THE COURT’S OBSERVATIONS

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 2013 is provided in Table 1 .

Table 1 — European Development Funds — Key information 2013 (million euro) Budget title Policy area Description Payments 2013 European Development Funds 8th EDF Operational expenditure Projects 20 Budget support 0 Administrative expenditure 0 20 9th EDF Operational expenditure Projects 256 Budget support 1 Administrative expenditure 2 259 10th EDF Operational expenditure Projects 1 961 Budget Support 717 Administrative expenditure 94 2 772 Total operational expenditure (Projects) 2 237 Total operational expenditure (Budget support) 718 Total administrative expenditure 96 Total payments 3 051 - advances - 1 753 + clearings of advances 1 314 Audited population 2 612 Total individual commitments (36) 3 350 Total global commitments (36) 3 923

THE COURT’S OBSERVATIONS

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 2013, 42 % of payments were made under centralised management, 32 % under decentralised management and 26 % under joint management (6).

Risks to regularity

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 United Nations (UN) — the nature of the instruments and of the payment conditions limit the extent to which transactions are prone to errors.

8. Budget support contributes to 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 verified 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.

THE COURT’S OBSERVATIONS THE COMMISSION’S REPLIES

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 eligible expenditure. Under the so-called ‘notional approach’ the Commission assumes that underlying transactions are regular as long as the pooled amount includes sufficient eligible expenditure to cover the EU contribution. Should other donors follow the same approach and apply the same eligibility criteria for their contribution, there is a risk that overall spending does not meet the combined conditionality requirements of the Commission and the other donors. 10. The Commission believes that the internal control measures put in place, together with those of the international organisations, limit this theoretical risk to a level which is indeed acceptable. The Commission is not aware of any specific problems with the ‘notional approach’ (which has been developed to allow the Commission to participate in multi-donor actions including trust funds). This approach guarantees that the legal requirements applicable to EU funding in external actions are met (by ensuring that the amount contributed by other donors is sufficient to pay for any activities which are ineligible under EU rules) while spending EU funds in the most efficient way (through donor coordination), in accordance with the principle of sound financial management. The Commission limits this risk by assessing the accounting, audit, internal control, procurement, ex post publication of information and protection of personal data procedures of the partner international organisations in advance of any joint working, the presence of its staff in the field (and participation in steering groups) and the rigorous overall financial reporting required of the international organisation. In addition, during the implementation of external actions programmes, systems are regularly reviewed through the performance of verification missions undertaken by external auditors. The audits carried out by the Commission have not to date evidenced any ‘specific risks’ of this nature, nor is the Commission aware of any other donor with ‘the same eligibility criteria’.

THE COURT’S OBSERVATIONS

CHAPTER I — IMPLEMENTATION OF THE 8TH, 9TH AND 10TH EDFs

Financial 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 2013, payments were made from the 8th, 9th and 10th EDFs. The 8th EDF (1995-2000) amounts to 12 840 million euro and the 9th EDF (2000-2007) to 13 800 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 2013, the total contributions from the Member States amounted to 3 200 million euro, of which 2 950 million euro for actions managed by the Commission.

14. Table 2 shows the use, during 2013 and cumulatively, of EDF resources. As the funds of the 10th EDF shall no longer be committed beyond 31 December 2013 (9), the Commission managed to achieve higher results than planned in terms of commitments: global and individual commitments were respectively 29 % and 31 % above the initial forecast. As a consequence, payments were 7 % more than initially forecast and outstanding commitments increased by 8 % compared to 2012.

Table 2 — Use of EDF resources at 31 December 2013 (million euro) Situation at end of 2012 Budgetary implementation during the financial year 2013 (net) (42) Situation at end of 2013 Total amount Implement. rate (38) 8th EDF (39) 9th EDF (39) 10th EDF Total amount 8th EDF 9th EDF 10th EDF Total amount Implement. rate (38) A — RESOURCES (37) 48 920 - 104 - 336 548 108 10 481 16 114 22 433 49 028 B — USE 1. Global commitments (40) 43 991 89,9 % - 98 - 72 4 093 3 923 10 478 16 084 21 351 47 914 97,7 % 2. Individual commitments (41) 38 059 77,8 % - 11 - 96 3 457 3 350 10 437 15 408 15 565 41 410 84,5 % 3. Payments 32 417 66,3 % 18 230 2 715 2 963 10 363 14 795 10 222 35 380 72,2 % C — Outstanding commitments (B1 - B3) 11 574 23,7 % 115 1 289 11 129 12 534 25,6 % D — Available balance (A - B1) 4 929 10,1 % 3 30 1 082 1 114 2,3 %

