Annual Report of the Court of Auditors on the activities funded by the seventh, eighth and ninth European Development Funds (EDFs) concerning the financial year 2007, together with the Commission’s replies
Date: 2008-11-10
Institutions: European Court of Auditors
Subjects: European Court of Auditors, European Development Fund, activity report, audit, financial control, financial management, financial year

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ANNUAL REPORT ON THE ACTIVITIES
FUNDED BY THE SEVENTH, EIGHTH
AND NINTH EUROPEAN DEVELOPMENT
FUNDS (EDFS)

(2008/C 286/02)

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Annual Report on the activities funded by the seventh, eighth and ninth
European Development Funds (EDFs)

TABLE OF CONTENTS

Introduction

Chapter I — Implementation of the seventh, eighth and ninth EDFs

Financial implementation

The Commission’s annual report on the financial management of the EDFs

Chapter II — Statement of Assurance by the Court of Auditors on the EDFs

Statement of Assurance by the Court of Auditors on the seventh, eighth and ninth Euro-
pean Development Funds (EDFs) for the financial year 2007

Information in support of the Statement of Assurance

Scope and nature of the audit

Reliability of the accounts

Legality and regularity of the underlying transactions

Conclusions and recommendations

Paragraph

1-5

6-13

6-11

12-13

14-56

I-XI

14-50

14-15

16-18

19-50

51-56

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.-5. The EDF is in effect the EU’s main development aid instrument
for the ACP countries. Although the Commission agrees with the Court’s
opinion on a number of points, we would like to point out the high risks
associated with management of the EDF in view of:

— the significant volume of funds implemented,

— the weak administrations in certain partner countries,

— the numerous serious problems in most of the beneficiary countries,

including weak governance.

In view of these factors, the Commission has established a control strat-
egy at different levels comprising the use of supervisors and auditors and
controls not only by the contracting authorities but also directly by the
Commission’s delegations and central services.

This control strategy must of course take account of a risk analysis and
also a cost/benefit ratio. The Commission considers that the provisions
it has established are effective and that they meet the criteria established.
Based on the remarks of the Court, but also on its own experience, the
Commission has fine-tuned this strategy in recent years and will con-
tinue to do so in future.

The Court’s report should be read in the light of the environment in
which the Commission is obliged to operate and the risk inherent in this
type of activity should be taken into account.

INTRODUCTION

1. The European Development Funds (EDFs) are the result of
international conventions or agreements (1) between the Commu-
nity and its Member States, of the one part, and certain African,
Caribbean and Pacific (ACP) States, of the other part, and of
Council Decisions on the association of overseas countries and
territories (OCT).

2. The Commission has responsibility for and takes charge of
the management of most of the expenditure of the EDFs. The
EDF’s investment facility has been fully managed by the European
Investment Bank (2) (EIB) since 1 April 2003. This facility is not
covered by the Court’s Statement of Assurance or the European
Parliament’s discharge procedure (3) (4).

(1) The Yaoundé I Convention dates back to 1964. The most recent agree-
ment (Cotonou) dates from 23 June 2000 and was revised in Luxem-
bourg on 25 June 2005.

(2) Thus, under the ninth EDF,

the initial allocation amounted to
13 800 million euro, of which the EIB is responsible for 2 200 mil-
lion euro.

(3) See Articles 96, 103 and 112 of

the Financial Regulation of
27 March 2003 applicable to the ninth EDF (OJ L 83, 1.4.2003, p. 1).
In its Opinion No 12/2002 on the proposal for this Regulation
(OJ C 12, 17.1.2003), the Court stressed that these provisions reduce
the scope of the European Parliament’s powers of discharge.

(4) A tripartite agreement between the EIB, the Commission and the Court
(Article 112 of the Financial Regulation of 27 March 2003 applicable
to the ninth EDF referred to above) sets out rules for the audit of these
operations by the Court.

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3. Once programming is complete, EDF resources are mobilised
in two stages. The Commission makes the financing decision
(shown in the accounts as financial commitments) following
receipt of a request from an ACP State. The Commission and the
ACP State then lay down the rules for the implementation of
these decisions by the National Authorising Officer (NAO) of the
country concerned within the framework of a financing agree-
ment or directly by the Commission. The NAO concludes con-
tracts (shown in the accounts as individual legal commitments)
and authorises payments, which will be checked and executed by
the Commission.

4. Budget support is not subject to this system of management.
Financing agreements constitute legal commitments and give rise
to payments without any individual legal commitments being
entered into. Once the Commission has checked that the condi-
tions of the Cotonou Agreement and the financing agreement
have been met, it makes an initial transfer of funds to the budget
of the recipient country. Once transferred, these funds merge with
the budget of the ACP State, where they are used and audited in
accordance with the laws and procedures of the recipient coun-
jointly with other main international
try. The Commission,
donors, assesses both the improvements made to the manage-
ment of public finances in these countries and the results in terms
of poverty reduction. Before making subsequent disbursements,
the Commission checks that the conditions laid down in the
financing agreement have been met.

5. Within the Commission, most of the EDF programmes are
managed by the EuropeAid Co-operation Office (hereafter called
EuropeAid). A small proportion of the EDF projects (5) relates to
humanitarian aid and is managed by the Directorate-General for
Humanitarian Aid (DG ECHO).

CHAPTER I — IMPLEMENTATION OF THE SEVENTH,
EIGHTH AND NINTH EDFs

Financial implementation

Following the closure of the sixth EDF in 2006, the seventh,
6.
eighth and ninth EDFs were implemented simultaneously in
2007. It is projected that the seventh EDF will be closed in 2008.

7. Total contributions received in 2007 from the Member States
amounted to 2 679 million euro, including 39 million euro vol-
untary contributions to the African Peace Facility in the frame-
work of
the
Commission started calling up contributions under the ninth EDF
as those due under the eighth EDF were fully exhausted.

Intra ACP cooperation (6). During the year,

In line with the Monterrey and Paris declarations, in 2007 the
6.-8.
Commission continued its efforts to step up aid and make it more effec-
tive. 2007, like 2006, was a very successful year for implementation of
the EDFs. Once again, there was a record level of contracts and payments
made, a substantial reduction in old and ‘dormant’ commitments and
progress towards the final closure of the 7th EDF. The objective for the
end of 2007 was to commit all the 9th EDF appropriations, resulting
in EUR 15,9 billion being implemented for 2003-2007, i.e. 100 % of
the funds under the 9th EDF. This is the highest level ever in the history
of the EDF.

(5) Representing 0,8 % of the 2007 payments.
(6) Decision No. 2/2007 of the ACP-EC Council of Ministers of 25 May

2007 (OJ L 175, 5.7.2007, p. 35).

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8. The tenth EDF will be committed in the period from 2008
to 2013; it provides for Community aid to ACP countries for
21 966 million euro which represents a 62 % increase compared
with the financial allocations of the ninth EDF.

As regards quality, in 2006 the Commission introduced total coverage
by the Quality Support Group of all EDF financing proposals in the
identification and assessment phases. This practice was also applied in
2007.

The Commission will continue its efforts to improve even further the
implementation of the EDF and will continue to follow up the Court’s
recommendations in this connection.

The 10th EDF allocation of EUR 21 966 million (operational credits
for the ACP, excluding the Overseas Countries Territories (OCTs)) cov-
ers a six-year period, against a five-year period for the 9th EDF (initial
amount, without taking into account the transfer of the balances of the
previous EDFs — see point 9 —, of EUR 13 500 million). For the sake
of comparison, funds should be annualised, in which case the nominal
increase is reduced to 35,6 %.

9. This is the first time ever that an entire EDF has been committed
before the entry into force of the next EDF. When the 9th EDF entered
into force in April 2003, almost 2 billions EUR remained uncommit-
ted under the 8th EDF.

9. Tables 1 and 2 show the cumulative use of EDF resources
managed by the Commission and the financial implementation.
Charts I and II show the cumulative resources and decisions by
sector of intervention. In May 2005, the Council decided that
funds from the ninth EDF had to be committed before 31 Decem-
ber 2007 (7). In line with this so called ‘sunset clause’, virtually all
funds under the ninth EDF had been committed by that date. This
was achieved by the significant increase of 16,7 % of global com-
mitments which amounted to 3 172 million euro. Net payments
increased by 4,1 % and reached 2 874 million euro which is
slightly lower than the initial target due to cash flow restraints at
the end of the year.

