THE COURT’S OBSERVATIONS

INTRODUCTION

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

Box 1 — European Development Funds — 2016 financial overview Table 1 — European Development Funds — Key information 2016 (million euro) Total operational payments (projects) 2 676 Total operational payments (budget support) 644 Total administrative payments (42) 96 Total payments 3 416 - advances and EDF contributions to EU Trust Funds 2 057 + clearings of advances and EU Trust Funds 1 477 Audited population 2 836 Total individual commitments (43) 4 234 Total global commitments (43) 6 491

THE COURT’S OBSERVATIONS

Brief description of the European Development Funds

2. Launched in 1959, the EDFs are the main instrument by which the European Union (EU) provides development cooperation aid to the African, Caribbean and Pacific (ACP) countries and overseas countries and territories (OCTs). The partnership agreement signed in Cotonou on 23 June 2000 for a period of 20 years (‘the Cotonou Agreement’) is the current framework governing the EU’s relations with ACP countries and OCTs. Its primary objective is to reduce and ultimately eradicate poverty.

3. The EDFs are particular in that: (a) they are funded by the Member States according to quotas, or ‘contribution keys’, which are set by the national governments at the Council of the European Union; (b) they are managed by the Commission, outside the framework of the EU general budget, and the European Investment Bank (EIB); (c) due to the intergovernmental nature of the EDFs, the European Parliament exercises a more limited role in their functioning than it does for the development cooperation instruments financed by the EU general budget; notably, it is not involved in establishing and allocating EDF resources. However, the European Parliament is still the discharge authority, except for the Investment Facility, which is managed by the EIB and therefore outside the scope of our audit (1) (2); (d) the principle of annuality does not apply to the EDFs: EDF agreements are usually concluded for a commitment period of five to seven years, and payments can be made over a much longer time frame.

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

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

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

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

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

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

Box 2 — Use of EDF resources at 31 December 2016 (million euro) Situation at end of 2015 Budgetary implementation during the 2016 financial year (net) (49) Situation at end of 2016 Total amount Implement. rate (45) 8th EDF (46) 9th EDF (46) 10th EDF 11th EDF (46) Total amount 8th EDF 9th EDF 10th EDF 11th EDF Total amount Implement. rate (45) A — RESOURCES ( 44 ) 76 880 - 20 - 163 223 - 24 16 10 392 15 467 21 607 29 430 76 896 B — USE 1. Global commitments ( 47 ) 53 607 69,7 % - 13 - 104 - 80 6 688 6 491 10 391 15 429 21 058 13 220 60 097 78,2 % 2. Individual commitments ( 48 ) 48 797 63,5 % - 6 - 46 541 3 745 4 234 10 378 15 309 19 576 7 769 53 032 69,0 % 3. Payments 41 989 54,6 % 0 68 1 466 1 816 3 350 10 376 15 053 16 476 3 435 45 339 59,0 % C — Outstanding commitments (B1 – B3) 11 618 15,1 % 15 376 4 582 9 785 14 758 19,2 % D — Available balance (A – B1) 23 273 30,3 % 1 38 549 16 210 16 799 21,8 %

THE COURT’S OBSERVATIONS THE COMMISSION’S REPLIES

9. Across its entire area of responsibility, in 2016 DG DEVCO continued its efforts to reduce old prefinancing payments and commitments, largely exceeding its targets (6). It also sought to bring down the number of open expired contracts (7). As in the last two years, DG DEVCO was close to meeting its 2016 target for the share of expired contracts in its portfolio as a whole (8), but progress was less satisfactory in respect of the EDFs (9). 9. The main problems preventing the closure of expired contracts for EDF are recovery orders not cashed, legal cases and ongoing audit processes. Although these aspects are not entirely under its control, the Commission will pursue its efforts to speed up the closure of expired contracts.

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

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

Opinion

I. We have audited: (a) the annual accounts of the 8th, 9th, 10th and 11th EDFs, which comprise the balance sheet, the statement of financial performance, the statement of cash flow, the statement of changes in net assets, and the report on financial implementation for the financial year ended 31 December 2016, approved by the Commission on 23 June 2017, and (b) the legality and regularity of the transactions which underlie those accounts and of which financial management falls to the Commission (10), as required by Article 287 of the Treaty on the Functioning of the European Union (TFEU) and Article 49 of the Financial Regulation applicable to the 11th EDF, which also applies to previous EDFs.