THE COURT’S OBSERVATIONS

The Commission’s annual report on the financial management of the 8th to 10th EDFs

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

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

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

I — Pursuant to the provisions of article 287 of the Treaty on the functioning of the European Union (TFEU) and Article 141 of the Financial Regulation applicable to the 10th EDF, which also applies to previous EDFs, the Court has audited: (a) the annual accounts of the 8th, 9th and 10th European Development Funds which comprise the balance sheet, the economic outturn account, the statement of cash flow, the statement of changes in net assets and the table of items payable to the European Development Funds and the report on financial implementation for the financial year ended 31 December 2013 approved by the Commission on 17 July 2014; and (b) the legality and regularity of the transactions underlying those accounts within the legal framework of the EDFs in respect of the part of the EDF resources for whose financial management the Commission is responsible (11).

Management's responsibility

II — In accordance with Articles 310 to 325 of the TFEU and the Financial Regulations applicable to the 8th, 9th and 10th EDFs, 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 (12) 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. Management is also responsible for ensuring that the activities, financial transactions and information reflected in the financial statements are in compliance with the authorities which govern them. The Commission bears the ultimate responsibility for the legality and regularity of the transactions underlying the accounts of the EDFs (Article 317 of the TFEU).

Auditor's responsibility

III — The Court's responsibility is to provide, on the basis of its 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 underlying transactions. The Court conducted its audit in accordance with the IFAC International Standards on Auditing and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions. These standards require that the Court plans and performs the audit to obtain reasonable assurance as to whether the annual accounts of the EDFs are free from material misstatement and the transactions underlying them are legal and regular.

IV — An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the accounts and the legality and the regularity of the transactions underlying them. The procedures selected depend on the auditor's judgment, including an assessment of the risks of material misstatement of the accounts and of material non-compliance of the underlying transactions with the requirements of the legal framework of the EDFs, whether due to fraud or error. In making those risk assessments, internal control relevant to the preparation and fair presentation of the accounts, and supervisory and control systems implemented to ensure legality and regularity of underlying transactions, are considered in order to design audit procedures that are appropriate in the circumstances but not for the purposes of expressing an opinion on the effectiveness of internal control. An audit also includes evaluating the appropriateness of accounting policies used and reasonableness of accounting estimates made, as well as evaluating the overall presentation of the accounts.

V — The Court considers that the audit evidence obtained is sufficient and appropriate to provide a basis for its opinions.

Reliability of the accounts

Opinion on the reliability of accounts

VI — In the Court's opinion, the annual accounts of the 8th, 9th and 10th EDFs for the year ended 31 December 2013 present fairly, in all material respects, the financial position as at 31 December 2013, 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 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

VII — In the Court's opinion, revenue underlying the accounts for the year ended 31 December 2013 is legal and regular in all material respects.

Commitments

Opinion on the legality and regularity of commitments underlying the accounts

VIII — In the Court's opinion, commitments underlying the accounts for the year ended 31 December 2013 are legal and regular in all material respects.

Payments

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

IX — The Court concludes that the supervisory and control systems are partially effective in ensuring the legality and regularity of payments underlying the accounts. The Court’s estimate for the most likely error rate for expenditure transactions from the 8th, 9th and 10th EDFs is 3,4 %.

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

X — In the Court’s 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 2013 are materially affected by error.

4 September 2014

Vítor Manuel da SILVA CALDEIRA

President

European Court of Auditors

12, rue Alcide De Gasperi, 1615 Luxembourg, LUXEMBOURG

THE COURT’S OBSERVATIONS

Information in support of the Statement of Assurance

Audit scope and approach

16. Annex 1.1 of chapter 1 of the 2013 annual report of the Court of Auditors on the implementation of the budget describes the Court’s overall approach and methodology. For the audit of the EDFs, the following specific points should be noted.