10. As a result of this, outstanding payments increased from
10 281 million euro at the end of 2006 to 10 579 million euro
at the end of 2007. Of total outstanding payments, 903 million
euro relates to funds committed more than five years ago. Global
commitments for which no individual legal commitments or pay-
ments have been made in the last two years decreased however
significantly to 100 million euro at year-end. The implementation
rate, as measured by the ratio of total unspent funds to annual
payments, remained stable at 3,7 years.

10. The Commission’s performance was exceptional in 2007. Pay-
ments increased significantly by 12 %, commitments increased by 9 %
and the increase in outstanding commitments was kept down to 2,8 %.

The implementation rate of 3,7 years corresponds to the average project
implementation period.

(7) Decision 2005/446/EC of the Representatives of the Governments of
the Member States meeting within the Council (OJ L 156, 18.6.2005,
p. 19), as amended by Decision 2007/792/EC of 26 November 2007
(OJ L 320, 6.12.2007, p. 31).

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infrastructure,

11. The sector of social
including education,
health, water and basic sanitation, was the principal recipient of
EU aid with 852 million euro (31 % of total payments) in 2007,
followed by the transport, communication and energy sector with
799 million euro (28 %). Total payments made in the area of
commodity aid and general programme assistance,
including
food aid and food security equalled 557 million euro, of which
455 million euro (16 % of total payments) had been spent by
means of general budget support programmes. Aid implementa-
tion continued to involve close cooperation with UN organisa-
tions and the World Bank (306,5 million euro, i.e. 10,7 % of
payments).

The Commission’s annual report on the financial
management of the EDFs

12. The Financial Regulation applicable to the ninth EDF (8)
requires the Commission to report each year on the financial
management of the EDFs. The Court carried out a review of this
report to assess whether it fairly describes the achievement of
objectives, the financial situation and the events that had a sig-
nificant influence on the year’s activities. The review included the
verification of the accuracy of the financial data presented and the
follow-up of observations made previously by the Court and rec-
ommendations made by the discharge authority.

In the Court’s opinion, the report on the financial manage-
13.
ment presents an accurate description of the achievement of the
objectives for the financial year, the financial situation and the
events that had a significant influence on the activities carried out
in 2007. However, the summary of the Commission’s follow-up
to observations by the Court does not provide, in a number of
cases, sufficient information on the actions taken or planned; the
Court presents its analysis of the situation in table 4. Moreover,
the information provided by the ACP States with respect to the
use of Stabex funds (9) and bank balances of accounts held at
banks within the ACP States remains unreliable due to the com-
plexity of the measure and the limited control by EuropeAid
which is aware of this and intended to initiate audits of the Sta-
bex funds in all ACP countries concerned in 2007. However,
audits were carried out in only four out of the 38 beneficiary
countries.

13. The Commission attaches the greatest importance to the Court’s
recommendations, which have all been followed up. The Commission
considers that, overall, satisfactory action has been undertaken with
regard to the Court’s recommendations but will provide more detailed
information in the future.

Although not required under the provisions of Article 212 of the
Lomé IV Convention, the Commission decided to reinforce the control of
Stabex funds, by performing audits. Out of a total of 38 beneficiary
countries, 10 did not register any movement of those funds in 2007,
and 14 were subject to audits concerning either the reliability of the
Stabex Accounts (eight countries) or projects financed through Stabex
funds (six countries).

(8) Articles 96 and 102.
(9) The financial importance of the Stabex programme is decreasing as the
measure is being phased out. At end-2007, about 100 million euro
remained at security accounts held in Europe under the sole control of
the Commission compared to 192 million euro at end-2006. The
Commission’s target is that these funds are to be paid by 31 Decem-
ber 2010 provided that all disbursement conditions have been fulfilled.

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CHAPTER II — STATEMENT OF ASSURANCE BY THE COURT OF AUDITORS ON THE EDFs

Statement of Assurance by the Court of Auditors on the seventh, eighth and ninth European Development Funds
(EDFs) for the financial year 2007

I.

Pursuant to the provisions of Article 248 of the Treaty the Court has audited

(a)

the ‘Final annual accounts for the financial year 2007 of the 7th, 8th and 9th European Development Funds’ which comprise
the consolidated financial statements (10) and the consolidated report on the financial implementation of the seventh, eighth
and ninth EDFs; and

(b)

the legality and regularity of the underlying transactions within the legal framework of the EDFs in respect of the part of the
EDF resources for whose financial management the Commission is responsible (11).

Management’s responsibility

II.
In accordance with the Financial Regulations applicable to the seventh, eighth and ninth EDFs, management (12) is respon-
sible for the preparation and fair presentation of the final annual accounts of the EDFs and the legality and regularity of the under-
lying transactions:

(a) The management’s responsibility concerning the final annual accounts of the EDFs includes designing, implementing and
maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from mate-
rial misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, on the basis of the
accounting rules adopted by the EDF accounting officer (13), and making accounting estimates that are reasonable in the cir-
cumstances. The Commission approves the final annual accounts of the EDFs.

(10) The consolidated financial statements comprise the balance sheet, the statement of economic outturn, the statement of cash flow and the table of
items payable to the European Development Funds. The financial statements and information supplied by the EIB are not covered by this State-
ment of Assurance (see footnote 11).

(11) Pursuant to Articles 1 and 103(3) of the Financial Regulation applicable to the ninth EDF, the Statement of Assurance does not extend to the part

of the ninth EDF resources that is managed by the EIB and for which it is responsible.

(12) At the level of the Commission management includes the Members of the Institution, Authorising Officers by delegation and sub-delegation, the
Accounting Officer and the leading staff of financial, audit or control units. At the level of Beneficiary States, management includes National Autho-
rising Officers, Accounting Officers, Paying Agents and the leading staff of implementing organisations.

(13) The accounting rules adopted by the EDF accounting officer are derived from International Public Sector Accounting Standards (IPSAS) issued by
the International Federation of Accountants or, in their absence, International Accounting Standards (IAS)/International Financial Reporting Stan-
dards (IFRS) issued by the International Accounting Standards Board. In accordance with the Financial Regulation, the ‘Consolidated financial state-
ments’ for the financial year 2007 are prepared on the basis of these accounting rules adopted by the EDF accounting officer, which adapt accruals
based accounting principles to the specific environment of the Communities, while the consolidated reports on implementation of the EDFs con-
tinue to be primarily based on movements of cash.

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(b) The way in which management exercises its responsibility for legality and regularity of underlying transactions depends on
the method of implementation of the EDFs. In the case of direct centralised management, implementation tasks are per-
formed by the Commission’s departments. Under decentralised management implementation tasks are delegated to third
countries and under indirect centralised management to other bodies. In the case of joint management, implementation tasks
are shared between the Commission and international organisations. Implementation tasks have to comply with the prin-
ciple of sound financial management, requiring designing, implementing and maintaining effective and efficient internal con-
trol including adequate supervision and appropriate measures to prevent irregularities and fraud and, if necessary, legal
proceedings to recover funds wrongly paid or used. Regardless of the method of implementation applied, the Commission
bears the ultimate responsibility for the legality and regularity of the transactions underlying the accounts of the EDFs.

Auditor’s responsibility

III. The Court’s responsibility is to provide, on the basis of its audit, the European Parliament and the Council with a statement
of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions. The Court con-
ducted its audit in accordance with the IFAC and INTOSAI International Auditing Standards and Codes of Ethics, in so far as
these are applicable in the EDF context. These standards require that the Court plans and performs the audit to obtain reasonable
assurance whether the final annual accounts of the EDFs are free from material misstatement and the underlying transactions,
taken as a whole, are legal and regular.

