Annual report : the 2007 EU budget.
Date: 2008-10-30
Institutions: European Court of Auditors
Subjects: Community budget, European Court of Auditors, European Development Fund, audit, budgetary control, report

  INTRODUCTION The European Court of Auditors is the external auditor of the EU budget. Every year we audit the financial accounts and the income as well as EU expenditure programmes from which payments flow to millions of beneficiaries across the Union and beyond. The results of this audit are presented to the political authorities of the EU, the Parliament and the Council, in our annual report. Not only do we report the results of this audit to policy makers but also endeavour to inform the citizens of the Union about the financial management of EU funds. This information note sets out our main conclusions and provides background and explanation. Readers are requested to refer to the full text of the annual report for further details.  The information note starts with the key messages of the report - as well as a traffic-light chart indicating the situation in different areas of EU revenue and spending - to give a quick overview of the report. The rest of the note is divided into five sections:  o About the Court of Auditors and the EU budget   This section gives general background information on the Court and the budget we audit.  o The 2007 audit opinion on the EU budget   In this section information is given about our audit opinions on the reliability of the accounts and the legality and regularity of the underlying transactions in the EU budget.  o The situation in specific areas   Supplementary information is provided in particular on the areas where spending is the highest and those where the scope for improvement in supervisory and control systems is the greatest.    1  o Moving forward: improving supervision and control     The Commission is responsible for the management of EU funds. It is taking several steps intended to improve this management. We report on these, put the problems that exist into context and point out future possible roads to progress.  o The 2007 audit opinion on the EDFs   Here information is given about our audit opinions on the reliability of the accounts and the legality and regularity of the underlying transactions in the European Development Funds (EDF).  I hope that this information note will prove useful to you. If you have any views on our work or suggestions for improvements in our reports please do not hesitate to contact us. To find out more about how EU funds are managed I recommend you also to read the special reports we publish in which we assess how economically, efficiently and effectively EU funds are used. All our publications are available on our website: www.eca.europa.eu                     Vítor Manuel da Silva Caldeira       President of the European Court of Auditors 2  Unqualified opinion on the reliability of the accounts but certain weaknesses The Court concludes that the 2007 accounts of the EDFs present fairly, in all material aspects, the financial position of the EDFs. Without qualifying this opinion the Court draws attention to certain weaknesses. There is an overstatement of guarantees, representing about 4 % of their total value. The majority of the liabilities (83 %) are based on statistical estimates, the validity of which have not been demonstrated, which may lead to an understatement of accrued expenditure. Qualified opinion on the legality and regularity of the underlying transactions The Court concludes that the transactions of the EDFs, except for those underlying payments, are free from material error. Its assessment of the supervisory and control systems for the EDFs is that they are partially effective. The Court concludes that the transactions underlying the revenue and commitments of the EDFs are free from material error, except for the effects of several cases of errors in project commitments and of several cases of incomplete or unclear provisions of financing agreements for budget support. The Court also draws attention to the high fiduciary risk of budget support programmes being launched in countries that do not already meet a minimum standard of public finance management.  Recommendations  The Court gives a number of recommendations to improve EuropeAid's design and/or implementation of control systems, including further developing its control strategy, improving the processing of audit information and better supporting the management of implementing organisations. A review should also be carried out to assess whether EuropeAid’s central services and the Delegations have the level and type of human resources required to ensure the quality of controls. For budget support, the Court recommends that compliance with the Cotonou Agreement, before budget support is granted, be benchmarked against minimum requirements, such as the availability of timely published and audited accounts. The Court also gives a number of other recommendations regarding performance indicators, well structured conclusions, clear and complete assessments and high quality financing agreements. 38   KEY MESSAGES  THE 2007 AUDIT OPINION - THE EU BUDGET  o The Court's audit opinions on the EU accounts and the transactions underlying these accounts are similar to previous years. The estimated error rates in some spending, notably that previously covered under the headings "internal policies" and "external actions", have fallen - however not enough to affect the overall picture. o The accounts in general give a fair presentation, in all material respects, of the EU's financial position and results. The qualifications expressed in last year's annual report on the 2006 accounts are, due to the improvements that have taken place, no longer necessary for 2007.  o The Court gives unqualified (clean) opinions on the legality and regularity in certain areas, such as the Union's administration. However, for most spending areas the Court cannot provide a clean opinion. Although most of the payments the Court checks are made in compliance with the rules, the Court still finds that payments made to final beneficiaries, such as farmers and project promoters running EU-funded projects, have a too high level of error. Except for cohesion policies, the level of error in these policy area groups is in between 2 % and  5%. o  are the result of fraud, nor that most transactions in these areas are illegal and/or irregular.  The result does not imply that  cases of non-compliance 3   THE 2007 AUDIT OPINION - THE EDFS1  3 billion euro for development aid outside the general EU budget  The European Development Funds (EDFs ) are the result of international conventions and agreements between the Community and its Member States, on the one part, and certain African, Caribbean and Pacific (ACP) States, on the other part, as well as Council decisions on association of overseas countries and territories (OCT). The Commission manages most of the expenditure in association with ACP countries, partly through EuropeAid (see the policy area group External relations, development & enlargement) and partly through Delegations in the recipient countries. The investment facility part of the EDFs is managed by the European Investment Bank (EIB) and is not included in the Court's audit mandate.  Roughly a third of expenditure in 2007 was on social infrastructure, including education, health, water and basic sanitation. A similar proportion of spending was directed to the transport, communication and energy sector. Commodity and food aid and general programme assistance also presented a substantial part of spending, most of it as budget support programmes. Conditions for budget support are outlined in the so called Cotonou Agreement, stating that it should be granted where public expenditure management is sufficiently transparent, accountable and effective. About a tenth of total aid payments in 2007 were implemented in close cooperation with UN organisations and the World Bank.                                                   371  These funds are not part of the Union’s budget and are therefore subject to a separate statement of assurance (DAS) by the Court. For the complete and detailed audit findings, as well as the exact wording of the Statement of Assurance, please refer to the Annual Report for the European Development Funds.  THE SITUATION IN SPECIFIC AREAS  o In three areas: administrative and other expenditure, economic and financial affairs and revenue, the results of the Court's testing of representative samples of transactions show low estimated levels of error. o In the largest area of Union spending - agriculture and natural resources - the estimated overall error rate is still material. Rural development, with its often complex rules, accounts for a disproportionately large part of  this error rate. For European Agricultural Guarantee Fund (EAGF) expenditure the Court estimates the value of the error rate to be slightly below materiality. o As in previous years, cohesion policies, representing more than a third of the budget, are the area most affected by errors. Following the Court's sample estimate at least 11 % of the value of reimbursed cost claims should not have been paid out. Measures that have been taken to try to reduce the level of error in this area have not had time to be effective.  