17. The Court’s observations regarding the reliability of the EDF accounts concern the financial statements (13) and the report on the financial implementation of the 8th, 9th and 10th EDFs (14) approved by the Commission in compliance with the EDF Financial Regulation (15) and received, together with the accounting officer’s letter of representation, by the Court on 17 July 2014. The audit involved the testing of amounts and disclosures and the assessment of the accounting principles used, significant estimates made by the management and the overall presentation of the accounts.

18. The audit of the regularity of transactions involved:

(a) an examination of all contributions from Member States and a sample of other types of revenue transactions;

(b) an examination of a sample of 30 commitments (16);

(c) an examination of a sample of 165 transactions (17). The sample is designed to be representative of the entire range of payments within the EDFs. It consisted of 93 payments approved by 10 EU delegations (18) and 72 payments approved by the Commission headquarters (19);

(d) where errors were detected, the relevant control systems were analysed to identify the specific system weaknesses involved;

(e) an assessment of control systems examined at EuropeAid and EU delegations, covering:

(i) ex ante checks by Commission staff, external auditors or supervisors before payments are made;

(ii) monitoring and supervision, notably the follow-up of external audits, verification missions, monitoring visits, and EuropeAid’s 2012 and 2013 residual error rate (RER) studies; and

(iii) internal audit;

(f) a review of the annual activity report (AAR) by the Director-General of EuropeAid; and

(g) a follow-up of previous Court recommendations.

19. 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 2013 refer to EuropeAid’s entire area of responsibility.

Reliability of accounts

20. The economic outturn account includes as revenue interest on pre-financing (5,7 million euro) in respect of pre-financing payments to beneficiaries of more than 2 50 000 euro. For pre-financing payments over 7 50 000 euro, the Commission is required to recover interest on an annual basis (20). The Court found some improvement compared with 2012 as the number and value of recoveries increased (21). However, authorising officers by sub-delegation still do not comply systematically with this rule and the amount of interest revenue disclosed in the accounts is partly based on estimates. Furthermore, the interest earned on pre-financing between 2 50 000 and 7 50 000 euro is still not recognised as financial revenue in the financial statements because the Commission has not yet completed the development of the CRIS system.

THE COURT’S OBSERVATIONS THE COMMISSION’S REPLIES

Regularity of transactions

Revenue

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

Commitments

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

Payments

23. Annex 1 contains a summary of the results of payment transaction testing. Out of the 165 payment transactions audited by the Court, 45 (27 %) were affected by error. On the basis of the 32 errors which it has quantified, the Court estimates the most likely error to be 3,4 % (22) (23). 23. The Commission does not share the Court’s analysis of two procurement errors with a significant impact on the Court’s estimated error rate. See also the Commission reply to paragraph 26(b).

Projects

24. Of the 130 payment transactions audited by the Court, 42 (32 %) were affected by error, of which 30 (71 %) were quantifiable errors. Of the 30 payment transactions affected by quantifiable errors, 17 were final transactions authorised after all ex ante checks had been performed.

25. As was the case in 2012 (24), errors were more frequently found in transactions relating to programme estimates, grants and contribution agreements between the Commission and international organisations than in other forms of support. Of the 72 transactions of this type audited, 32 (44 %) were affected by error.

26. The main types of quantifiable errors detected by the Court in payment transactions related to projects concerned: 26.

(a) absence of supporting documents to justify that eligible activity occurred (12 transactions);

(b) non-compliance by the beneficiary with procurement rules (eight transactions) (23); (b) The Commission does not share the Court’s analysis of one quantifiable error. The Commission considers that the technical specifications as defined by the contracting authority, in accordance with its broad discretional power, a principle acknowledged by the Court of Justice, were not disproportionate and did not distort competition. This principle provides legal certainty for the contracting authorities without which any future procurement procedure could be compromised. For another error linked to tender, the Commission considers that it reflects a very strict interpretation of rules.

(c) ineligible expenditure such as expenditure relating to activities not covered by the contract (five transactions), ineligible VAT (three transactions), expenditure incurred outside the implementation period (two transactions) or non-compliant with the rule of origin (one transaction);

(d) expenditure not incurred by beneficiaries (seven transactions);

(e) incorrect calculation of expenditure claimed (five transactions).

