Report from the Commission - Member States' replies to the Court of Auditors' 2005 Annual Report {SEC(2007) 335}
Date: 2007-03-21
Institutions: European Commission
Subjects: EU Member State, European Court of Auditors, activity report, report

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 21.3.2007 
COM(2007) 118 final 

REPORT FROM THE COMMISSION 

Member States' replies to the Court of Auditors' 2005 Annual Report 

{SEC(2007) 335} 

EN 

   EN 

 
 
 
  
 
 
TABLE OF CONTENTS 

1. 

2. 

3. 

4. 

Introduction .................................................................................................................. 3 

2005 DAS findings....................................................................................................... 4 

Preparation of the Court's annual report ...................................................................... 7 

Conclusion ................................................................................................................. 10 

EN 

2 

   EN 

 
1. 

INTRODUCTION 

The European Court of Auditors ('the Court') must prepare its Annual Report within 
extremely  tight  deadlines  imposed  by  the  EC  Treaty,  which  requires  the  Court  to 
produce  “a  statement  of  assurance  as  to  the  reliability  of  the  accounts  and  the 
legality and regularity of the underlying transactions…” 1. In particular establishing 
assurance on transactions poses a challenge when performed on an annual basis – not 
least as the Court audits down to the final beneficiary level, necessitating more than 
100 audit missions to Member States as part of the preparation of the 2005 Annual 
Report. 

Time  pressure  also  makes  it  very  difficult  to  verify  in  due  time  before  the  Court 
finalises  the  Annual  Report  whether  or  not  Member  States  agree  with  the  Court's 
findings. The Commission, however, is obliged to issue a report on Member States' 
reactions  to  the  Annual  Report  afterwards2.  Its  services  also  commit  themselves  to 
follow up the Court’s findings in detail and take the necessary remedial action.  

The reactions to the 2005 Annual Report show that Member States disagree with a 
significant  number  of  the  findings  made  by  the  Court  and  used  as  the  basis  to 
partially  qualify  its  statement  of  assurance  (‘DAS’)  presented  in  the  2005  Annual 
Report3. 

Disagreement was more pronounced in structural actions than in agricultural policy – 
particularly on cases considered to have a financial impact on the EU budget. It was 
also  more  frequently  the  case  in  structural  actions  that  Member  States  disputed 
findings which the Court considered to  have  maximum  financial  impact  on  the  EU 
budget, i.e. to disqualify the whole transaction from EU funding. 

The  Commission  tried  to  take  the  position  of  Member  States  into  account  when 
preparing  its  replies  to  the  2005  Annual  Report.  However,  this  was  in  many  cases 
difficult  as  about  half  the  replies  from  Member  States  to  the  Court’s  statements  of 
preliminary  findings  were  not  available  in  sufficient  time  before  the  contradictory 
procedure between the Court and the Commission on the report in June/July 20064. 

This  summary  report  provides  an  opportunity  to  consider  how  procedures  can  be 
improved  and  whether  lessons  can  be  learned.  It  is  not  to  be  seen  as  a  further 

1 
2 

3 

4 

Article 248 in the Treaty establishing the European Community. 
In accordance with article 143(6) in the Financial Regulation applicable to the general budget of the 
European  Communities,  Council  Regulation  (EC,  Euratom)  No  1605/2002  of  25.6.2002,  the 
Commission sent a letter to each Member State on 23 October 2006 asking for comments on the Court's 
observations  in  the  2005  Annual  Report  (available  on  the  Court's  web-site  www.eca.eu)  as  well  as 
reactions to findings made by the Court and attributed to the Member State.  
See  Section  2  in  the  Commission  Staff  Working  Document  accompanying  this  report  for  a  more 
detailed analysis of Member States' reactions to the findings made by the Court. Based on the replies 
received, the Commission estimates that Member States disagreed with 4-5 in 10 of the Court's findings 
concerning the 2005 DAS.  
See  Section  2  in  the  Commission  Staff  Working  Document  accompanying  this  report  for  a  more 
detailed  analysis  of  the  statements  of  preliminary  findings  ('SPFs')  sent  by  the  Court  to  the  Member 
States and underlying the 2005 DAS.  