IV.
In the context described under paragraph III, an audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the final consolidated accounts and the legality and the regularity of the underlying transactions. The
procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the final
consolidated accounts and of material non-compliance of the underlying transactions with the requirements of the legal frame-
work of the EDFs, whether due to fraud or error. In making those risk assessments, the auditor considers internal control rel-
evant to the preparation and fair presentation of the final consolidated accounts, and supervisory and control systems
implemented to ensure legality and regularity of underlying transactions, in order to design audit procedures that are appropriate
in the circumstances. An audit in this context also includes evaluating the appropriateness of accounting policies used and rea-
sonableness of accounting estimates made, as well as evaluating the overall presentation of the final consolidated accounts and
the annual activity reports.

V. The Court considers that the audit evidence obtained is sufficient and appropriate to provide a basis for its statement of assur-
ance.

Opinion on the reliability of the accounts

VI.
In the Court’s opinion, the final annual accounts of the seventh, eighth and ninth EDFs present fairly, in all material respects,
the financial position of the EDFs as of 31 December 2007, and the results of their operations and cash flows for the year then
ended, in accordance with the provisions of the Financial Regulation and the accounting rules adopted by the accounting officer.

VII. Without qualifying the opinion expressed in paragraph VI, the Court draws attention to the fact that the validity of the
assumptions used for the estimate of the provision for costs incurred has not been demonstrated by the Commission and that
they may lead to an understatement of accrued expenditure, as well as to an overstatement of the amount of guarantees disclosed
in the notes to the financial statements.

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Opinion on the legality and regularity of the underlying transactions

In the Court’s opinion, except for the effects of the matter described in paragraph IX, the transactions underlying the rev-

VIII.
enue and commitments for the financial year are, taken as a whole, legal and regular.

IX. The Court’s audit revealed a material level of errors affecting transactions underlying payments.

X. Without calling into question the opinion expressed in paragraph VIII, the Court draws attention to the high fiduciary risk
with regard to budget support resulting from the Commission’s ‘dynamic interpretation’ of the eligibility criteria, which does not
provide for countries to meet minimum standard of credible management of public finances before budget support is under-
taken.

XI. The Court notes the improvements introduced by the Commission as regards its supervisory and control systems but under-
lines the need to continue to pursue efforts to clarify certain important elements of the overall control strategy and improve the
design and/or implementation of certain systems.

18 September 2008

Vítor Manuel da SILVA CALDEIRA
President

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

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Information in support of the Statement
of Assurance

Scope and nature of the audit

14. The aim of the work on the reliability of the accounts of the
EDFs is to obtain appropriate sufficient evidence to conclude on
the extent to which all revenue, expenditure, assets and liabilities
have been properly registered and that the annual accounts faith-
fully reflect the financial positions at the end of the year. The
observations regarding the reliability of the accounts, set out in
paragraphs VI and VII of the Statement of Assurance, are based
on an audit of the consolidated financial statements (14) and the
consolidated report on the financial implementation of the sev-
enth, eighth and ninth EDFs (15). The audit comprised an appro-
priate range of audit procedures designed to examine, on a test
basis, evidence relating to the amounts and disclosures. It included
an assessment of the accounting principles used, significant esti-
mates made by management and the overall presentation of the
consolidated accounts.

15. The observations regarding the legality and regularity of the
underlying transactions, set out in paragraphs VIII to XI of the
Statement of Assurance, are based on:

(a) an evaluation of the supervisory and control systems at Euro-
peAid’s central services and in five Delegations (Ghana,
Guinea Bissau, Niger, Madagascar and Sudan) covering six
countries;

(b) an examination in each Delegation visited of a statistically
selected sample of transactions covering all domains except
budget support. A total of 90 payments and 15 individual
legal commitments were audited;

(c)

for budget support, an examination of 30 payments and 15
financial commitments statistically selected. This selection
represents 46,0 % and 62,1 % of total budget support pay-
ments and financial commitments respectively. The exami-
nation consisted of a desk review and, for 8 payments, a
further analysis in four of the countries visited (Ghana,
Guinea-Bissau, Niger and Madagascar);

(d) an examination of 30 statistically selected payments autho-

rised by EuropeAid’s central services;

(14) See Article 100 of the Financial Regulation of 27 March 2003 appli-
cable to the ninth EDF: the financial statements shall comprise the
balance sheet, the statement of economic outturn, the statement of
cash flow, and the table of items payable to the EDF.

(15) See Article 101 of the Financial Regulation of 27 March 2003 appli-
cable to the ninth EDF: the reports on financial implementation shall
comprise tables describing the appropriations, the commitments and
the payments.

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(e) an examination of 30 statistically selected transactions already

checked ex-post by EuropeAid’s central services;

(f) an examination of 30 statistically selected financial commit-

ments;

(g) an examination of the Annual Activity Report and the decla-
ration by the Director-General of EuropeAid and the proce-
dure for preparing them.

Reliability of the accounts

16. As the Court already noted in its Annual Report on the EDF
concerning the financial year 2006 (16), the accounting system
used for the EDF does not have all the features necessary for effi-
cient and effective reporting of economic information on an
accruals basis. Consequently, the transformation of cash-based
data into accrual-based annual accounts for the EDF requires
extensive manual processing which increases the risk of error.
Moreover, the financial impact of variations in currency exchange
rates cannot be identified separately by the accounting system nor
can it be extracted manually (17). The integration of the EDF into
the accounting system already used by the Commission to
account for budgetary expenditure was originally scheduled for
2006 but, due to technical difficulties, has been postponed on
several occasions and is now planned for the start of 2009.

16. The introduction of the new accounting system as from 2009 will
overcome current limitations. The manual processing is subject to rigor-
ous controls in order to reduce risks. The current accounting system of the
EDF does not provide for the identification of the financial impact of
variations in currency exchange rates, but nevertheless the net result for
the financial year 2007 includes the gains and losses due to exchange
rate differences.

Moreover only 9 % of payments are executed in currencies subject to
exchange rate fluctuations. Therefore, the Commission does not consider
these potential exchange differences to be material in relation to the
accounts as a whole.

17.
In 2007 the Commission further fine-tuned and improved its
approach to calculating the provision by applying a specific implemen-
tation rate to each type of contract (grants, construction work, services
and supplies).

An individual analysis of each contract (there are around 8 000 ongo-
ing contracts) would give rise to a disproportionate workload with respect
to the mathematical approach currently used. The Commission plans to
launch a study in order to reinforce the criteria used in this approach.

17. The annual accounts contain a provision for the costs
incurred in the reporting period but for which no invoices have
been received at the year-end. This provision is statistically esti-
mated on a number of assumptions and amounts to 2 087 mil-
lion euro, or 83 % of total liabilities. As the Court observed in its
Annual Report on the EDF concerning the financial year
2006 (18), the validity of the assumption concerning the linearity
of project expenditure has not been demonstrated by the Com-
mission. The Court’s analysis (19) indicates that the method used
by EuropeAid may lead to an understatement of accrued expen-
diture. It is however not possible to quantify the impact on the
consolidated balance sheet at the end of 2007.

(16) Paragraph 15 (OJ C 259, 31.10.2007).
(17) Its disclosure is required by IPSAS 4 — The Effects of Changes in For-

eign Exchange Rates.

(18) Paragraph 17.
(19) As insufficient information was available relating to the situation at
the end of 2007, the Court examined the validity of the method by
checking the provision as at 31 December 2006 for a sample of 60
individual contracts statistically selected and relating to 18 projects in
13 ACP countries.

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18. The amount of guarantees disclosed in note 1.4 to the
financial statements was 1 004 million euro as at the end of
2007. The Court found that this amount is overstated by 4,1 %.

18.
In 2007 the Commission made significant efforts to reinforce the
quality of the information recorded in the accounting system. During the
annual closure of accounts, additional verifications and corrections were
made in order to establish the annual accounts. As a result, the impact
on the annual accounts is very slight and is not considered to be signifi-
cant.

Legality and regularity of the underlying transactions

Substantive testing of transactions

Project Commitments

19. The Cotonou Agreement (20) requires that financing agree-
ments between the Commission and the ACP State or States con-
cerned are drawn up within 60 days of the Commission’s decision.
The Court’s audit revealed that a significant number of financing
agreements (eight out of 30 Commission decisions examined)
were not signed by the recipient country within this time limit.