27. Graph 1 provides an overview of the contribution of the different types of errors to the overall estimated error. Errors relating to non-compliance with procurement procedures by beneficiaries and the absence of supporting documents account for 70 % of the most likely error.

Graph 1 — Contribution by type of error to the most likely error

Box 1 — Examples of quantifiable errors in project transactions Box 1 — Examples of quantifiable errors in project transactions

Absence of supporting documents to justify expenditure The Court examined the final clearance of expenditure incurred under the ‘Support to peacebuilding and transition activities’ programme implemented by an international organisation in sub-Saharan Africa. The Court tested 25 expenditure items. For four items, relating to staff salaries and travel costs amounting to 18 200 euro the essential supporting documents to justify the expenditure (e.g. employment contract, salary slip, proof of payment for staff salaries, invoice, boarding passes, proof of payment for travel costs) were not provided to the Court.

Failure by the beneficiary to comply with procurement procedures The Court examined the final clearance of expenditure incurred under the ‘Assistance to Micro and Small Enterprises’ programme in Africa and found an error in the procurement of IT equipment to a business information centre amounting to 23 398 euro. According to the tender notice, the contract award criterion was the lowest price. The evaluation report did not correctly reflect the financial offers made by the bidders. As a result, the bid offering the lowest price was not awarded the contract. The error was not detected by the Commission’s framework auditor performing a financial audit of this programme.

Ineligible expenditure and expenditure not incurred by the beneficiary The Court examined the final clearance of expenditure incurred under the ‘All ACP Agricultural Commodities Programme’ implemented by an international organisation. The expenditure of 2 54 000 USD claimed by an implementing partner included 17 675 USD of overhead costs which were not allowed for in the contract and were therefore ineligible. In addition, there was a difference of 3 862 USD between the amount paid by the international organisation to the implementing partner as advance payments and the expenditure actually incurred. The error points to a weakness in the checks by the international organisation on compliance with contractual provisions and the use of advance payments. Ineligible expenditure and expenditure not incurred by the beneficiary The Commission has reminded the organisation about the applicable rules and obligations. The ineligibilities detected by the Court will allow the Commission to recalculate the amount of the EU contribution. In the future, enhanced verification missions will be carried out for the programmes managed by this organisation.

28. Non-quantifiable errors concerned shortcomings in the procurement procedures followed (six transactions), insufficient supporting documents to justify the correctness of the amount paid (three transactions) and insufficient information to enable the Court to quantify the error relating to the eligibility of expenditure (three transactions).

Budget support

29. For the 35 budget support transactions tested, three (9 %) were affected by errors, of which two (67 %) were quantifiable errors. 29. The Commission notes that the number of budget support-related errors has decreased by 82 % from 2011 to 2013.

30. The quantifiable errors detected by the Court in budget support transactions concerned the incorrect application of the scoring method for determining whether or not recipients had met the conditions for a performance-based variable tranche (one transaction) and an incorrect exchange rate used to convert a budget support disbursement to local currency (one transaction).

31. The Court also identified one non-quantifiable error. The Commission had not required the recipient to provide evidence that the correct exchange rate was used to convert the disbursement to local currency.

Box 2 — Example of a quantifiable error in a budget support transaction Incorrect application of the scoring method for a performance-based variable tranche The Court examined a performance-based variable tranche of 4 1 81 250 euro under the ‘Programme d’appui au plan de développement territorial’ in Mayotte. According to the financing agreement, the Commission should assess the progress made in respect of budget credibility separately for each selected budget chapter. Instead, the Commission made an overall assessment based on the total amount of the budget chapters, which meant that positive and negative variations on individual budget chapters cancelled each other out when added up. The failure to comply with the scoring method set out in the financing agreement resulted in an overpayment of 2 22 861 euro (5,33 %). Box 2 — Example of a quantifiable error in a budget support transaction Incorrect application of the scoring method for a performance-based variable tranche The Commission corrected this for the subsequent disbursement and established a recovery order.

Examination of selected control systems

32. Annex 2 contains a summary of the results of EuropeAid’s systems examined by the Court.

Ex ante checks

33. 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.