EN 

3 

   EN 

 
                                                 
contradictory procedure between the Court and the Member States nor as part of the 
exchanges  between  the  Commission  and  the  Member  States  during  the  detailed 
follow-up of cases, which is currently taking place. Thus, the positions taken by the 
Member States and reported here are not necessarily shared by the Commission. 

The  Commission  instead  hopes  the  questions  raised  will  be  part  of  the  continuous 
debate  on  the  Integrated  Internal  Control  Framework  involving  the  European 
Parliament, the Council, the Court and the Commission. 

The report presents an analysis of the findings made by the Court and underlying the 
2005 DAS (section 2). It also considers the current procedure concerning exchange 
of information between the Court, the Member States and the Commission in relation 
to findings made by the Court (section 3). Conclusions are drawn at the end of the 
report (section 4). 

2. 

2005 DAS FINDINGS  

The  Court  bases  its  DAS  on  several  sources  of  evidence,  not  least  findings  made 
during  audits  of  authorities  and  final  beneficiaries  in  Member  States5.  Findings  are 
categorized as either: 

(a) Systems-related: These findings relate to the implementation of supervisory and 
control  systems.  The  Court  examines  whether  for  instance  the  systems  are  set  up 
correctly,  whether  duties  are  appropriately  segregated,  and  whether  controls  are 
carried out correctly and as often as intended. 

(b)  Formal:  The  findings  concern  payments  to  final  beneficiaries,  like  farmers, 
companies etc., and are considered as having either no potential financial impact on 
the  general  EU  budget  or  a  potential  impact  that  is  not  quantifiable.  This  category 
covers for instance cases where EU participation in projects has not been publicized 
as required, public tendering procedures have not been fully complied with, or data 
registers are incomplete. 

(c) Substantive: These findings also concern payments to final beneficiaries but are 
considered to have a (potential) financial impact on the general EU budget, which is 
quantifiable.  This  category  covers  for  instance  cases  where  the  size  of  a  field  is 
smaller than claimed by the farmer, essential supporting documents are missing, or 
expenditure claimed by a project manager is ineligible. 

All  the  findings  made  during  audits  in  the  Commission  or  in  Member  States  along 
with  other  elements  such  as  an  analysis  of  the  Annual  Activity  Reports  and 

5 

The  2005  DAS  was  based  on  four  sources  of  evidence:  (a)  an  examination  of  the  way  in  which  the 
supervisory  and  control  systems  set  up  both  in  the  Community  institutions  and  in  the Member  States 
and  third  countries  work,  (b)  testing  of  samples  of  transactions  for  each  major  area  by  carrying  out 
checks down to final beneficiary level, (c) an analysis of the annual activity reports and declarations by 
the  Directors-General  and  of  the  procedures  applied  in  drawing  them  up,  (d)  where  possible,  an 
examination of the work of other auditors who are independent of Community management procedures. 
See point 1.59 in the 2005 Annual Report 

EN 

4 

   EN 

 
                                                 
declarations  by  the  Directors-General  in  the  Commission  feed  into  the  DAS  and 
affects the final opinion of the Court as presented in the Annual Report. 

To prepare this summary report the Commission asked Member States to indicate if 
they agreed fully, partially or not at all with the findings made by the Court6. A more 
detailed analysis of the replies concerning the findings underlying the 2005 DAS is 
presented  in  Section  2  of  the  Commission  Staff  Working  Document  accompanying 
this summary report. The main results of the analysis are that: 

•  Member  States  tended  to  agree  more  with  the  Court’s  findings  made  in 

agricultural policy than in structural actions.  

•  Substantive findings where the Court considered the full amount of the transaction 
to  be  in  error  were  more  than  twice  as  frequent  in  structural  actions  as  in 
agricultural policy. 

•  A discrepancy between the size of a field as measured by the Court and the area 
claimed  by  the  farmer  was  the  most  common  substantive  finding  within 
agricultural policy. Member States accepted more than 8 in 10 of these findings. 

•  Lack of essential supporting documents was the most common substantive finding 
within  structural  actions.  Member  States  accepted  less  than  4  in  10  of  these 
findings. 