19. The Commission and the recipient countries have not breached the
60-day rule laid down in the Cotonou Agreement, since this rule con-
cerns the drawing up and not the signing of the financing agreements.
The deadline for signing financing agreements is 31 December of year
n + 1, year n being the year in which the Commission’s financial com-
mitment was adopted (Article 54(2) of the Financial Regulation appli-
cable to the 9th EDF). The Commission follows the diligent practice of
not only drawing up but also signing almost all financing agreements
within 60 days of its decision.

20.
Frequent errors (five errors affecting four out of the 15 indi-
vidual legal commitments checked) were found concerning the
legally prescribed bank guarantees in support of tenders and con-
tracts. In the case of one individual legal commitment, a deroga-
tion to tendering rules was given although the legal condition
allowing this was not fulfilled.

20. The Commission considers that there is no financial risk since no
payments are made before receipt of the bank guarantee.

With regard to the derogation, the Commission considers that it was jus-
tified on the grounds of extreme urgency.

21. The Commission fully supports the Court’s request for obtaining
from UN organisations necessary supporting evidence, and this principle
is clearly stipulated in the FAFA. As soon as the Commission was
it
informed by the Court of difficulties encountered in this respect,
approached its counterparts at the UN in order to find a solution and to
ensure that the Court received the information required.

Project Payments

21. Out of eleven payments to UN organisations selected, the
legality and regularity of two payments could not be fully audited
because the Court could not obtain the underlying documenta-
tion from the UN organisations concerned (21). Therefore, the
Court cannot conclude on the legality and regularity of these
transactions. Furthermore, the Court draws attention to the fact
that the audit of the other UN transactions was hampered by
inadequate cooperation by the UN organisations and was even-
tually made possible only thanks to timely intervention by the
Commission.

(20) Article 17, paragraph 2, of Annex 4.
(21) United Nations Population Fund and United Nations Development

Programme.

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22. The Court’s audit of payments authorised by Delegations
and EuropeAid’s central services revealed a material level of error
(27 errors affecting 24 out of 120 transactions examined) affect-
ing the amount of the underlying transactions audited. Most of
these errors are serious (22) and mainly concern:

22. The control system established by the Commission to verify the
legality and regularity of the expenditure is based on the work of exter-
nal auditors and supervisors and on internal controls. The Commission
is aware that this system entails a certain residual risk of error. However,
since it is impossible to verify all the transactions given the costs involved
in such control measures, the Commission will continue to improve its
system based on a cost/effectiveness ratio providing reasonable assurance.

— the eligibility of the expenditure, such as payments made out-
side the permitted period, payment of VAT, payment in
excess of the allowed budget and payment of types of expen-
diture not provided for by the contract (17 errors affecting
15 out of the 120 transactions examined);

— prefinancing cleared although expenditure had not yet been
incurred (six errors affecting six out of the 120 transactions
examined);

— payments of improper sums as a result of calculation errors,
payment for quantities declared that did not correspond to
reality and technical requirements for works not respected
(three errors affecting three out of the 120 transactions
examined).

23. Most of the errors should have been prevented or detected
and corrected by the authorising officers before clearances of pre-
financing or payments were authorised. Other errors are
explained by inadequate controls carried out by supervisors or
auditors. This indicates weaknesses in the supervisory and con-
trol systems (see paragraphs 32 to 47). While audits planned by
the Commission might detect and correct some errors, the level
of residual error is likely to remain material (see paragraph 39).

23. Most of the cases referred to relate either to payments made on the
basis of an auditors’ report and cost statements drawn up by the con-
tracting authority, or clearances of advances that can subsequently be cor-
rected.

24. The Court’s audit also revealed other recurring errors that
may have an impact on the amount of the underlying transac-
tions, mainly concerning legally prescribed bank guarantees and
tender and contracting requirements (16 errors affecting 15 out
of the 120 transactions examined). Errors which do not have an
impact on the amount of the underlying transactions have also
been identified, such as premature payments, the lack of visibility
given to the EDF’s financial support and expenditure allocated to
the wrong programme estimate (six errors affecting six out of the
120 transactions examined).

24. Two cases relate to extensions of guarantees covering contracts
being performed. There was therefore no residual risk. In all the other
cases, the guarantees were provided after the contract had been signed,
but no payment was made before receipt of the guarantees. There was
therefore no financial risk.

In April 2008 the Commission published a manual on the visibility of
the EU for external actions.

(22) For the Court, errors are classified as ‘serious’ if their rate exceeds 2 %.

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Budget support commitments

25. The Cotonou Agreement states that direct budgetary assis-
tance (budget support) shall be granted where public expenditure
management is sufficiently transparent, accountable and effec-
tive (23). The Commission interprets this condition dynami-
cally (24). In its view, the weaknesses affecting public finance
management at the time of the financing decision do not preclude
the launch of a budget aid programme, provided that the will for
reform exists and the reforms planned are deemed to be satisfac-
tory. The European Parliament has questioned the Commission’s
‘dynamic interpretation’ of the eligibility criteria for budget sup-
port and stated that budget support should only be undertaken in
countries that already meet a minimum standard of credible man-
agement of public finances (25).

26. The Court’s audit showed that in five out of the 15 com-
mitments examined (26), budget support is provided to ACP States
where the requirements of the Cotonou Agreement for public
expenditure management to be sufficiently transparent, account-
able and effective are not met. The Court found serious weak-
nesses in the internal oversight of the budget, accounting systems,
public procurement or anti-corruption measures. Important mat-
ters of concern are the failure to produce timely audited accounts
and the ineffectiveness of external control which, as the Court has
already underlined, are essential to demonstrate transparency
and accountability. Providing budget support in these conditions
implies a very high fiduciary risk. In its Annual Report on the

(23) Article 61(2)(a).
(24) See paragraphs 28 and 29 of Special Report No 2/2005 concerning

EDF budget aid to ACP countries (OJ C 249, 7.10.2005).

(25) European Parliament report of 22 April 2008 on discharge in respect
of the implementation of the budget for the Sixth, Seventh, Eighth
and Ninth European Development Funds for the financial year 2006,
point 32.

(26) The 5 commitments relate to Burundi, Central African Republic,
Guinea-Bissau and Haiti. Budget support commitments for these
countries in 2007 amount to 83,7 million euro i.e. 24,9 % of budget
support commitments.

25.
The Commission is aware that the ‘dynamic interpretation’
approach has been questioned by the European Parliament in its review
of the follow-up to the 2006 discharge recommendations, as noted in
the Court’s observations. Nevertheless, the Commission continues to con-
sider that this approach is useful and appropriate on a country-by-
country basis as it allows the Commission to better support improvements
in Public Finance Management (PFM) systems and in so doing enhances
the overall development impact of budget support for the beneficiary.
Apart from being methodologically difficult, establishing ex-ante bench-
marks applicable to all countries would reduce the Commission’s capac-
ity to support PFM reforms both where such benchmarks would not be
met as well as where they would be met. The Commission’s approach,
therefore, focuses on a comprehensive diagnostic review using the Public
Expenditure and Financial Accountability (PEFA) methodology, the need
for a credible and relevant reform strategy and the monitoring of its sat-
isfactory implementation. Thus, as most other donors (including the
Bretton Woods Institutions), the EC uses the initial PFM diagnostic as
the baseline against which progress is benchmarked in the implementa-
tion of the reform strategy. Whilst the Commission acknowledges that
its assessments of PFM reform progress need to be more structured and
formalised, it notes that the increasing evidence produced, as more PEFA
assessments become available, will allow it to better inform its assess-
ment of a country position and its pace of progress. Finally, the Com-
mission recalls that eligibility is verified throughout all programme
phases and that in the particular case of countries in fragile situations,
the Commission manages the ensuing risks by typically requiring the
existence of an International Monetary Funds (IMF) programme address-
ing basic issues such as cash management and treasury control.

