ensure the correct application of specific conditions for budget support payments. A working group on budget support has been set up to address the specific audit findings of the Court.