Reliability of the accounts

Opinion on the reliability of the accounts

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

Legality and regularity of the transactions underlying the accounts

Revenue

Opinion on the legality and regularity of revenue underlying the accounts

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

Payments

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

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

Basis for opinion

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

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

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

Key audit matters

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

Accrued charges

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

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

Responsibilities of management

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

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

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

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

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

XIV. As part of an audit in accordance with ISAs and ISSAIs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: — Identify and assess the risks of material misstatement of the EDF accounts and of material non-compliance of the underlying transactions with the requirements of the EDF legal framework, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement or non-compliance resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. — Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control. — Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. — Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the EDFs’ ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated accounts or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the entity to cease to continue as a going concern. — Evaluate the overall presentation, structure and content of the annual accounts, including the disclosures, and whether the annual accounts represent the underlying transactions and events in a manner that achieves fair presentation.

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

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

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

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

13 July 2017

Klaus-Heiner LEHNE

President

European Court of Auditors

12, rue Alcide De Gasperi, Luxembourg, LUXEMBOURG

THE COURT’S OBSERVATIONS

Information in support of the statement of assurance

Audit scope and approach

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

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

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

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

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

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

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

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

(f) followed up our previous recommendations.

Box 3 — Auditors examining the accuracy of road thickness measurements for a payment relating to a road project in Zambia Source: European Court of Auditors.

THE COURT’S OBSERVATIONS

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

THE COURT’S OBSERVATIONS THE COMMISSION’S REPLIES

Reliability of accounts

14. Last year we reported on recoveries of unspent prefinancing which had been incorrectly recorded as operational revenue. DG DEVCO’s accounting tests and our review of a sample of recovery orders (15) have also identified similar cases in 2016. Although corrections amounting to 3,2 million euro (16) were made in the final EDF accounts, it is likely that similar errors occurred in the untested population. At the end of 2016, DG DEVCO issued detailed instructions to its staff on the correct encoding of recovery orders of this type. 14. Instructions produced by DEVCO on the encoding of recovery orders and corrections made by DEVCO on the basis of controls made on recovery orders issued in 2016 resulted in a significant reduction of errors in the encoding of recovery orders and/or recovery contexts (from 9,6 million euro detected by the Court in 2015 down to 3,2 million euro detected by DEVCO and/or the Court in 2016). DEVCO will pursue its efforts in 2017.

Regularity of transactions

Revenue

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

Payments

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

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

Box 4 — Breakdown of the estimated level of error Source: European Court of Auditors.

THE COURT’S OBSERVATIONS

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

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

THE COURT’S OBSERVATIONS THE COMMISSION’S REPLIES

Box 5 — Examples of quantifiable errors in project transactions Box 5 — Examples of quantifiable errors in project transactions

Non-compliance by the beneficiary with procurement rules We examined the Commission’s clearance of 3 489 416 euro spent under a grant contract to support trade capacity development in ACP countries, implemented by an international organisation. Of the 10 expenditure items sampled, 6 were found to contain errors, including 5 in which fees and allowances were paid to trade advisors on the basis of service contracts. These contracts (total value 570 500 euro) were not awarded following a competitive selection procedure, as required by the grant agreement. Instead, the contracts were directly awarded to advisors who had previously worked on a predecessor project. Non-compliance by the beneficiary with procurement rules The project consisted almost exclusively of the recruitment of regional and national trade advisors. Independently of the type of selection procedure, their recruitment was subject to standard operative processes for recruitment of international staff, including prior publication of the vacancy notice.

Ineligible expenditure — activities not covered by the contract We examined the Commission’s final clearance of 10 875 375 euro spent on the 2012 work programme of an international body providing assistance to enterprises in ACP countries. Of the 10 cost items sampled, 3 related to contracts sub-granted to third-party beneficiaries (value 147 990 euro). No provision was made for sub-granting under the special conditions of the grant, meaning the activities were in breach of contract. Furthermore, the sub-grants were directly awarded without a competitive selection procedure. Ineligible expenditure — activities not covered by the contract The Commission initiated the recovery procedure.

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

THE COURT’S OBSERVATIONS

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

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

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

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

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

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

Annual activity report and other governance arrangements

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

Box 6 — DG DEVCO’s efforts to improve the implementation of its control system Last year we reported on the satisfactory progress achieved on the 2013 and 2014 action plans; 19 actions had been fully implemented, with the remaining 4 transferred to the 2015 action plan. The design of the 2015 action plan was further improved with the inclusion of measures targeting high-risk areas: funds under indirect management via international organisations and grants under direct management. All actions were initially scheduled to be completed by June 2016. By the end of 2016, ten actions had been completed, five partially implemented and one was ongoing. Four new targeted measures were added to the 2016 action plan, the progress of which will be assessed in our next annual report.

THE COURT’S OBSERVATIONS THE COMMISSION’S REPLIES

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

29. In our 2014 and 2015 annual reports, we reported on the measures (25) which DG DEVCO had already taken to improve the quality of these audits and verifications (26). DG DEVCO is currently revising the terms of reference of the audits and verifications to obtain information allowing for a quality assessment, as we recommended in last year’s report. Although planned to be finalised by June 2017 (27), this critical revision has not yet been completed. 29. Work on the revision of the Terms of Reference for Audits and Verifications is ongoing. The Commission expects the work to be completed, even if not fully operational, by the end of 2017.