Member States sometimes indicated action taken in the instances where the Member 
States agreed with the finding made by the Court. Typical follow-up actions included 
for instance providing missing documentation, initiating recovery procedures and/or 
issuing  better  guidelines/instructions  to  authorities  implementing  on-the-ground. 
Depending  on  the  outcome  of  recovery  procedures  launched,  the  final  financial 
impact of findings made may be considerably smaller than estimated by the Court at 
the time of the Annual Report. 

Several Member States also argued that the rules governing funding in the structural 
actions  area  are  open  to  various  interpretations.  Ireland  observed  that  owing  to 
previous  problems  of  interpretation,  managing  authorities  were  no  longer  allowing 
overheads to be included in claims submitted to the paying authority. 

Findings concerning measurement of area (agricultural policy) 

Member States accepted a large share of the findings made by the Court concerning 
areas  claimed  by  final  beneficiaries.  Relatively  small  error  rates  were  often 
calculated for these findings7. In the rather few cases where Member States did not 
agree  with  the  Court's  finding  concerning  the  size  of  a  field,  they  sometimes 
underlined that they had in fact complied with the legislation in force – despite the 

6 

7 

Member States replied to about 60 per cent of the cases. The rate of reply was very high for findings 
within agricultural policy (almost 90 per cent) but somewhat lower within structural actions (around 50 
per cent).  
28 per cent of the findings had error rates less than 2 per cent. A further 25 per cent of the findings had 
error rates between 2 and 5 per cent. 

EN 

5 

   EN 

 
                                                 
fact that the Court made a finding. However, these findings may have no impact on 
the Court’s overall DAS. 

For instance, in one case Poland commented on a finding concerning a farmer where 
the "data declared in the application was verified as part of an administrative check 
based on the IACS reference database. […] Bearing in mind that an administrative 
check  based  on  the  available  reference  data  was  carried  out  during  the  2004 
campaign,  and  did  not  reveal  differences  between  the  area  declared  in  the 
application  and  the  data  contained  in  the  reference  data  base,  the  amount  of 
payment had been correctly calculated." 

France noted as a general remark in cases where the Court verified the size of fields 
that: " As a rule, the Court's random choice of cases results in examination of cases 
which do not form part of the sample controlled by the French authorities. Moreover, 
the  regulation  states  that  6.73%  of  cases  should  be  controlled  on  the  spot  (France 
rounds this rate to 6.7%), leaving more than 90% which are not visited." A similar 
observation was made by Sweden. 

EU legislation is in principle based on proportionality between EU funds spent and 
costs of controls, leading to national authorities not being required to check all fields 
on the spot before making payments8. Due to the sampling approaches applied by the 
national  authorities,  the  Commission  and  the  Court,  it  is  to  be  expected  that  the 
probability  for  findings  in  cases  that  have  not  been  checked  by  the  national 
authorities on the spot beforehand is higher, indicating the need to improve day-to-
day management or even to increase the number of on-the-spot checks in the cases 
where  the  error  rate  is  above  the  materiality  threshold.  Nevertheless,  the  national 
authorities may have complied fully with the rules in force. 

Findings concerning missing documents 

In the structural actions area, the most common substantive finding in the 2005 DAS 
exercise  was  a  lack  of  essential  supporting  documents.  Member  States  contested 
these  findings  in  more  than  half  the  cases,  usually  on  the  ground  that  either  the 
documents  had  been  provided  to  the  Court  already  or  had  been  found  in  the 
meantime.  Some  Member  States  also  maintained  that  the  period  for  keeping 
documents in the 1994-99 period had been unclear.  

Cases where Member States claimed to have uncovered the documents requested by 
the Court are listed below. The Commission is not in a position immediately to verify 
the information provided by Member States but a follow-up may be made. 

Sweden  informed  that  it  followed  up  on  the  Court's  findings  of  a  European  Social 
Fund programme by carrying out an audit of its own "according to which the Court's 
criticisms  are  largely  unfounded.  The  substance  of  many  of  the  supporting 
documents, which according to the Court of Auditors were lacking was identified in 
the  follow-up  audit.  […]  Given  the  fact  that  several  years  had  elapsed  since  the 

8 

The  intensity  and quality  of  primary  controls  in  Structural  Funds  for 2000-06  is  specified  in  a  recent 
best practice note; Member States' level of checking may still not be adequate. 