THE COURT’S OBSERVATIONS

34. In May 2013, EuropeAid adopted an action plan to address weaknesses identified in the implementation of EuropeAid’s control system (25). The action plan addresses a number of recommendations made by the Court in its previous annual reports, as well as the issues identified by the 2012 and 2013 EuropeAid RER studies. It includes awareness-raising, training and provision of guidance on the main types of error and how to avoid them. It also sets out actions aimed at improving the quality of external audits (26), which are a key component of EuropeAid’s supervisory and control systems, and at reinforcing cooperation with international organisations as regards control of regularity (see paragraph 39).

Monitoring and supervision

35. As indicated in the Court’s previous annual reports (27), 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 delegations accountable for the timely follow-up and correction of the system weaknesses and errors identified. EuropeAid is developing new functions in the audit module of its CRIS information system to improve the follow-up of audit reports.

36. EuropeAid is also developing a tool to help EU delegations to screen their portfolio of projects more effectively and prioritise visits to those in particular need of monitoring based on risk assessments.

2013 RER study

37. EuropeAid carried out its second RER study to measure the level of error which has evaded all management checks to prevent, detect and correct errors. The study consisted of an examination of a representative sample of transactions relating to contracts closed between September 2012 and August 2013 in order to estimate the most likely error in the population of closed contracts.

38. The results of the 2013 RER study are presented in the AAR (28). The study estimates the RER at 3,35 %, i.e. above the 2 % materiality level set by the Commission. The main types of errors identified by the study are:

(a) absence of satisfactory documentation demonstrating eligibility provided by beneficiary organisations (51,63 % of the RER);

(b) errors which were estimated because insufficient evidence was available to check the regularity of transactions (17,82 % of the RER);

(c) non-compliance with public procurement procedures (12,45 % of the RER);

(d) unrecovered and uncorrected amounts (8,71 % of the RER);

(e) other types of errors (9,39 %).

39. Transactions implemented by international organisations account for a fifth of all transactions sampled but they account for 29,18 % of the residual error rate.

40. As indicated by the Court in its 2012 annual report (29), the design of the RER methodology is overall appropriate. For this second study, refinements were made in the calculation of error rates on individual transactions and the treatment of transactions for which no information was readily available.

THE COURT’S OBSERVATIONS THE COMMISSION’S REPLIES

41. The AAR indicates (30) that the RER methodology ‘results in an accurate assessment of the volume of errors not detected by the overall control system’ and that ‘the result of the overall error evaluation was then expressed as an actual level of error with a 95 % confidence level’. This is not a fully accurate presentation of the RER study results: 41.

(a) the RER methodology reflects valid cost-effectiveness considerations, notably as regards the degree of reliance placed upon previous audit or verification reports and the extent of substantive testing performed. This involves a limitation of scope which should be disclosed to allow for a correct understanding of the RER study results; (a) In order to promote an efficient and cost effective study, the RER methodology foresees reliance on previous control work, including: financial and technical audits, the DAS, verifications, evaluations and technical supervisors’ reports. This aspect of the RER methodology is founded on the presumption that RER procedures will not produce benefits exceeding those already provided by comprehensive, diligent previous control work. Previous control work typically will have been performed with greater intensity and higher cost than RER procedures.

(b) on the basis of the 2013 RER study, 3,35 % is indeed the estimated most likely error rate, but the 95 % confidence level means that the error rate lies between lower and upper error limits, which are however not disclosed. (b) The disclosure of the upper and lower error limits in the 2013 AAR has not been explicitly foreseen by the instructions given by the Central Commission Services.

Internal audit

42. In its 2011 annual report (31), 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) (32). In its reply to the Court’s 2011 annual report, the Commission committed itself to assessing the capacity of the IAC and would consider strengthening it if necessary (33). This has not been done and there was no significant improvement in the functioning of the IAC in 2013. 42. The Commission has initiated some actions to improve the capacity of the IAC.

Review of annual activity report

43. In his declaration of assurance, the Director-General makes a reservation concerning the legality and regularity of transactions, since the amount considered at risk (228,55 million euro) represents more than 2 % of payments made by EuropeAid in 2013. However, the Director-General also states that the control procedures in place give the necessary guarantees concerning the legality and regularity of the underlying transactions. The Court considers that this is not a logical conclusion because controls systems are not effective when they fail to prevent, detect and correct material error. 43. Given the risk environment DG DEVCO operates in, and the fact that the residual error is not a consequence of the design of the control system, but rather of weaknesses in its implementation, it is still reasonable to conclude that the control procedures in place give the necessary guarantees concerning legality and regularity of the underlying transactions.