MOVING FORWARD: IMPROVING SUPERVISION AND CONTROL   4o s in the design and operation of systems also contribute to the problems identified. o  conclude if they are effective in decreasing the o actions in the action plan. It is o political authorities of the Union define what a o To dregulations, streamlining internal control arrangements and better monitoring and reporting.  The high level of error in areas like cohesion is in part due to the inherent risk associated with the many beneficiaries claiming EU funds according to complex rules and regulations. The weaknesseMost EU funded programmes have provisions for corrective actions to recover detected errors on a multiannual basis. However, there is a lack of information on the impact of these actions. This means that it is not possible tolevel of illegal and/or irregular expenditure.  The Commission has since 2000 been working on a reform program to improve the management of the EU budget, including a 2006 action plan for this purpose. By the end of 2007 the Commission had introduced two thirds of the sub-however too early to assess the impact of these measures.   Improved high level controls - such as Commission supervision of Member State controls - cannot compensate for inadequate lower level controls, such as on-the-spot-checks. The benefits of increasing the number of the latter however have to be balanced against the costs. The Court recommends that the reasonable level of risk of error would be.  ecrease the level of error in EU payments the Court recommends simplified rules and   THE 2007 AUDIT OPINION - THE EDFS o The accounts of the European Development Funds (EDFs) present fairly, in all material respects, the EDF's financial position and the results. The opinion on the legality and regularity of EDF transactions is qualified in respect of payments.   Box 1 - Interpreting audit opinions    Auditors can give the following kinds of opinions:  -  an unqualified opinion (also called "clean") when there is evidence that the accounts are reliable or the underlying transactions, i.e. payments, are legal and regular in all material aspects; -  an adverse opinion when the level of error in the underlying transactions is material and pervasive, or the accounts are not reliable; -  a disclaimer of opinion if auditors are unable to obtain sufficient appropriate audit evidence on which to base an opinion, and the possible effects are both material and pervasive;  -  a qualified opinion when an unqualified opinion cannot be expressed but the effect of any disagreement or limitation on scope is not so material or pervasive as to require an adverse opinion or a disclaimer of opinion.   5   Simplified rules and regulations  The Court also calls for due consideration to be given to simplification. Well designed rules and regulations which are clear to interpret and simple to apply decrease the risk of error, streamline the required controls and consequently also reduce their cost. In areas such as rural development and research the Court has consistently advised the political authorities to consider simplifying the regulatory frameworks.  35  A MIXED PICTURE1       Assessment of systems Error rate range  Cohesion: 42 billion euro  ● ●  Agriculture and natural resources: 51 billion euro ●2●3 External aid, development and enlargement: 6 billion euro  ● ●  Research, energy and transport: 4,5 billion euro  ● ●  Education and citizenship: 1,5 billion euro  ● ●  Administrative and other expenditure: 8 billion euro  ● ●  Economic and financial affairs: 0,5 billion euro ●4●4 Revenue ●4●      Assessment of supervisory and control systems   Range in which the error rate (ER) is situated Not effective  ● ER > 5 % Partially effective  ● 2 %< ER < 5 % Effective  ● ER < 2 %  (below materiality)                                                   1  The table summarises the overall assessment of supervisory and control systems, as outlined in the relevant chapters of the 2007 Annual Report, and gives the broad results of the Court's testing of representative samples of transactions. For more information on the Court's methodology, see the section How does the Court perform its audits?.   2 See the section Agriculture and natural resources for an assesment of the continued effectiveness of the Integrated Administration and Control System (IACS) which covers the majority of spending.  3  Rural developement accounts for a disproportionally large part of the overall error rate. For spending from the European Agricultural Guarantee Fund (EAGF) - the largest part of the expenditure - the error rate is slightly below 2 %.  4  Certain weaknesses are described in the respective sections.6    RECOMMENDATIONS1  A political decision on a tolerable level of risk  As indicated above improved high level supervision and reporting although important cannot compensate for inadequate lower level controls. However, the benefits of increasing the number of on-the-spot checks have to be compared to the related costs. This requires recognition by all participants in the budget process that: o not all final beneficiaries can be checked on-the-spot, and therefore there will always be some residual risk of error. The key issue is to set that risk at an appropriate (tolerable) level; o costs of control are an important issue, both for the EU budget and Member or beneficiary States. The same is true for the administrative costs incurred by the final beneficiaries of EU aid;  o the cost/risk balance in individual areas is of such importance that it should be approved at the political level (i.e. by the budget/discharge authorities) in the name of the citizens of the Union; and  34o plemented at an acceptable level of cost and with tolerable risk it should be reconsidered. pproach to risk management would, in the Court’s view, benefit contributors and beneficiaries alike. on improving not least the information on these multiannual corrections and their impact.                                                   if a scheme cannot be satisfactorily imStreamlining internal control arrangements  Establishing an internal control framework around these principles would allow control systems to be defined in terms of what they should achieve (output targets), as well as laying down agreed criteria against which to judge and audit their performance. The Court encourages the Commission to conclude its analysis on the cost of controls, and on the different levels of risk inherent in the spending areas. A realistic, transparent, rational and cost-effective aBetter monitoring and reporting  The Court recommends the Commission to continue its efforts to improve its monitoring and reporting. The Commission should ensure that annual activity reports and declarations present a consistent assessment of the systems, compatible with the reservations presented. It should also collaborate with Member States to improve the information provided in annual summaries and demonstrate how it is used for increased assurance or added value in annual activity reports. Furthermore, it should complete an appropriate follow-up of the relevant measures of the action plan, including that on recovery systems. The Court also gives a number of recommendations  1  A more detailed account of the Court's recommendations can mainly be found in Chapter 1 of the report. Recommendations on monitoring and reporting can predominantly be found in Chapter 2, except for on multiannual corrections which has a specific section in Chapter 3. Several of the recommendations set out above were originally - and in a more detailed manner - set out in the Court's "Single Audit"-opinion in 2004 (Opinion No 2/2004).   ABOUT THE COURT OF AUDITORS AND THE EU BUDGET  THE EXTERNAL AUDITOR OF THE EU BUDGET1  The Court of Auditors  The European Court of Auditors is the independent external audit institution of the European Union based in Luxembourg. Through its work, it aims to contribute to improving the quality of financial management. The Court has three main outputs: its annual reports, which comprise the results of its financial and compliance audit work for a specific financial year; its special reports, published throughout the year, presenting the results of its other audits, mainly performance audits assessing the economy, efficiency and effectiveness of EU spending; and its opinions on draft legislation with financial management impact.  What is the Court's statement of assurance (DAS)?  