26. The Commission does not agree with the Court’s assessment
regarding the four countries in question. As indicated in paragraph 25,
all commitments in those States in fragile situations mentioned by the
Court were made following an evaluation of sufficient positive progress
in PFM systems, backed by IMF assessments. The countries concerned
have subsequently continued to show progress in PFM and have remained
on track for further budget support.

The Commission did not understand the Court’s recommendation as a
request to set minimum standards applicable to all countries and, as out-
lined in paragraph 25, does not consider it appropriate. During 2007,
the Commission continued to apply the dynamic approach, which it con-
siders the appropriate one.

Anti-corruption measures are analysed in the context of Financing
Agreements (FAs) and monitored in the framework of Delegations’ PFM
Annual Reports.

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EDF concerning the financial year 2006 (27), the Court recom-
mended that compliance with the Cotonou Agreement should be
benchmarked against baseline requirements. This recommenda-
tion has not been acted upon.

In several cases (seven out of 33 financing agreements
27.
examined), provisions of the financing agreements for budget
support were incomplete or unclear; they did not contain the gen-
eral conditions for budget support, or ambiguously defined the
method for the calculation of the amounts for disbursement; or
referred to commitments made by government without defining
a due date and the consequences when these commitments are
not met.

27. The Commission invokes the legal application of the Cotonou
Agreement in all its FAs and assessments of tranche releases. The Com-
mission nevertheless recognises that it is preferable that the eligibility cri-
teria are explicitly mentioned in financing agreements and the general
conditions therein, in line with the Guidelines on the Programming,
Design and Management of GBS (General Budget Support). The
Commission will therefore seek to further improve the quality of financ-
ing agreements under the 10th EDF. On the establishment of dates for
the assessment of disbursement conditions, the timing included in the FA
is only indicative.

Budget support payments

28. The Court’s audit of budget support payments revealed a
material level of error (four errors affecting four out of 30 pay-
ments examined) affecting the amount of the underlying transac-
tions audited. The cases identified concern calculations of
amounts for disbursement based on a positive conclusion as
regards progress in public finance management which is not con-
sistent with the underlying assessment of the situation and the use
of a calculation method not provided for by the Financing Agree-
ment. In three other cases, payments were made without up-to-
date reports concerning public finance management being
available. This implies a risk that eligibility conditions were not
met.

28.
In each of the four cases cited by the Court, the Commission
sought to arrive at an informed decision based on a reasoned interpre-
tation of the provisions of the respective Financing Agreements.

In two out of the three cases (Botswana and Namibia) reports concern-
ing the PFM situation were available in accordance with the guidelines
on GBS, and eligibility was demonstrated. In the case of New Caledonia
(2007BS-EE16) the commitments referred to by the Court are accom-
panying measures and not conditions for disbursement.

(27) Paragraph 55.

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29.
In a significant number of cases (six out of 30 payments
examined), the Commission did not demonstrate in a structured
and formalised way whether the payment conditions relating to
public finance management were respected. Situations encoun-
tered include assessments of progress being unreasonably opti-
mistic or based on outdated or inappropriate information,
conclusions not supported by the underlying information, reli-
ance put on future occurrences rather than on events that had
taken place and the inaccurate appraisal of indicators.

29. The Commission agrees that it is necessary to demonstrate in a
structured and formalised way that payment conditions related to PFM
are respected.

The primary tool used by the Commission to assess a PFM system is the
PEFA assessment, which is complemented by other information on the
most recent progress in PFM reforms (often in concert with other devel-
opment partners).

When making a payment, the Commission will base the decision on all
the available information. In addition, Delegations are required to sub-
mit an Annual PFM Report, providing information on recent and
planned reforms. Nevertheless, the Commission agrees that for some of
the payments cited, Delegations could have been more explicit about the
information they used to make their assessments.

As regards the observation related to being unreasonably optimistic in
making assessments, the Commission takes into account PFM progress
being made, the credible and relevant commitment to future reforms, the
results of dialogue with partner countries and development partners, and
the provision of complementary assistance. Thus, the Commission bal-
ances the progress made, the political commitment to reform and the
remaining areas of concern to arrive at an informed decision.

31.
EuropeAid’s AAR 2007 and its annexes included legality and
regularity indicators as for instance the results of ex-post controls and
the implementation of the Annual Audit Plans. Results of recovery
activities carried out by EuropeAid services as well as of other controls
were available to the Director General.

The reasonable assurance of the Director General is not derived in a
mechanical way from one single indicator. The declaration is based on
the appreciation of a number of elements, including: regular manage-
ment supervision activities, results of regular assessments of the function-
ing of the internal controls, regular reporting from the Authorising
Officers by sub-delegation, implementation of the action plans stemming
from the recommendations of the different control bodies, results of
ex-post controls.

Activity Report by the Director-General of EuropeAid

30. The activity report by the Director-General of EuropeAid
presents the policy achievements, the management performance
of the services and the main results of the controls. The report
also reflects the Commission’s follow-up of recommendations
made by the Court of Auditors, the Internal Audit Service (IAS)
and the Internal Audit Capability (IAC) of EuropeAid.

31. The activity report includes specific indicators concerning
legality and regularity (28). The indicators do not however include
financial
information such as coverage of audits, error rates
detected by the various controls, the amount of recovery orders
issued and the amounts actually recovered. It is therefore unclear
on what basis the Director-General of EuropeAid declared that he
had obtained reasonable assurance that the control procedures
put in place gave the necessary guarantees concerning the legal-
ity and regularity of the underlying transactions. The Court’s audit
revealed a material level of error and weaknesses in the supervi-
sory and control systems.

(28) EuropeAid Annual Activity Report 2007, p. 57.

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EuropeAid is committed to improve the presentation of these ele-

32.
ments of its control strategy.

33. The Commission agrees with the Court that adequate staffing,
both in terms of number and skills, represents a challenge.

Supervisory and control systems

Overall control strategy

Following the Commission’s Action Plan towards an Inte-
32.
grated Internal Control Framework and the Court’s recommen-
dation (29) regarding the establishment of EuropeAid’s overall
control strategy, the description of the key management and con-
trol systems has been developed in internal control templates
included in the activity report by the Director-General of Europe-
Aid. Whilst this constitutes significant progress, it does not con-
tain yet important elements such as key indicators supporting the
level of assurance to be obtained, the coverage of some controls
and the coordination between ex-ante and ex-post controls.

33. The number of Commission staff compared to the funds
committed is decreasing (30). In addition, no significant increase
of staff is foreseen despite the forecasted substantial increase of
commitments under the 10th EDF. Whilst it is, of course, legiti-
mate to assure an efficient use of human resources, there is a risk
that shortage or inadequate distribution of staff or unavailability
of specific skills and knowledge has an impact on the quality of
the controls, verifications and monitoring. Concerns in this
respect have been expressed by the European Parliament (31). In
addition, the increase of budget support within the EDF creates
the need for specific skills and knowledge, and the Court notes
that EuropeAid’s Internal Audit Capability (IAC) has recom-
mended that a human resources policy in relation to budget sup-
port is developed to incorporate objectives on numbers, skills and
knowledge of budget support staff.

(29) See Opinion No 2/2004 of the Court of Auditors of the European
Communities on the ‘single audit’ model (and a proposal for a Com-
munity internal control framework) (OJ C 107, 30.4.2004), the
Annual Report on the activities funded by the sixth, seventh, eighth,
and ninth EDFs concerning the financial year 2005 (OJ C 263,
31.10.2006, p. 205), paragraph 40, and the Annual Report on the
activities funded by the sixth, seventh, eighth, and ninth EDFs con-
cerning the financial year 2006, paragraph 54.

(30) 4,8 staff per 10 million euro committed in 2004 and 4,2 in 2007.
(31) European Parliament resolution of 24 April 2007 with observations
forming an integral part of the decision on the discharge for imple-
mentation of the budget of the Sixth, Seventh, Eighth and Ninth Euro-
pean Development Funds for the financial year 2005 (OJ C 74 E,
20.3.2008) and European Parliament resolution of 22 April 2008
with observations forming an integral part of the decision on the dis-
charge for implementation of the budget of the Seventh, Eighth and
Ninth European Development Funds for the financial year 2006.