2016 RER study

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

31. The study examined a representative sample of transactions made under contracts closed between September 2015 and August 2016. We reviewed the 2016 RER study and found that it had been conducted in compliance with the RER methodology. All weaknesses reported in our 2013 report had been addressed, with the exception of the RER-specific estimation method, which still left too wide a margin for judgement when estimating individual error rates. 31. The number of estimations has decreased year-on-year from 43 in 2012 to 6 in 2016. Each estimation is reviewed at Director and Partner level to ensure consistency. This procedure restricts the margin for judgement when estimating individual error rates. Estimations are done when there is a legal or logistical reason for documentation not being available for the RER auditor before the deadline for completion of work at the end of the study. Those transactions where documentation has not been provided present an inherently enhanced risk of susceptibility to error and therefore estimations increase the level of error.

32. For the first time in 2016 the study estimated the RER to be within the 2 % materiality threshold set by the Commission (30). This result is attributable to a combination of the following main factors: 32. The Commission considers that the decrease in the error rate through the years is linked to a number of factors, the main one being the measures taken to reinforce the internal control system of DEVCO.

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

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

(c) increase in the share of budget support transactions in the RER sample (32), for which the residual error rate is estimated to be 0 % (see also paragraphs 22 to 24). (c) From the Commission's point of view, there is no direct correlation between the share of budget support transactions in the RER sample and the level of error rate. The number of Budget Support items in the sample is purely dependent on the monetary unit sampling applied. It is true that budget support contracts are hardly affected by errors, because of the substantial efforts the Commission has made to improve guidance and tackle the risks in line with your recommendations. However, the downward trend in the error rate has not been accompanied by a parallel increasing share in Budget Support transactions in the sample through the years. It can be argued that this may be one of the factors in the current situation of the error rate.

Box 7 — Evolution of DG DEVCO’s RER from 2012 to 2016 Source: European Court of Auditors, based on the 2012-2016 RER studies.

THE COURT’S OBSERVATIONS

Review of the 2016 annual activity report

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

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

Box 8 — DG DEVCO’s progress towards a risk-differentiated declaration of assurance Source: European Court of Auditors, based on DG DEVCO’s annual activity reports.

THE COURT’S OBSERVATIONS

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

THE COURT’S OBSERVATIONS THE COMMISSION’S REPLIES

36. The 2016 figure (36) (25 million euro) was half the 2015 estimate due to DG DEVCO’s efforts to exclude from the calculation recoveries on prefinancing, cancelled recovery orders and earned interest, as we recommended last year. Nevertheless, the reliability of the 2016 figure is still impaired (i) by detected errors that have not been fully extrapolated to the untested population of recovery orders in 2016 and in previous years (37); and (ii) because the calculation has not been reconciled with the EDF financial statements (38). It is difficult to quantify the overall extent of these shortcomings (39). 36. Measures taken by DEVCO for preventing and correcting errors in the encoding of recovery context are presented in paragraph 14. These efforts will be pursued in 2017. Furthermore, DEVCO will make sure that potential errors still detected in the future will be fully extrapolated to the untested population of recovery orders taken into account in the estimation of the corrective capacity. The system bug which caused the recording of recovery orders without recovery context field (none or qualified) will be resolved during 2017 and thus was a one-off event. This will be achieved through a correct use of the recovery context functionality in accordance with the instructions issued (e.g. recovery context manual) and via the implementation of necessary business rule in the Commission’s accounting system.

CONCLUSION AND RECOMMENDATIONS

Conclusion

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

38. The overall audit evidence indicates that, for the financial year ending 31 December 2016: (a) the revenue of the EDFs was not affected by a material level of error; (b) EDF payment transactions were affected by a material level of error (see paragraphs 16 to 26). Our testing of transactions produced an estimated level of error of 3,3 % (see Annex 1 ).

Recommendations

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

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

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

— Recommendation 2: complete the revision of the terms of reference for all its audits and expenditure verifications by the end of 2017. The Commission accepts the recommendation. Work is already under way.

— Recommendation 3: extend the actions in its 2017 action plan to also cover grants and programme estimates under indirect management in the AAR reservation. The Commission accepts the recommendation. The fact of issuing a reservation concerning those two areas implies already the definition of specific actions for them.

— Recommendation 4: consider reducing the extent of the RER substantive testing of individual low-risk budget support transactions and reallocating the saved resources to increase the substantive testing of project-related transactions. The recommendation is accepted. The Commission will consider the approach proposed by the Court and, if relevant, introduce it into the RER methodology.