The Court's annual reports, on the EU budget and on the European Development Funds (EDFs), include annual opinions, called statements of assurance. The EC Treaty requires the Court of Auditors to give such statements on the reliability of the accounts and on the legality and regularity of underlying transactions. This statement of assurance is generally known by its French acronym DAS ("Déclaration d'Assurance"). The primary aim of the DAS is to provide stakeholders - notably the European Parliament and the Council, but also all EU citizens - with an audit opinion as to whether EU income and expenditure is completely and accurately recorded in the accounts, and has been raised or spent in accordance with all contractual and legal obligations. The Court gives an overall assessment of the legality and regularity of the transactions underlying the budget expenditure as a whole. It also provides assessments covering specific segments of the budget made up of suitable groups of policy areas (see Box 3). The conclusions of these assessments form the Court's Statement of Assurance.                                                   1  For more information on the Court of Auditors please refer to our 2007 Annual Activity Report.7  MEASURES ARE BEING TAKEN1  The Commission has made significant efforts since 2000  There have been significant efforts to address the existing weaknesses in supervision and control. Since 2000 the Commission has been working on a reform programme to improve the management of the EU budget, centred mainly around its own responsibilities. The Court follows this process and has in its last annual reports also included a specific chapter outlining the progress achieved. In early 2006 the Commission launched an action plan for further improving the supervisory and control systems of the Union.  Positive developments in 2007  For 2007, the Court has identified further progress in the Commission’s supervisory and control systems, in particular in the area of reporting.  2007 was the first year for which Member States were required to produce an annual summary of available audits and declarations. The Commission adequately supervised the process; however, e.g. due to the disparity of presentation, annual summaries do not yet provide a reliable assessment of the functioning and effectiveness of the systems. Regarding the Commission's Directorates-General own reports, most annual activity reports and declarations, including those relating to cohesion and agriculture, are now more in line with the Court's own assessments. The financial impact of the reservations is higher than previously. However, the scope and scale of some reservations still appears to underestimate the problems. It is only for administrative expenditure and economic and financial affairs that the Court assesses that the annual activity reports provide clear and unambiguous evidence for its DAS conclusions.  In its synthesis report the Commission acknowledges that further efforts are needed to resolve a number of weaknesses in internal control systems, not only those highlighted by its Directorates-General but also others belonging to areas not considered satisfactory by the Court.  Improved high level supervision and reporting has yet not had a proven impact  on errors  The Commission's assessment of its progress in improving control systems however differs from the Court's, mainly because the Court focuses on the effectiveness of the measures rather than the introduction of them. For example, although the Commission has been able to demonstrate a consistently high degree of implementation of internal control standards since 2004, the Court - in contrast to the Commission - does not consider this objective as completed since the effectiveness of a number of supervisory and controls systems cannot yet  be demonstrated.  Concerning the Commission's 2006 action plan the Court does not fully agree with the Commission's assessment, published in early 2008, on its impact. By the end of 2007 the Commission had implemented two thirds of the plan’s sub-actions. However, the Court states that it is still too early for a potential assessment of its impact.  33                                                 1  This section reports on the Commission’s progress in 2007 in improving the effectiveness of the supervisory and control systems in its Directorates-General. The complete and detailed audit findings can be found in Chapter 2 of the report. For more information on the Court's views on annual summaries, please refer to Opinion No 6/2007.  How does the Court perform its audits?1  The Court's audit of the reliability of the EU accounts is carried out in line with international auditing standards. While such international standards do not specifically address the audit of legality and regularity as undertaken by the Court they are applied in analogy.  In order to provide assurance as to whether the payments comply with the legal and regulatory frameworks, the Court draws on the results of its examination of both supervisory and control systems and a sample of the transactions (payments) themselves (see Box 2). The Court carries out its audits of the selected transactions in most cases down to the level of the final beneficiaries, including on-the-spot visits. When systems are tested and found to be reliable, then fewer transactions need to be audited by the Court in order to come to a valid conclusion on their legality and regularity. Other sources, such as the analysis of annual activity reports and the work of other auditors, are also used to support the Court’s conclusions.  What is an error of legality and/or regularity, according to the Court?  An error is a deviation, identified by the auditor, from what is required by the applicable regulations. Some errors are quantifiable, i.e. with a direct and measurable financial impact on the amount paid out from the EU budget, such as over-declaration of land or of farm animals or beneficiaries claiming EU grants for types of expenditure not eligible for support. Other errors have a non-quantifiable impact on payments, such as a missing bank guarantee.  The Court compares the estimated error rate against what is deemed to be a tolerable limit - or materiality threshold - to determine the nature of the opinion to be given. In the absence of a political decision on what a tolerable level of error would be, i.e. what level of illegality and/or irregularity can be accepted, the Court applies a limit of two percent of the population under audit. When calculating the error rate (see Box 2) the Court includes only quantifiable errors. The estimated error rate is thus an indication of the percentage of funds that should not have been paid out. The Court also discloses the combined frequency of quantifiable and non-quantifiable errors found in the samples of transactions tested.  Errors can arise from misapplication or misunderstanding of the often complex rules of EU expenditure schemes. Only if EU funds have intentionally been improperly claimed can it be considered as fraud. If the Court has reason to suspect that fraudulent activity has taken place, it will report this to OLAF, the Union's antifraud office, which is responsible for carrying out any resulting investigations. Over the last 4 years the average number of cases reported by the Court on the basis of its audits has been 3,5.  8                                                 1  More information on the DAS methodology can be found in the brochure on the subject, available on our website.  Most errors can only be detected by on-the-spot-controls1There are several layers of supervision and control of EU funds (see the section How is the budget managed?). Since the majority of errors occur at the level of the final beneficiary they can however often only be detected reliably by primary level - on-the-spot - controls. On-the-spot checks often cover only a small proportion of individual claims, largely because of the costs concerned. The Court finds weaknesses concerning the checks in agriculture and cohesion policies corresponding to weaknesses within Member State authorities. Cases of poor quality primary controls were also identified for direct management, including Commission level checks on reimbursements to research beneficiaries failing to operate satisfactorily and poor quality audits carried out by independent auditors on individual claims  Poor performance in primary level controls cannot be compensated for directly by secondary level controls. The effectiveness of the latter is therefore determined by their ability to promote adequate control arrangements at the primary level, rather than the ability to detect and correct individual errors. The Court’s audit work on the 2007 financial year again found that secondary checks by Member States and supervisory checks by the Commission, are not achieving the desired level of effectiveness. For example, the Court found weaknesses in the Commission’s conformity clearance in agriculture (where corrections are made based on the legality and regularity of previous expenditure), in audits in cohesion spending and in ex-post financial audits in Research, energy and transport .  