EN 

6 

   EN 

 
                                                 
project was concluded, the supporting documents concerned were not always to be 
found with the beneficiaries but were held in the archives of the competent authority.  

Ireland maintained that legislation concerning the 1994-1999 period was not clear as 
to the point from which documents should be retained, i.e. from the last payment on 
a project or from the last payment on a programme9. 

Germany also noted a case where it disagreed with the Court's interpretation of this 
part  of  the  legislation.  Nevertheless,  it  stated  that  it  had  since  the  Court's  audit 
"received the files relating to three of these [four] cases. The Court of Auditors was 
informed  of  this  situation  and  other  details  regarding  the  selected  cases  and  the 
whereabouts  of  the  supporting  evidence  in  the  course  of  the  standard  commenting 
procedure." 

In cases where essential elements were missing and no other documentation could be 
provided alternatively, the Court classified these findings as substantive with an error 
rate of 100 per cent, i.e. with a significant financial impact on the general EU budget. 
Nevertheless, if  the Commission subsequently finds that Member States have since 
produced the supporting documents – albeit with some delay – then the underlying 
payment  could  be  judged  legal  and  regular  in  a  court  of  law  and  there  will  be  no 
grounds  for  initiating  a  recovery  procedure.  Such  findings  could  more  fairly  be 
presented  as  ‘absence  of  assurance  in  the  time  available  for  the  audit’,  instead  of 
substantive errors. 

3. 

PREPARATION OF THE COURT’S ANNUAL REPORT 

The 2005 Annual Report was the first to be published by 31 October following the 
revision of the Financial Regulation in 2002. The Court thus had to meet a deadline 
which was one month shorter than in earlier years and thus also had one month less 
than  usual  to  plan  and  carry  out  audit  missions,  analyse  findings  (often  involving 
translation  of  documents  received  during  the  mission),  inform  auditees  of  the 
findings made and await and analyse replies from the auditees.  

The severe time restriction faced by the Court in its preparation of the 2005 Annual 
Report should be borne in mind when considering the weaknesses identified below in 
the  procedure  for  exchanging  information  between  the  Court,  the  Commission  and 
Member  States.  Nevertheless,  the  difficulties  encountered  this  year  –  albeit  more 
severe than usual – were also encountered in earlier years.  

To collect evidence for its DAS, the Court carries out audits in both the Commission 
and Member States. In the area of shared management, the 2005 DAS was based on 
findings  made  during  more  than  100  audit  missions  to  Member  States  where  the 
Court audited control systems and transactions to final beneficiaries such as farmers 
and companies receiving money from the Structural Funds. 

9 

Article 23(3) in Council Regulation (EEC) No 2082/93 of 20 July 1993 says that: “For a period of three 
years following the last payment in respect of any operation, the responsible body and authorities shall 
keep available for the Commission all the supporting documents regarding expenditure and checks on 
the operation.”  

EN 

7 

   EN 

 
                                                 
When missions are completed and the Court has finalised its analyses of the findings 
made, the Court sends a letter called a Statement of Preliminary Findings ('SPF') to 
the  National  Supreme  Audit  Institution  in  the  Member  State  concerned  by  the 
findings.  The  Court  normally  invites  the  National  Supreme  Audit  Institution  to 
inform  the  Court  of  its  reaction  to  the  findings  made  within  6-8  weeks.  The 
Commission receives a copy of both the SPF and the ensuing reply10. 

On  the  basis  of  its  findings  in  both  the  Commission  and  Member  States,  the  Court 
establishes  its  draft  report,  which  is  discussed  between  the  Court  and  the 
Commission  services  before  final  adoption  by  the  Court.  The  Court  is  the  external 
auditor  of  the  Commission  –  and  the  Commission  only  –  in  line  with  the  principle 
that the Commission is responsible for the implementation of the general EU budget. 
The contradictory procedure between auditor and auditee therefore involves only the 
Court and the Commission. 

The DAS itself, i.e. the two-page statement at the very beginning of chapter 1 in the 
Annual  Report,  is  not  included  in  the  draft  report.  It  is  not  presented  to  the 
Commission  during  the  contradictory  procedure  and  is  for  that  reason  not 
accompanied  by  any  Commission  reply.  The  Court  adopts  the  DAS  when  the 
contradictory procedure is finalised. 