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Implementing organisations

34. The Court found that small entities which manage pro-
gramme estimates (32), and beneficiaries of grant agreements are
often characterised by weak internal control systems. These enti-
ties, for instance, often have no appropriate accounting system to
record project expenditure. In addition, the audits mandated by
implementing organisations often fail to detect issues affecting
the legality and regularity of transactions.

34. To improve the quality of the internal control systems of the man-
agement units, the Commission has produced guides for them and pro-
vides regular training (in 22 countries in 2007). It is also studying the
possibility of creating accounting and financial management tools for all
users.

Since February 2006, Terms of Reference concerning verification of
expenditure have
formed an integral part of grant agreements
(Annex VII). The Terms of Reference strictly define the scope and meth-
odology to be applied by the auditor authorised by the recipient organi-
sation, and contribute to improving controls.

Supervisors

35.
For important works, supply or service contracts, an exter-
nal supervisor is designated to direct and/or monitor the execu-
tion of the contract. In some cases, the Court’s audit has shown
that the quality of the controls carried out by supervisors was
inadequate which affected the legality and regularity of transac-
tions.

35. The Commission has asked its Delegations to reinforce control of
the work carried out by supervisors. It will examine the possibility of
introducing a mechanism designed to ensure that the quality of the con-
trols carried out by the supervisors meets the requirements concerning the
legality and regularity of transactions, and to increase the effectiveness of
the supervisory tasks.

ACP States

36. The Commission continued its efforts to increase the capac-
ity of the National Authorising Officer (NAO) administrations by
providing technical assistance, equipment and training in order to
enable effective control of EDF expenditure by NAO administra-
tions. Nevertheless, the lack of involvement by the ACP States in
many cases means that Delegations can place only limited reli-
ance on the controls performed by the NAO administrations,
resulting in a heavier workload for Delegation staff to ensure the
adequacy of controls.

Authorising officers in Delegations and central services of EuropeAid

37. The Court found weaknesses in the quality of some of the
checks made by authorising officers, notably in relation to the
authorisation of clearances of prefinancing and the scrutiny of
documentation justifying expenditure, including the work and
results of auditors, as well as in the follow-up of audit findings.
There is also an insufficient presence of Delegation staff in the
field, for instance to monitor supervisors.

(32) Public or semi-public agencies or departments of the State or States
concerned or the legal person responsible for executing the operation.

36. The Commission is continuing its assistance and training drive. In
2007, 1 430 participants from 22 ACP countries received full training
on the EDF’s financial and contractual procedures.

37. To ensure compliance with the provisions of the Financial Regu-
lation relating to the validation of expenditure by the authorising officer,
the Commission uses standard financial circuits and control lists for each
transaction performed, thereby contributing to the standardisation and
quality of the transactions.

The Commission will remind authorising officers of the principles of
clearance of advances. With regard to the monitoring of audits, the
authorising officers are careful to issue recovery orders whenever neces-
sary.

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39. The process by which risk analysis is to be performed is clearly
indicated in the Operational Guidelines for the Annual Audit Plan and
Risk Analysis. The Commission agrees that the process of the documen-
tation of the risk analysis should be reinforced.

The Annual Audit Plan identifies the audits to be launched, which are
generally linked to the verification of project expenditure. Some of these
audits will be launched and received in the same year (n + 1) while some
others in the following year (n + 2), depending on the pace of imple-
mentation of the project/programme and the audit process itself.

This results in adjustments to the initial plan, and each audit cancelled
or postponed requires proper justification. This does not automatically
imply that all the audits not started during the year are postponed. The
implementation rate of the 2007 audit plan as results from such adjust-
ments is 77 %. This is in line with previous years’ plans, which have a
life-cycle of 2 years.

Assurance is guaranteed by the fact that no payment subject to an audit
is executed before receiving and taking into account the results of such
an audit.

38. Audits of expenditure which are initiated by Delegations
and EuropeAid’s central services and entrusted to private audit
firms are a key component of the Commission’s supervisory and
control systems and are designed to contribute to the provision
of assurance over EDF expenditure.

39. The annual audit plan contains mandatory and risk based
audits. Due to insufficient documentation on the risk analysis,
there is a lack of clarity over the process by which the risk analy-
sis is performed and whether this process is consistently per-
formed by Delegations. The overall level of implementation of the
annual audit plan, specifically at Delegations, is low, at 55 % of
all audits planned being started within the year, the others being
postponed or sometimes cancelled. This is partly due to the Del-
egations’ limited capacity to organise and follow up audits. Fur-
thermore, even when audits were launched, the cycle is a lengthy
one with final reports being produced a significant amount of
time after the expenditure has been incurred. Such weaknesses in
the system may be to the detriment of the overall level of assur-
ance available as compared with that which was planned.

40. The Commission has made an important step forward in
the area of audits by issuing in October 2007 new terms of ref-
erence applicable to all audits. Though the effects of these have
yet to be seen due to such recent implementation, there are posi-
tive signs that they should enable more consistent reporting from
auditors, in particular with regard to the form of the audit opin-
ion given and the materiality threshold which is applied.

Monitoring by the central services of EuropeAid

41. The main tool for monitoring the Delegations is the Exter-
nal Assistance Management Reports (EAMRs), six-monthly man-
agement reports prepared by the Delegations. They are a periodic
information source which enables the devolved Delegations to
send EuropeAid’s central services the most important items of
information on internal organisation, project implementation and
external audits. Subsequently, EuropeAid’s central services pro-
vide feedback to the Delegations. Issues regularly reported by Del-
egations concern the lack of capacity and resources at NAO
administrations (see paragraph 36) and staff constraints (see para-
graph 33).

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42. There has been no centralised management information
relating to the coverage and results of the audits initiated in 2007
by the Delegations. This means that the level of assurance that can
be derived from these audits is much reduced compared with
what could be obtained if a robust management information sys-
tem were in place. An existing computerised tool, CRIS audit, has
been modified in order to facilitate its use, which was made man-
datory in January 2008. This recent implementation has not yet
allowed for an assessment of its effectiveness but the signs that it
will prove useful as a system for monitoring progress are posi-
tive. Certain refinements still need to be made to allow for the
assessment of audit coverage of expenditure and the use of this
system in collating, analysing and acting upon audit findings and
recommendations to enable ongoing assessment of issues and to
ensure that prompt and timely action is taken where necessary.

42.
EuropeAid has developed appropriate tools to conduct audits while
several mechanisms contribute to their quality control as well as to the
consolidation and use of the systemic audit findings.

The planning and follow-up of audit results are both ensured by the Del-
egations and Headquarters. No payment subject to an audit is autho-
rised before receiving and taking into account the results of such audit.
Results of previous audits are taken into account when establishing the
Annual Audit Plan.

EuropeAid follows the implementation of the AAP at central level and,
since 2005, has been performing a review of audit reports issued during
the year. The objective of this review is to contribute to the monitoring of
audit activity at Headquarters and in the Delegations and to further
improve the audit system based, inter alia, on an analysis of the typol-
ogy of audit findings.

For years, audits mandated by EuropeAid’s central services
43.
have been subject to rigorous control and a synthesis report is
produced annually to collate information from these with a view
to putting in place improvements to systems where necessary. A
similar exercise was undertaken during 2007 to address the audits
mandated by Delegations which represent the majority of audits.
The approach to this is methodical and covers main areas of inter-
est, such as adherence to the terms of reference. The report pro-
duced contained much factual
information on numbers and
classification of findings.

Verification by the central services of EuropeAid

44. Verifications by EuropeAid’s central services include mis-
sions to verify the functioning of the Delegations’ internal con-
trol systems, transactional ex-post controls and audits initiated by
EuropeAid’s central services.

45.
In 2007, EuropeAid’s central services carried out one moni-
toring mission to a Delegation consisting of an examination of
the set-up and functioning of the supervisory and control sys-
tems. The mission was well designed and provided practical rec-
ommendations for improvements to control systems but this is
the only mission of this kind that has taken place. In 2007
EuropeAid was developing a standardised methodology for these
missions. In this process, two pilot missions were carried out dur-
ing which priority was given to operational issues rather than the
functioning of the supervisory and control systems.