Weak primary and secondary controls cannot be compensated for by the Commission's supervision. The purpose of this supervision is to ensure that adequate primary and secondary level control arrangements are in place, and are being operated effectively. Weaknesses at the lower levels should be identified (for example in annual activity reports), and measures should be taken to remedy the situation.  Recovery mechanisms are not sufficient and have other purposes than deterring error2    In many areas of the budget, mechanisms exist for recovering incorrectly made payments from beneficiaries or, where Member States have incorrectly administered expenditure schemes, "disallowing" some expenditure, i.e. refusing to finance it from the EU budget. The Commission has sometimes claimed that, over time, these corrective actions correct or compensate for the errors in payments detected by the Court. The Court's audit has highlighted a serious lack of information on the impact of these corrective actions. The Commission does not yet have complete and/or fully reliable information on the consequences for beneficiaries of EU spending, the EU budget and national budgets. The information provided on the correction mechanisms applied for cohesion policies at Member State level is incomplete and unreliable. Concerning agriculture, the Court has doubts about the reliability of the information provided. Based on the lack of evidence the Court concludes that corrective actions currently cannot yet be taken to be effective in mitigating errors of legality and/or regularity. Moreover, refusing to finance expenditure from the EU budget usually has the result that burdens are simply transferred to national taxpayers.  32                                                 1  A more detailed account of the different levels of supervisory and control systems, the weaknesses the Court finds in them and the respective effect of these weaknesses on the level of error itself can be found in Chapter 1 of the report. 2  Audit findings related to multiannuality and the recovery of funds can mainly be found in Chapter 3 of the report (relating to budgetary management), but also in Chapter 2 (in the context of the Commission’s action plan to improve internal control) and chapters on the relevant spending areas.     Box 2 - The Court's testing of a sample of payments from the EU budget The Court does not have the resources to audit all the transactions of the EU budget in detail. It therefore uses statistical sampling techniques to provide a result which is representative of the populations in question. This involves randomly selecting a representative sample of underlying transactions from, for example, agriculture for detailed testing. The Court traces these transactions down to the final beneficiaries of the aid, for example a farmer in Denmark. The Court then performs checks to verify the compliance of the claim with reality, in many cases on the spot (such as measuring the size of the farmland).  The representative nature of the Court's sample means the results can be extrapolated over the total population, i.e. a specific revenue or expenditure area, and together with information arising from the evaluation of systems and other sources, be used as a basis for its assessments.  9   €€€€ €€€€€€€€ €€€€ €€€€€€€€€€€Random selection of a representative sample Payment to farm in Denmark EU’s agricultural spending: approx. 50 billion euro population of all agricultural payments €€€€€€This is an illustration of how the Court identifies transactions for detailed testing.     MOVING FORWARD: IMPROVING SUPERVISION AND CONTROL  HIGH LEVEL OF INHERENT RISK AND WEAKNESSES IN THE DESIGN AND OPERATION OF SYSTEMS  Millions of cost claims based on self-declarations The Court’s audit has shown over the years that significant amounts of EU funds under shared management are irregularly spent. High levels of error in areas such as Cohesion can partly be explained by the fact that. EU funds are disbursed to millions of beneficiaries across the Union based on self-declaration of those who receive the funds. The main risk of error - and the majority of errors found - resides at this level.  Complex rules and regulations  Errors in general occur because final beneficiaries overstate costs without this being detected by the national or European level of management that reimburses the cost claims. When final beneficiaries claim non-existent, ineligible or incorrectly calculated amounts, this can be intentional. However many errors instead occur because the beneficiary misunderstands or misapplies the complex rules and regulations that govern EU funds. This complexity can also lead to mistakes on the part of those paying out the funds.  For 2007 the Court's audits in the areas of Agriculture and natural resources, Cohesion, Research, energy and transport as well as Education and citizenship show that such complexity has a considerable impact on the legality and regularity of payments.   31   THE EU BUDGET1   The EU's payments for 2007 totalled 114 billion euro, equivalent to around one percent of the Union's GNI. This can be compared to Member States' public sector budgets which in many cases amount to around half of total GNI.  Where does the money come from? The EU general budget - the audit of which represents the Court's main task - is composed of revenue and expenditure. The revenue of the European Union mainly consists of contributions from Members States based on their gross national income (GNI – 63 %,) and on a measurement connected to value added tax collected by the Member States (VAT – 17 %). Customs and agricultural duties (so called traditional own resources – 14 %) also represent a significant share of revenue.   Traditional own resources 14,1%VAT resource 16,5 %GNI resource  62,9 %Other 6,5 %                                                  1  More financial information on the general budget can be found in Annex I of the report. Audit results concerning the implementation of the EU budget, and the Commission's reporting on this, is covered in Chapter 3 of the report. 10  What is the money spent on? The largest single element of European Union spending is on agriculture and rural development - principally in the form of payments to farmers - accounting for almost half of the budget. Another significant proportion is spending on cohesion - regional and social development - cofinancing a wide range of projects, from road construction in Romania to courses for the unemployed in the UK. This constitutes about a third of the budget.  Research, Energy & Transport 3,9 %Economic and financial affairs  0,4 %Administrative expenditure 7,2 %Cohesion 36,9 %Agriculture and natural resources  44,8 %Education and citizenship 1,3 %External aid, development & enlargement 5,5 %Total payments 2007: 114 billion euro How is the budget managed?   The budget is decided annually - within the context of seven-year financial frameworks - by the Council and the Parliament. Ensuring that the budget is properly spent is the responsibility of the Commission. For around 80 % of spending – cohesion and agriculture – the task of implementation is shared with the Union's 27 Member States. Depending on the spending schemes, national administrations may be responsible for setting spending strategies, selecting beneficiaries and projects, making payments and checking the expenditure. In all cases, however, the Commission retains the overall responsibility for the execution of the budget, and is accountable for this to the European Parliament and Council.  The European Union budget involves payments made to millions of individual final beneficiaries. Payments made are based on the compliance of the final beneficiaries with legal or regulatory conditions, as well as the accuracy and existence of the underlying activities and/or costs. Payments are legal and regular when these conditions are met, and the right beneficiaries receive the right amounts at the right time.  11   GNI and VAT own resources come from direct contributions from Member States. In both cases the Commission relies on statements from the Member States to serve as the basis for the revenue due. They are however open to correction for up to four years. If the Commission - or Member States - finds doubtful elements in the statements it can issue a reservation, thereby keeping them open for longer periods of time.  The Court concludes (see scope limitation) that the revenue transactions are free from material error. The related supervisory and control systems are assessed as effective, although the Court draws attention to certain weaknesses. The Court recommends the Member States to strengthen the underlying controls of the warehousing procedure and the Commission to continue its efforts to ensure that the B accounts are utilised appropriately. It should also further examine what steps are open to it to bring pressure to bear on those Member States with very long outstanding VAT own resources reservations and improve its control approach in its on-the-spot visits for the verification of inventories so as to obtain a better view of the comparability, reliability and exhaustiveness of Member States GNI data.   ! Scope limitation In this context, the revenue transactions cover the Member States' declarations and payments of traditional own resources, the Commission's calculation of the Member States' contributions on the basis of the VAT and GNI data received from the Member States ,and other types of revenue. For traditional own resources the audit cannot cover imports that have escaped customs supervision. For VAT and GNI-based contributions, the Court does not directly audit the data underlying macroeconomic aggregates and statistics.  29   Internal control - through supervisory and control systems - is the range of procedures and processes (such as checks) by which the Union administers and manages its budgets and ensures that funds are collected and spent properly and in accordance with the rules.    Primary level controls, which check compliance of final beneficiaries with their regulatory obligations.    Secondary level controls, which check the effectiveness of the primary level controls.     Overall supervision by the Commission, to ensure that Member States and/or Commission Directorates-General meet their obligations and responsibilities     There are several factors that determine whether or not errors occur in transactions in the first instance and whether or not they are subsequently detected and corrected by control systems. They include:  o the complexity of the eligibility rules and obligations with which beneficiaries must comply, and their familiarity with them;  o the way that claims are made and processed;  o the number and extent of checks made;  o the extent of sanctions imposed on over-claiming beneficiaries when errors are detected; and o the visibility - and associated deterrent effect - of the control procedures. eports and declarations are compiled in a synthesis report signed by the Commission as a whole.  nses to be accounted for in the year to which they relate rather than when cash is received or paid.  How is the management of the budget reported?  Since 2000 the Commission has been working on a reform programme to improve the management of the EU budget, centred mainly around its own responsibilities. A major element of this has been improving reporting, with e.g. the introduction of annual activity reports for the departments of the Commission - the Directorates-General (DGs) - accompanied by declarations by the Directors-General that head them. The annual activity rThe accounts of the EU general budget have also been modernised, 2007 being the third year of accruals-based accounts for the Union's financial statements. Accruals-based accounting - in contrast to the more traditional cash-based system - requires income and expe12  REVENUE AND TWO SPENDING AREAS FREE FROM MATERIAL ERROR  Administrative and other expenditure - 8 billion euro1  Administrative expenditure includes salaries, allowances and pensions as well as rent payments, purchases and miscellaneous expenses of the European Parliament, Council, Commission, Court of Justice, European Economic and Social Committee, Committee of the Regions, European Ombudsman and the European Data Protection Supervisor, as well as the Court of Auditors itself.  The Court concludes that transactions in this area are free from material error and the supervisory and control systems in place conform to those required by the Financial Regulation. The Court however recommends that the Institutions start to interpret and implement the regulations concerning certain aspects that contribute to the setting of EU staff salaries in the same way, in order to enable equal treatment. Economic and financial affairs - 0,5 billion euro2This area covers a total of almost 40 Investment and assistance programs for enterprise and economic and financial affairs of various sizes and nature, such as Security and Space Research and the Guarantee Fund for External Actions. Part of the expenditure is related to the same research and technological development Framework Programs (FPs) covered in Research, energy & transport.  The Court concludes that the policy group is free from material error, although it draws attention to certain errors. The related supervisory and controls systems are assessed as effective, though the Court points to certain weaknesses. The Court recommends that the Commission take appropriate action regarding payments in research contracts to, amongst other things, implement simplified financial rules as regards eligible costs. Revenue - mostly direct contributions from Member States3  Traditional own resources are collected by national administrations - mainly customs administrations - of Member States on behalf of the Union. They are entered into national treasuries (so called A-accounts) and thereafter made available to the Communities. Where duties or levies remain unpaid and no security has been provided, or they are covered by securities but have been challenged, Member States may suspend making these resources available by entering them in a separate account ("the B account"). Furthermore, there is a customs warehousing suspensive regime which permits the storage of non-community goods without them being subject to import duties or commercial policy measures while they are stored in premises or under an inventory system authorised as a customs warehouse.  28                                                 1  The complete and detailed audit findings can be found in Chapter 11 of the report.2  The complete and detailed audit findings can be found in Chapter 10 of the report.3  The complete and detailed audit findings can be found in Chapter 4 of the report.   The accounts consist of the financial statements and reports on the implementation of the budget. The financial statements include the balance sheet - which sets out the assets and liabilities of the Union at the year end - an economic outturn account showing the income and expenditure for the year, a cash flow statement and a statement of changes in net assets. The reports on budget implementation set out the revenue and expenditure for the year on a (modified) cash basis.  The Commission’s Accounting Officer draws up the annual accounts, consolidating the results of the various EU institutions and bodies. He/she provides the Court with a representation letter confirming that the consolidated accounts are complete and reliable (subject to certain limitations). Similar management representations are given by the Accounting Officers of the relevant institutions and bodies.  Box 3 - How the EU budget is organised and how the Court reports on its implementation  The main part of the general budget is divided into 31 policy areas covering different policy objectives or administrative issues. The policy areas constitute the way the Union's activities are planned and recorded, and those responsible for each area are held accountable for their management of EU funds.  EU spending is also planned in seven-year cycles, the so-called financial frameworks, which have a separate set of headings. Policy areas relate mainly to one of these headings, but some are included in several. 2007 is the first year for which the Court's reporting is structured around groups of policy areas. These correspond closely, but not entirely, with the 2007-2013 financial framework headings. Information in this note is, if not otherwise indicated, linked to the Court's groups of policy areas. See the inside cover of this information note for more information on what policy areas are included in the Court's policy area groups, and how these groups correspond to the financial frameworks.  The main changes in the Court's reporting compared to previous years is the introduction of two new specific assessments, one on Education and citizenship and one on Economic and financial affairs (previously covered under Internal policies), as well as the merger of two previous assessments (Pre-accession aid and External actions) into one on External aid, development and enlargement. 13  MATERIAL LEVEL OF ERROR IN EDUCATION AND CITIZENSHIP SPENDING1 Funds for education and citizenship as well as for communication - 1,5 billion euro Spending on Education and Citizenship is mostly managed by the Commission in an indirect centralised way or through shared management. EU support in these domains is characterised by a multiplicity of funding schemes for various thematic areas and types of projects, such as grants to actions in favour of citizenship or for mobility in the education and training sectors. Projects are carried out not only by teaching organisations, but also by private firms and public administrations. Final beneficiaries are individuals, mostly EU citizens. Conclusion: a material level of error  The Court concludes that payments underlying the policy group Education and Citizenship are affected by a material level of error of legality and regularity. Its assessment of the supervisory and control systems is that they are only partially effective for the policy group as a whole.  