Member States in practice implement around 80 per cent of the general EU budget 
and the Court accordingly bases its opinion to a significant degree on findings made 
in Member States. Feedback from Member States on the findings made by the Court 
is  consequently  of  great  importance  to  the  Commission  when  preparing  its  replies 
which are published along with the Court's observations in the Annual Report. 

It  is  not  extraordinary  that  an  auditee  does  not  agree  fully  with  the  findings  of  an 
auditor.  The  auditor  has  to  perform  an  audit,  adhering  to  international  auditing 
standards and – in the case of the general EU budget – in respect of the legislation 
underlying the transactions made. In some cases, issues may be open to interpretation 
and the auditor and auditee may have differing views. 

The objective of the Commission is to include the points of view of Member States 
in its replies where Member States do not fully agree with the Court's findings, and 
where  the  Commission  finds  that  Member  States  are  able  to  substantiate  their 
position.  But  the  Commission  is  aware  when it  accepts  the  final  draft  of  the  report 
that  during  the  subsequent  follow-up  not  all  the  remaining  findings  will  be 
substantiated11. 

In  the  case  of  the  2005  Annual  Report,  the  contradictory  procedure  took  place  in 
June/July  2006  during  which  time  the  Court  and  the  Commission  services  met  on 
several occasions to discuss the Court's draft report (adopted in May/June 2006) and 
the  Commission's  draft  replies  (prepared  in  June/July  2006).  The  Court  adopted  its 

10 

11 

The Commission also receives statements of preliminary findings on audits the Court has carried out in 
the Commission. 
The  Commission  may  not  apply  financial  corrections  based  on  the  findings  of  other  auditors  without 
making its own assessment of each case (Article 4(3) of Regulation 448/2001) because its decisions are 
open to appeal to the Court of Justice. 

EN 

8 

   EN 

 
                                                 
2005 DAS in September 2006. The time until publication of the report (end October 
2006) was needed for translation and printing of the Annual Report in all the official 
languages.  

The  Court  sent  almost  75  SPFs  to  Member  States  and  received  replies  to  the  vast 
majority of these. Half of the replies were transmitted within the two month deadline 
and most of the remaining replies within an additional month. Nevertheless, around 3 
in  4  replies  were  not  available  to  the  Court  when  it  adopted  its  draft  report  and 
around  half  of  the  replies  still  arrived  too  late  to  be  taken  into  account  in  the 
Commission's replies. 

The consequences of the incomplete feedback from Member States before the final 
preparation of the Annual Report was noted by Spain which said that: “The Report 
refers to matters arising from inspection visits whose final conclusions have not been 
received  by  Spain.  It  therefore  seems  that  the  conclusions  contained  in  the  2005 
Annual  Report  in  some  cases  depend  on  an  appraisal  of  the  statements  and 
comments  submitted  by  the  Member  State  following  the  provisional  report 
concerning  the  inspection  visit.  Reference  could  therefore  usefully  be  made  to  the 
situation of the specific procedures (whether final or provisional conclusions of the 
inspection  visits  are  concerned,  and  whether  comments  have  been  made  by  the 
Member State." 

Particular difficulties were also encountered in assuring that the figures included in 
the  chapter  concerning  the  common  agricultural  policy  were  correct.  The  2005 
Annual  Report  was  the  first  to  contain  figures  for  the  10  new  Member  States. 
Slovenia,  Malta  and  Poland  pointed  out  in  their  response  to  the  published  Annual 
Report that some figures concerning their performance within agricultural policy and 
appearing in the 2005 Annual Report were revised subsequently.  

In the extraordinary case of Slovenia, wrong figures concerning area aids and cows 
were provided at the time of the audit and subsequently included in the 2005 Annual 
Report. Concerning area aid, the percentage of applications inspected were initially 
calculated to be overstated by 53.5 per cent on the basis of data available but were 
corrected down to 1.8 per cent in the follow-up process which could not be reflected 
in  a  timely  manner  in  the  Annual  Report12.  Similar  figures  initially  provided 
concerning animals claimed by farmers but found not to exist or not to be eligible for 
subsidy  were  rightfully  11.8  per  cent  for  suckler  cows  and  7.7  per  cent  for  special 
beef premium instead of respectively 48.2 per cent and 56.2 per cent13.  