EuropeAid adopted a standardised methodology for these missions

45.
in March 2008.

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46.
EuropeAid’s transactional ex-post control system provides
an effective mechanism for the identification of errors affecting
formal aspects of transactions but is less effective at identifying
errors which have an impact upon the amount of the payment.
As mentioned in the Annual Report concerning the financial year
2006, the transactional ex-post control can therefore make only a
limited contribution to the overall assurance on systems and pro-
cedures, and the legality and regularity of the underlying transac-
tions. The Court’s review of a sample of transactions checked
ex-post also revealed that these checks had in some cases not been
appropriately documented,
that some errors had not been
detected and that findings were not always followed up in as
timely a manner as they could have been.

46.
Setting up a transactional ex-post control system and defining its
characteristics are both based on an appreciation of residual risk and of
the interaction with the other components of the control system. Ex-post
transactional controls provide an additional layer of assurance for the
appreciation of the elements which are subject to such control.

This covers payments, recoveries and clearance of pre-financing transac-
tions carried out by the Commission. The study of each transaction
entails a systematic checking of the applicable contractual conditions.

The documentation requested for each type of transaction selected is
clearly set out in the ex-post transactional control manual.

47. Risk-based audits initiated by EuropeAid’s central services
identify a high level of error. The documentation of the risk analy-
sis is not sufficient to demonstrate that EuropeAid has selected all
high risk subjects for audit.

47. The Commission agrees that the process of the documentation of
the risk analysis should be reinforced.

Internal audit

48. The principal objective of EuropeAid’s IAC is to assess and
evaluate the internal control system. The IAC performs its func-
tion effectively. The Court observes nevertheless that the risk
analysis of the IAC does not sufficiently take account of Europe-
Aid’s risk register and that the audit programme is not sufficiently
flexible to adapt to modifications over time of the perceived risk.
In 2007, the IAC completed audits on budget support, pool and
trust funds; the identification process; selected internal control
standards in selected Delegations and risk management in Delega-
tions as well as a number of follow-up audits. The conclusions of
the IAC are generally consistent with the Court’s findings.

48. The IAC risk analysis forms the basis for its own annual audit
plan. In addition, the risks in EuropeAid’s risk register are considered in
relation to the impact they have on the area to be audited. While the IAC
risk register might consider an area to be high risk that area might not
appear in the audit plan for a particular year because the business pro-
cess is not yet within the working practice of the DG or the management
cycle for certain programmes. The IAC risk register is updated several
times a year to take into account any evidence of changes to the risk envi-
ronment of EuropeAid.

49. The Commission’s Internal Audit Service (IAS) carried out
an audit on ex-post control activities (33) in EuropeAid. Its conclu-
sions corroborate the Court’s findings regarding the overall con-
trol strategy (see paragraph 32) and the planning and monitoring
of audits (see paragraphs 38 and 42).

49. The IAS audit was carried out at a time when the control strategy
was being prepared for formalisation. Its conclusions could not take into
account the developments that occurred afterwards.

(33) Transactional ex-post controls and financial audits.

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50. The IAS also performed a final follow-up audit on NGOs
funding in EuropeAid and an audit of the eligibility of costs under
the financial and administrative framework agreement (FAFA)
with the United Nations. The latter confirmed that the design of
the FAFA is appropriate, but also that the control mechanisms
still need to be effectively and further implemented at both project
and partner levels, for instance by strengthening controls on pay-
ments and ensuring an appropriate coverage of verification mis-
sions (34).

50.
Significant progress has been made by EuropeAid since comple-
tion of the IAS audits carried out in 2006 and the beginning of 2007
on the FAFA:

— the formal analysis of the compliance of the UN agencies with the
internationally recognised standards was conducted (97 % cover-
age),

— in line with the increase in the Commission’s contributions to the
UN, there was a significant increase in the number of UN verifi-
cation missions (39 in 2007 compared with 7 in 2005-2006),

— the planning of these verifications is carried out annually,

— their results are consolidated,

— the Commission and the UN have signed common guidelines aimed

at improving the quality of reporting.

Conclusions and recommendations

51. Based on its audit work, the Court concludes that EDF
accounts for the financial year ending 31 December 2007 are, in
all material respects, reliable but the Court draws attention to the
observation in paragraph 17 concerning the provision for costs
incurred.

52. Based on its audit work, the Court concludes that:

(a)

except for the effects of the matter described in para-
graphs 19, 20 and 27, the transactions underlying the rev-
enue and commitments of the EDFs are free from material
error. Furthermore, the Court draws attention to the high
fiduciary risk for the cases mentioned in paragraphs 25
and 26;

(b)

the transactions underlying the payments of the EDFs are
affected by a material level of error.

53. The Court’s assessment of the supervisory and control sys-
tems for the European Development Funds is that they are par-
tially effective. Table 3 gives an overview of
the Court’s
assessment of EuropeAid’s supervisory and control systems (35).

53. Given the financial and human resources available to it, the Com-
mission considers that it has set up control systems which provide rea-
sonable assurance.

(34) Annual report to the discharge Authority on internal audits carried
out in 2007 (presented by the Commission (SEC(2008) 2361 final of
30.7.2008)).

(35) See chapter 8, External aid, development and enlargement, of the
Annual Report of the Court of Auditors on the implementation of the
budget concerning the financial year 2007 for an assessment of the
supervisory and control systems of DG ECHO.

296

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

54. The Commission welcomes the Court’s recognition of the continu-
ous progress made during the previous years.

54.
EuropeAid has continued to remedy some shortcomings
mentioned by the Court in its previous Annual Reports. Europe-
Aid has developed new terms of reference for audits and imple-
mented a management information system, CRIS audit, relating
to the coverage and results of the audits. The Court welcomes the
efforts made by EuropeAid to develop a control strategy but there
remains a lack of clarity as to the certain important elements, in
particular concerning the coverage of some controls, the coordi-
nation between ex-ante and ex-post controls and key indicators
supporting the overall assurance to be given by the Director Gen-
eral.

55. There is a need to continue to pursue efforts to improve the
design and/or implementation of some systems The following
recommendations should be considered in this context:

55.

(a) EuropeAid’s control strategy should include key indicators
supporting the level of assurance to be given by the Director-
General, the coverage of some controls, the coordination
between ex-ante and ex-post controls, as well as the human
resources required;

(a) EuropeAid is committed to improve the presentation of these ele-

ments of its control strategy.

(b) a review should 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 con-
trols;

(b) The Commission agrees with the Court that adequate staffing, both
in terms of number and skills, represents a challenge and is ready
to carry out the review.

(c)

the management of implementing organisations should be
better supported. This should involve greater presence of
Delegation staff in the field, supporting accounting systems
and training especially for projects implemented by pro-
gramme estimates;

(c) EuropeAid will develop several tools in order to improve the man-
agement of implementing organisations and will introduce new
terms of reference for audits of new programme estimates.

(d) checks performed by the Delegations before authorising pay-
ments should better scrutinise the payment requests and
intensify the focus on the reality, eligibility and accuracy of
the expenditure. The quality of the work performed by super-
visors and auditors should be better monitored;

(d) To ensure compliance with the provisions of the Financial Regula-
tion relating to the validation of expenditure by the authorising
officer, the Commission uses standard financial circuits and control
lists for each transaction performed, thereby contributing to the
standardisation and quality of the transactions.

(e)

the implementation of CRIS Audit should allow monitoring
of the audit coverage and the audit results. Qualitative infor-
mation as to the recommendations made and the improve-
ments which should be put in place to address the findings
is vital to ensure that the ultimate objectives of commission-
ing audits are met;

(e) The entry into force of the new CRIS-Audit module on the 1 Janu-
ary 2008, by linking the amount of the contract to be audited to
the audited amount, will facilitate the calculation of the audit cov-
erage, as well as the analysis of audit findings, as per their typol-
ogy.

The Commission agrees with the Court’s recommendation and
yearly collates and analyses audit results with a view to learning les-
sons and to introducing appropriate improvements.