Recommendations  The Court recommends:  o the Commission to improve its preliminary assessment of the Member States systems for the Life Long Learning Programme and the European Refugee Fund;  o that there should be an improvement in the quality of ex-ante checks carried out in respect of Communication expenditure. 27                                                 1  The complete and detailed audit findings can be found in Chapter 9 of the report.     Furthermore, although the coverage of the financial audits the Commission carries out has increased, efforts are still needed to improve their functioning, e.g. to recover outstanding amounts overclaimed without excessive delays. The Court also notes that, although the current main research programme (FP6) is drawing to a close, the Commission has not made use of its powers under the FP6 rules to impose financial penalties on beneficiaries who have received an unjustified EU contribution.  Recommendations  The Court recommends: o further simplification and clarification of the rules for the calculation and reporting of costs by beneficiaries, where possible introducing a results-based, rather than input-based, financing system;  o a number of steps to be taken within the current framework of reimbursement based on cost-reporting from beneficiaries, e.g. the Commission should make use of its sanction instruments and continue efforts to improve the audit certification process.  26   THE 2007 AUDIT OPINION -THE EU BUDGET  2007 ACCOUNTS - CLEAN OPINION1  Unqualified opinion on the reliability of the accounts  The Court concludes that the 2007 annual accounts of the European Communities give a fair presentation, in all material respects, of the financial position of the European Communities and the results of their operations and cash flows.  Without calling this opinion into question the Court notes that there are still weaknesses in the accounting systems of certain Directorates-General of the Commission and  decentralised bodies whose accounts are subject to consolidation - in particular for fixed assets of the Supervisory Authority for the European Global Navigation Satellite System (GSA) - that put the quality of financial information at risk. This is partly due to the complex legal and financial framework. Progress in the transition to accruals-based accounting  The Commission has taken several steps to improve the quality of the accounts - among them the introduction of management representations from the Accounting Officers, where the sufficiency and appropriateness of the financial statements are acknowledged at management level. Progress has also been made in the transition to full accruals-based accounting.                                                 1  For the exact wording of the Statement of Assurance as well as the complete and detailed audit findings please refer to Chapter 1 of the report.15  RESEARCH, ENERGY & TRANSPORT: SIMPLIFICATION NEEDED1  Funds to increase competitiveness through research and technology - 4,5 billion euro Research, energy and transport cover a wide range of activities, with the aim of increasing competitiveness and growth. The bulk of expenditure is on research and technological development.  Research funding is provided in multiannual Framework Programmes (FPs), which have multiple funding schemes, supporting various types of projects. Research projects are carried out by institutes and universities, but also by individuals, companies or public administrations. They usually involve several research partners from a number of EU Member States and associated countries. Although each partner signs a grant agreement with the Commission, one is nominated as a coordinator to oversee finance and administration as well as maintaining contacts with the Commission. EU grants to individual projects range from a few hundred euros to tens of millions. Expenditure on the Trans-European Networks (TEN) Energy and Transport programme supports major energy and transport projects, an average grant being of over 2 million euro. The beneficiaries are usually Member State authorities.  Conclusion: a material level of error   The Court concludes that payments in 2007 for the policy group Research, energy and transport are affected by a material level of error of legality and/or regularity. The Court's assessment of the supervisory and control systems for this policy group is that they are partially effective.  Errors mainly due to overstatement of personnel and indirect costs  Most errors occur because the Commission reimburses overstated eligible costs declared by beneficiaries in their cost statements. Errors mainly concern overstatement of indirect costs (overheads) and personnel costs, for example the time spent by a researcher on a funded project. One reason for this is the complex legal framework, with a large number of eligibility criteria, including requirements to prove that costs are real, eligible costs necessary for the implementation of the project. The Court's sample of payments included several major beneficiaries each of which participates in a large number of EU projects. The funding rules permit these beneficiaries to apply the same average costing methodology to all their cost statements. Errors found in the audited payments to such beneficiaries, one example being the overstatement of eligible costs by around 10 %, can thus be systematic. This means that there is a risk of irregular reimbursement in payments to the rest of these beneficiaries' projects - in total a considerable amount of potentially irregular expenditure. Audit certification has not solved the problems and sanctions are not applied  Beneficiaries' cost statements are certified by an independent auditor before submission to the Commission. However, in half the cases audited by the Court, audit certificates had been provided giving an unqualified opinion, whereas the Court found serious errors in the cost statement. There are also certain weaknesses in the Commission's desk reviews of these cost statements before reimbursement.  25                                                 1  The complete and detailed audit findings can be found in Chapter 7 of the report.  2007 LEGALITY AND REGULARITY - ADVERSE OPINIONS ON MOST SPENDING1  2007 is the 14th year for which the Court has provided a statement of assurance on the legality and regularity of the transactions underlying the accounts of the EU budget. To date, too high levels of illegality and irregularity in most areas of the budget have meant that the Court has provided adverse opinions.  Unqualified opinions in certain areas For 2007 the Court gives unqualified opinions for revenue, commitments and payments for Economic and financial affairs and Administrative and other expenditure. In these areas  the Court concludes that transactions are free from material error. Supervisory and control systems are implemented in a manner which ensures adequate management of the risk of illegality and irregularity.  Further improvement needed in others  The Court gives adverse opinions for Agriculture and natural resources, Cohesion, Research, energy and transport, External aid, development and enlargement and Education and citizenship. In these areas the Court concludes that payments are still materially affected by errors, although to different degrees. Supervisory and control systems covering these areas are judged to be only partially effective. The Commission and the Member and other beneficiary states need to make further efforts to improve risk management.  Similar to previous years, but some improvements noted   The 2007 opinions on the legality and regularity of the transactions underlying the EU budget accounts are similar to previous years.  In Research, energy and transport the Court notes certain improvements in the supervisory and control systems. The same is true, at the level of the Commission, for the supervisory and control systems covering External aid, development and enlargement. In both cases these changes are however not significant enough to change the nature of the opinions given.  Box 4 - Agencies - audit opinions published in separate reports  The Union's agencies cover a wide variety of tasks in various locations throughout the Union. The annual budgets of the 27 agencies audited by the Court for 2007 totalled 1,2 billion euro. Each agency has a specific mandate and manages its own budget. Audits of the European Union’s agencies and other decentralised bodies are the subject of specific annual reports which are published separately. The Court issued unqualified opinions on the reliability of the accounts and the legality and regularity of the underlying transactions for all agencies except for the European Police College and the Supervisory Authority for the European Global Navigation Satellite System (GSA).                                                   