Although  the  figures  for  Slovenia  clearly  were  very  different  from  other  Member 
States and although the Commission in its reply included in the Annual Report had 
stated that the figures probably needed to be adjusted, corrections could not be taken 
into account in time for the Annual Report, and critical headlines based on the wrong 
figures  appeared  in  both  the  international  and  national  press.  This  issue  has  since 
been cleared up. 

12 
13 

See graph 5.3 in chapter 5 of the 2005 Annual Report. 
Point 5.21 in chapter 5 of the 2005 Annual Report. 

EN 

9 

   EN 

 
                                                 
4. 

CONCLUSION 

The feedback from Member States after the publication of the 2005 Annual Report 
indicated some issues in need of further consideration:  

The level of on-the-spot checks required by legislation would have to be significantly 
increased  if  the  Court  were  not  to  find  errors  exceeding  the  materiality  threshold 
during  its  audit  visits  –  though  this  level  should  also  be  proportional  from  a  cost-
benefit point of view. 

Member States shall carry out the required minimum number of checks on the spot14. 
When the Court audits transactions not checked on the spot by Member States, it will 
probably find some errors, which may prevent it granting a positive statement on the 
underlying transactions. 

This  problem  will  continue  as  long  as  the  Court  has  no  political  guidance  from 
Parliament and Council as to the acceptable level of risk which should always take 
into consideration the costs and benefits of controls15. 

The Court is required to provide an annual DAS. The strictly annual nature of this 
exercise  may  lead  the  Court  to  over-estimate  the  financial  impact  of  errors  on  the 
general EU budget since it does not allow the Court to take into account measures 
taken  subsequently  to  correct  errors  detected  by  the  Court,  the  Commission  or  the 
Member States.  

The real financial impact on the general EU budget of the findings made by the Court 
will  for  instance  depend  on  whether  recovery  procedures  initiated  succeed  or  on 
whether missing documents are produced. The Court is naturally not able to wait an 
indefinite span of time before forming its opinion on the DAS but the Commission 
and Member States may find that the substantive findings made by the Court in the 
first  instance  may  be  corrected  in  the  end.  The  proposal  from  Spain  on  indicating 
more  clearly  in  the  Annual  Report  the  preliminary  nature  of  some  findings  made 
might  be  helpful  as  would  the  indication  of  certain  cases  as  a  ‘failure  to  obtain 
assurance’ instead of as ‘substantive findings’. 

Improvements  in  the  communication  between  the  Court  and  Member  States  seem 
possible and important.  

The Court is by definition not able to conclude all its audits within the same financial 
year it is auditing. For instance, some audits in relation to the financial year 2005 had 
to be carried out in 2006 in order to cover transactions made in the end of 2005. This 
makes it difficult to ensure that all Member States’ reactions to the Court’s findings 
are  available  to  both  the  Court  and  the  Commission  during  the  contradictory 
procedure. 

14 

15 

The legislation sets out minimum standards. Member States may increase the number of controls – and 
should do so if error rates are higher than expected. 
This point is among other issues addressed by the Action Plan towards an Integrated Internal Control 
Framework, COM(2006) 9. 

EN 

10 

   EN 

 
                                                 
A  common  understanding  at  the  operational  level  between  the  Court,  the 
Commission  and  Member  States  concerning  procedures  to  be  followed  when 
checking transactions on the spot, treatment of errors, questionnaires to be used and 
formats for reporting and replying might be helpful in resolving or at least reducing 
this problem.  

The Commission is responsible for executing – with the help of Member States – a 
budget  of  more  than  120  billion  euro  of  taxpayers’  money  each  year.  The  Court 
examines whether transactions have been implemented in a legal and regular manner 
– supplemented by other audits, which look into whether funds have also been spent 
well. Based on the work of the Court, the Council makes a recommendation and the 
Parliament finally decides whether the Commission should be given discharge. 

Resolving the issues set out above is of importance so that taxpayers can be assured 
that  the  basis  for  the  discharge  procedure  is  as  comprehensive  and  accurate  as 
possible within the limits set by the Treaty. 

EN 

11 

   EN