44. The reservation relates to the legality and regularity of the whole expenditure managed by EuropeAid. A reservation is appropriate when control weaknesses relate to defined areas of revenue or expenditure (34), but not when they affect the operation of the control system as a whole and the financial impact exceeds the materiality threshold for the whole budget under the Director-General’s responsibility. However, the Commission’s standing instructions for 2013 AARs do not clearly address such a situation.

CONCLUSION AND RECOMMENDATIONS

The conclusion for 2013

45. Based on its audit work, the Court concludes that the EDFs’ accounts for the financial year ending 31 December 2013 present fairly, in all material respects, the financial position of the EDFs as of 31 December 2013, 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. The Court concludes that, for the financial year ending 31 December 2013: (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 payment transactions were affected by material error (see paragraphs 23 to 31).

47. The examined systems of EuropeAid are assessed as partially effective (see paragraphs 19 and 32 to 38) (35). However, in May 2013 EuropeAid adopted an action plan to address the main weaknesses identified. 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. The Action Plan is already progressing in this direction.

Recommendations

48. Annex 3 shows the result of the Court’s review of progress in addressing recommendations made in previous annual reports. In the 2010 and 2011 annual reports, the Court presented 14 recommendations. Out of these recommendations, EuropeAid fully implemented three recommendations, while four were implemented in most respects, five were implemented in some respects and two were not implemented.

49. As regards the recommendations not implemented, EuropeAid has not made compulsory the guidelines on risk analysis for the preparation of annual audit plans and has not assessed the IAC’s capacity to perform its task effectively. 49. The Commission has initiated some actions to improve the capacity of the IAC.

50. As regards the recommendations implemented in some respects only, EuropeAid is taking action: 50.

(a) EuropeAid participated in a working group headed by DG Budget to review the cost-effectiveness of its overall control architecture. In the 2013 AAR, for the first time, it provided data on estimated control costs and benefits. While this shows that EuropeAid paid due attention to the need to monitor the efficiency of its supervisory and control systems, the Court found some weaknesses as regards the quantification of benefits, which affect the reliability of cost/benefit ratios. (a) Guidance on possible approaches to calculate or estimate benefits and costs of the most common internal control systems in the Commission has been proposed, in combination with the related Internal Control Templates. Each DG is expected to apply the approaches for estimating the benefits and costs of its concerned internal control strategies for the corresponding expenditure — including its best estimate of both the quantifiable and the non-quantifiable benefits of the controls. In line with the commitments made in the synthesis report, DG Budget shall continue to develop further guidance, identifying a limited number of cost-effectiveness indicators which could be used across the Commission, and define more precisely the methodology to be used to calculate them.

(b) EuropeAid is developing tools and guidance for EU delegations to better prioritise their monitoring visits to projects and assess the quality of audit reports.

(c) EuropeAid is developing new functions in the audit module of its CRIS information system to improve the follow-up of audit reports (see paragraph 35).

51. Following this review and the findings and conclusions for 2013, the Court recommends that EuropeAid: 51.

— Recommendation 1: ensures that all authorising officers by sub-delegation recover interest generated by pre-financing over 7 50 000 euro annually; The Commission accepts this recommendation. The actions taken by the Commission have already produced good results. The Commission will intensify these actions in 2014.

— Recommendation 2: by the end of 2014, completes the development of the CRIS system to allow interest on pre-financing of between 2 50 000 and 7 50 000 euro to be recognised as financial revenue; The Commission accepts this recommendation. Due to the implementation of the new Financial Regulation and the related ABAC release, it was not possible to implement that feature as planned. The finalization is now scheduled for the last quarter of 2014.

— Recommendation 3: revises the quantification of benefits of controls implemented; The Commission accepts this recommendation and will continue to improve the quantification of benefits of controls in line with the guidelines provided by the Commission Central Services.

— Recommendation 4: reports in the AAR on progress in the implementation of the action plan to address weaknesses in the control system; and The Commission accepts this recommendation.