1  For the exact wording of the Statement of Assurance please refer to Chapter 1 of the report.  16  Errors at the level of implementing organisations are frequently due to weaknesses in their financial procedures. The main weaknesses concern accounting systems and documentation procedures.  The Court found improvements in EuropeAid's project audit system, although the quality of such audits is still not always sufficient. Procedures have to be further developed to derive full benefit from the additional risk-based project audits. For expenditure channelled through United Nations organisations, the Court was unable to assess the full value of the verification missions carried out by the Commission since only four had resulted in a final report at the date of the Court's audit. There were some delays in the follow-up of closure audits in the Enlargement policy area. For DG ECHO the majority of audits of expenditure channelled through NGOs were done at headquarters level only, where not all aspects can be checked.  Recommendations  The Court recommends: o EuropeAid to increase the monitoring of, and improve training and support to, project finance staff, as well as improving planning, implementation and use of audits. In addition, DG ECHO should improve its audits, in this case among other things by ensuring a better coverage of the implementing organisation level;  o the Commission to improve its management of budget support programmes concerning performance indicators, providing better evidence for these indicators and improving the link between funding and performance;  o further steps to be taken urgently to correct the weaknesses in the management of EU funds in Bulgaria.   24   THE SITUATION  IN SPECIFIC AREAS  COHESION: THE AREA MOST AFFECTED BY ERROR1  Funds to promote economic and social cohesion - 42 billion euro EU spending on cohesion is planned in multiannual 'programming periods'; payments relating to each programming period continue for at least two years beyond its end. The Court's 2007 audit findings relate to payments in respect of the 2000-2006 period, as spending for the 2007-2013 period for 2007 is only in the form of advances. For the 2000-2006 period the two biggest Structural Funds are the European Regional Development Fund (ERDF), financing, for example, infrastructure and activities of small and medium-sized companies, and the European Social Fund (ESF), where typical projects concern unemployment and labour market integration. There is also a Cohesion Fund, which supports the improvement of environment and transport infrastructure in less developed Member States.  EU funding of cohesion takes the form of co-financing, part of the funds being provided by Member States. The unit of financing in cohesion is a project, with reimbursement based on a cost declaration by the project promoter. The Member States are required to set up control systems which are intended to prevent or detect and correct the incorrect reimbursements of project costs and other irregularities. They establish separate responsible bodies: Managing Authorities for day-to-day checking of project operations; Paying Authorities for certifying project expenditure; Audit Bodies for checking the effective functioning of systems; and Winding-up Bodies for validating the final declaration of project expenditure.                                                   1  The complete and detailed audit findings can be found in Chapter 6 of the report. 17  EXTERNAL AID, DEVELOPMENT, ENLARGEMENT: DIFFICULTIES IN PREVENTING WEAKNESSES AT THE PROJECT LEVEL1  Funds for development, cooperation and humanitarian aid as well as for enlargement – 6 billion euro External relations and development spending, which account for about two thirds of expenditure in this policy group, include assistance to and cooperation with other countries generally as well as specific programmes such as food security and the European Instrument for Democracy and Human Rights. The rest of the spending is devoted to enlargement (27 %), i.e. transition and institution-building assistance, and to humanitarian aid. Most of the expenditure is administered by one of three Commission Directorates-General: the DG for Humanitarian Aid (ECHO), EuropeAid (external relations and development projects) or the DG for Enlargement. In addition to expenditure covered in this section there is also significant spending through the European Development Funds (see the section The 2007 audit opinion - The EDFs).  A large part of the expenditure is managed by the Commission's Delegations in the countries in which the EU finances projects. The implementing organisations that carry out the projects may be international organisations and both local and international NGOs as well as government institutions. Part of development aid is given as budget support, where the funds are merged into the budget of the partner country, given certain conditions.  Conclusion: a material level of error  The Court concludes that transactions underlying the expenditure in the policy group External aid, development and enlargement are affected by a material level of error of legality and/or regularity. Its assessment of the supervisory and control systems is that they are only partially effective. Errors concerning eligibility and lack of supporting evidence  The Court found eligibility errors such as contracting procedures that were not applied properly and inclusion of expenditure outside the specified implementation period or cost categories. In other cases the supporting evidence (e.g. invoices, receipts and bank statements) for payments was not provided. Delegations are still not succeeding in preventing weaknesses at project level  The Commission’s system of checks on its own payments and contracts was generally effective. However, in the specific case of Bulgaria the national systems contained significant weaknesses. For budget support the Commission has developed specific guidelines whereby the payments are conditional on satisfactory progress being made. However, the performance indicators used were not time-bound, clear, unambiguous and achievable in all the cases examined.   23                                                 1  The complete and detailed audit findings can be found in Chapter 8 of the report.    Conclusion: a material level of error  The Court concludes that the reimbursement of expenditure to cohesion projects is affected by a material level of error of legality and/or regularity. It found that the majority of supervisory and control systems, both at Commission and Member State level, are only partially effective in ensuring the legality and regularity of reimbursements of expenditure.  Ineligible costs, serious procurement errors and problems with overheads and staff costs The Court has established a sample estimate, based on which it concludes that at least 11 % of the total amount reimbursed should not have been reimbursed. In the cases audited by the Court this year the most frequent causes of incorrect expenditure reimbursements in the Structural Funds were inclusion of ineligible costs, overdeclarations of money spent and serious failures to respect procurement rules.  Box 5 - Procurement: an example of an error in the European Regional Development Fund The owners of a holiday village failed to hold a public tender for renovation work for which they were receiving subsidies totalling 63 % of the costs, including a 25 % grant from the ERDF. As the EU public procurement rules apply to projects by private firms from the level of 50 % of financing with public funds, the breach made the project ineligible for EU support.  Weaknesses in Member State systems, Commission supervision only partially effective The Court identified several weaknesses in the control systems at Member State level. The main weaknesses at the level of the Managing Authorities were insufficient day-to-day checks that costs were real, failure to identify expenditure declarations not supported by appropriate evidence and failure to identify weaknesses in tender procedures. The key problem at Paying Authority level was failure to identify when Managing Authorities had not carried out the adequate day-to-day checks. The central weakness identified in the Audit Bodies was that not enough assurance had been obtained as to the effective functioning of the control systems, because of insufficient checks.  The Commission audits examined by the Court were mostly adequately planned and carried out, but in more than a third of the cases either appropriate corrective action had been taken late or the audit documentation made assessment difficult. Commission supervision is intended to ensure that Member State control systems are established and operating as required and mitigate the risk of control failures in Member States. The Court's audit findings indicate that this was not fully achieved.  18   Box 6 - SPS entitlements: examples of system weaknesses in the EAGF The Court found that a number of entitlements audited were erroneously calculated either due to a failure to take account of changes in land parcels or to the non-deduction of ineligible areas. Furthermore, payments were made to a number of farmers who did not hold entitlements, while various instances were noted of misuse of the national reserve, which should only be used to allocate entitlements to new farmers, those in special situations or those affected by restructuring or development programmes.    Recommendations The Court recommends that system weaknesses leading to errors are resolved, e.g. further significant efforts are needed to ensure that beneficiaries respect their obligations in the area of rural development. Concerning the SPS, the most urgent issues to address are:  o improving the identification, registration and management of the entitlements; o eliminating from the database ineligible areas and beneficiaries and ensuring up-to-date information on land parcels; and o clarifying and simplifying the rules underpinning the measures.  22   Recommendations  The Court recommends:  o a number of steps to reinforce the prevention of errors during the early stages of a project through working with the project promoters, e.g. managing authorities/intermediate bodies should make early contact with the project promoters to familiarise them with requirements;  o the Commission where possible to use the simplification provided for in the regulations and rules, without undermining the effectiveness of the spending; o the Commission to make maximum use for the 2007-2013 period of the work of the Audit Authorities in the Member States, but at the same time to monitor this work in order to ensure that it is up to standard;  19o  instruments at its disposal, like payment suspension, financial corrections and recoveries. The Court takes note that these recommendations may have considerable resource implications.  the Commission to make effective use of the corrective  Rural development, which represents 20 % of all spending, accounts for a disproportionately large part of the overall error rate. The Court found errors relating to farmers who did not meet eligibility criteria in agri-environmental schemes. There were also errors in the area of interest rate subsidies (cheaper loans to encourage rural development) due to inadequate procedures to ensure that the payment of EU subsidies to final beneficiaries could be verified.  For EAGF expenditure the Court estimates the value of the error rate to be slightly below 2%. Here it found errors such as unreliable data on olive oil cultivation leading to over-payments. In general, errors in the SPS are often due to farmers over-claiming and/or entitlements being wrongly calculated. Also for direct coupled payments, the Court found errors related to farmers over- claiming or exaggerating land area or the number of animals. In other EAGF schemes not covered by IACS, the Court found errors such as failure by the Member States to charge interest on debts, weaknesses in controls concerning export refunds, e.g. refunds to farmers to cover the difference between EU internal and world market prices, and missing quantities of rice from public storage.  IACS - an effective system given certain conditions   IACS continues to be effective in limiting the risk of irregular expenditure where properly implemented and if accurate and reliable data on entitlements are introduced. The recent introduction in SPS of support schemes, such as those related to olive oil, is a positive development although in the short term might lead to a higher frequency of errors. The correct calculation and allocation of entitlements is a prerequisite for correct payment in the first and all subsequent years. However, the Court considers that the systems for calculating the entitlements were only partially effective and that they do not yet provide reasonable assurance that the annual SPS payments are correct.  For production support in the form of direct coupled payments, the Court found a number of systems weaknesses in both administrative and on-the spot controls of aid for crops etc, while IACS proved reliable for aid for animals.  The Court furthermore found weaknesses in the national databases (part of IACS) where all agricultural areas are recorded. In addition, the statistics on the Paying Agencies inspection results addressing legality and regularity were not validated by certifying bodies at the level of final beneficiaries, nor has the Commission verified the reliability of these statistics.   The Court found the controls carried out to verify farmers' compliance with the relevant requirements in rural development to be deficient. Reasons for this included imprecise national definitions of eligibility and complex rules, particularly those related to agri-environmental measures.  For all agricultural expenditure - IACS and non-IACS - the Court notes that the Commission's yearly financial clearance decisions are limited to ensuring that the Paying Agencies' accounts are complete and accurate. The legality and regularity of payments are only addressed in multiannual conformity decisions. Therefore, financial clearance decisions do not mean that expenditure "cleared" is free from irregular payments. The Court's audit of the 2007 conformity decisions found that there was expenditure that should not have been approved by the Commission and some conformity audits were not carried out in time to allow recovery of the full amount of the possible irregularities found.  For some payments, for example export refunds and some rural development expenditure, Member States are required to carry out post-payment checks of commercial documentation, with the Commission having a supervisory and coordination role. The timeliness of these checks has improved but some, dating back as far as 2000/2001, were not yet completed and may therefore not be possible to execute properly.   21  AGRICULTURE AND NATURAL RESOURCES: LEVEL OF ERROR STILL MATERIAL1Funds for supporting farmers, rural development and market intervention - 51 billion euro As part of the Union's Common Agricultural Policy (CAP), the EU supports farmers and intervenes in agricultural markets. Most CAP expenditure is financed from the European Agricultural Guarantee Fund (EAGF) but an increasing share of spending comes from the European Agricultural Fund for Rural Development (EAFRD), including measures such as agri-environmental schemes, rural infrastructure and compensation for farming in less-favoured areas.   Although there is still production support to farmers for certain foodstuffs such as rice (so called direct coupled payments), the lion's share of spending on agriculture and natural resources (56% ) is now devoted to payments based on the number of hectares of eligible land in good agricultural and environmental condition ("decoupling" aid from production). The main scheme is called the Single Payment Scheme (SPS). To claim the aid, farmers need to have entitlements (one per hectare). These entitlements are allocated by Member States, based on different models, and are registered in the Integrated Administration and Control System (IACS). IACS also includes databases of agricultural parcels and animals kept, and provides for controls of the eligibility of the farmers' claims.   Virtually all agriculture and natural resources expenditure is paid out by Paying Agencies at national or regional level. They also carry out administrative checks on all claims and a series of on-the-spot checks of a sample of claims. Paying Agencies prepare annual accounts which, after being audited by a certifying body, provide the basis for the Commission's approval of expenditure - in technical terms, the clearance of accounts. This includes annual financial clearances as well as wider-ranging multiannual conformity clearances where corrections are made based on detected irregularities in previous expenditure. Clearance is carried out in order to establish the amounts definitively charged to the EU budget.  Conclusion: a material level of error  The Court concluded that the transactions underlying the expenditure declared for the policy group, taken as a whole, are affected by a material level of error of legality and/or regularity. The Court’s assessment of the supervisory and control systems is that they are partially effective. Rural development most error-prone, but problems also in other areas  The Court's estimate of the overall level of error in Agriculture and natural resources is not significantly different from the value obtained last year, but does not take account of certain serious errors which could not be quantified.  20                                                 1  The complete and detailed audit findings can be found in Chapter 5 of the report. This chapter also includes observations related to EU spending on the environment, fisheries, maritime affairs, and health & consumer protection.