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297

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(f)

(g)

transactional ex-post controls should include a better exami-
nation of supporting documentation to ensure that transac-
tions are not affected by errors of eligibility and occurrence
as well as to verify whether checks performed before the pay-
ment was authorised were adequate;

the standardised methodology for monitoring missions
should be finalised and the number of such missions
increased. The new methodology should maintain the focus
on the examination of the set-up and functioning of the
supervisory and control systems.

(f) The Commission is continuously working to further improve its sys-
tem and will pay specific attention to the issue of the detail of sup-
porting documentation on programme estimates.

(g) EuropeAid adopted a standardised methodology for these missions
in March 2008 and the number of monitoring missions is planned
to be increased.

56. As regards budget support, the following recommendations
should be considered:

56.

(a)

compliance with the Cotonou Agreement should be bench-
marked against baseline requirements, such as the availabil-
ity of timely published and audited accounts, to be met
before budget support is granted;

(a) As stated in paragraph 25, as part of the dynamic approach, the
Commission uses the initial PFM diagnostic and the programme of
reform as the baseline against which progress is benchmarked on a
country-by-country basis and considers the setting of common
minimum standards to be uniformly applied for all countries as
inappropriate.

(b)

(c)

the performance indicators used should permit clear evi-
dence of progress in public finance management to emerge
where appropriate. This could be achieved by strengthening
indicators which measure progress of results over time in
combination with process indicators on the performance of
one-off events;

(b) Compared to other sectors, it is more difficult and complex to define
result indicators for PFM. The Commission nevertheless favours the
use of result indicators, where available, that measures the effect of
reforms, but also uses process indicators and measures to monitor
the progress in the implementation of reform programme.

in order to set out its conclusions as regards progress in pub-
lic finance management in a structured manner, the Com-
mission should ensure that the data used as a basis for
disbursement decisions is reliable and should rely more on
measurements of events that have already taken place than
on predictions of future occurrences;

(c) When assessing eligibility, the Commission takes into account a
balance between past performance and future commitments. At the
same time, the Commission agrees that when assessing disburse-
ments the emphasis should be placed on demonstrating achieve-
ments.

(d) EuropeAid should ensure, before the start of a budget sup-
port programme, that there is a clear and complete assess-
the
ment of
recipient country has a credible and relevant reform pro-
gramme to address all significant weaknesses over a foresee-
able timetable;

the public finance management and that

(d) The Commission agrees that PFM systems need to be assessed before
the provision of BS and the Commission prefers to carry out such
an assessment within the PEFA framework. It is expected that in all
countries receiving BS from the EDF, PEFA assessments will have
taken place before the end of 2008. In most of cases, governments
already have PFM reform programs in place which may have to be
adapted according to the findings. In case new programs need to be
drawn up, the Commission has to be convinced of the government’s
commitment to develop and implement required PFM reform mea-
sures, before BS is provided.

298

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Official Journal of the European Union

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(e)

the quality of Financing Agreements should be improved by
including general conditions in all cases, unambiguous stipu-
lations and clear requirements for progress of public finance
management;

(e) The Commission will seek to ensure that FAs will include General
Conditions and that the assessment of PFM eligibility will be car-
ried out in a structured and formalised manner. Specific PFM per-
formance indicators within variable tranches need to be clear and
precise allowing to measure progress over time.

(f)

a human resources policy should be developed on the basis
of an analysis of the skills and knowledge needed in relation
to the management of budget support in view of its increas-
ing importance.

(f)

In addition to adapting personnel recruitment to the specific needs
of BS programs, the responsible Commission services are carrying
out a significant number of training courses for EC staff from Del-
egations and HQs, on specific issues related to BS (PFM, macro-
economic, performance measurement, sector specific courses, etc.).

Table 1 — Cumulative use of EDF resources managed by the Commission at 31 December 2007

Situation at end of 2006

Budgetary implementation during the financial year 2007

Situation at end of 2007

(million euro)

.

1
0
1
1
2
0
0
8

.

Global
amount

Implementa-
tion rate (2)

7th EDF

8th EDF

9th EDF

Global
amount

7th EDF

8th EDF

9th EDF

Global
amount

Implementa-
tion rate (2)

E
N

A — RESOURCES (1)

37 269,8

– 71,9

– 211,0

341,8

58,8

10 583,0

10 839,3

15 906,4

37 328,7

B — USE (3)

1. Financial commitments

34 107,2

91,5 %

– 71,9

– 211,0

3 455,1

3 172,2

10 583,0

10 839,3

15 857,1

37 279,4

99,9 %

2. Individual legal commitments

28 699,1

77,0 %

– 5,5

35,0

3 317,3

3 346,9

10 517,2

10 484,6

11 044,2

32 046,0

85,8 %

3. Payments

23 826,0

63,9 %

96,7

483,4

2 293,9

2 874,0

10 340,8

9 605,5

6 753,7

26 700,0

71,5 %

C —

OUTSTANDING PAYMENTS (B1-B3)

10 281,2

27,6 %

242,2

1 233,8

9 103,4

10 579,4

28,3 %

D — AVAILABLE BALANCE (A-B1)

3 162,6

8,5 %

0,0

0,0

49,3

49,3

0,1 %

(1) Initial allocations to the 7th, 8th and 9th EDFs, interest, sundry resources and transfers from previous EDFs.
(2) As a percentage of resources.
(3) 9th EDF amounts include Members states voluntary contributions to the African Peace facility (financial commitments: 39,1; individual legal commitments: 37,0; payments: 29,2).
Source: Court of Auditors, based on the EDF Reports on financial implementation and Financial statements at 31 December 2007.

1. Financial commitments

2. Individual legal commitments

3. Payments

Table 2 — Financial implementation in the financial years 2003-2007 inclusive

2003

3 395,8

2 742,7

2 179,5

2004

2 375,2

2 746,3

2 197,8

2005

3 035,1

2 652,0

2 489,1

2006

2 718,7

3 072,6

2 761,9

(million euro)

2007

3 172,2

3 346,9

2 874,0

Source: Court of Auditors, based on the EDF Reports on financial implementation and Financial statements at 31 December 2007.

O

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n
a
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a
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n

i

2
9
9

Table 3 — Assessment of supervisory and control systems

Monitoring missions

External audits

Key internal control

System concerned

Controls
performed before
transactions are
authorised

Quality

Quantity

Quality

Ex-post controls

Quantity/
implementation
of the audit plan

Follow-up of
individual audit
findings/Effective
recovery proce-
dures

Overall monitor-
ing by central
services of audits
commissioned by
Delegations

Internal audit

Overall assessment

Central services Europe-
Aid

Delegations

Legend:

N/A

N/A

N/A

N/A

Effective

Partially effective

Not effective

N/A

Not applicable: does not apply or not assessed

Results of transaction testing

Sample estimate of the proportion of transactions affected by an error

Error rate

Project payments

Budget aid payments

30 %

Above 5 %

30 %

Between 2 % and 5 %

3
0
0

E
N

O

f
f
i
c
i
a
l

J
o
u
r
n
a
l

o
f

t
h
e

E
u
r
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p
e
a
n
U
n
o
n

i

.

1
0
1
1
2
0
0
8

.

Table 4 — Follow-up of key Statement of Assurance observations

Court observation

Action taken

Court analysis

Commission reply

.

1
0
1
1
2
0
0
8

.

1.

2.

3.

4.

5.

The control strategy should be established and made opera-
tional by the end of 2007. As already indicated by the Court,
it should establish clear and consistent objectives, ensure coor-
dination and set the type and intensity of checking. This
should necessarily entail a balancing act between the costs of
the various controls and the accompanying benefits, whilst
taking account of the tolerable risk of errors in the underlying
transactions. The control strategy should include a well-
structured and documented risk analysis that formally involves
the Delegations in a fully participative manner.

(Annual Report concerning the financial year 2006, para-
graph 54(a)).

The management of projects financed by work programmes
should be better supported. This should involve greater pres-
ence of Delegation staff in the field supporting accounting sys-
tems and training. Carrying out more audits at an early stage
of the implementation of projects would also help to monitor
and, where necessary, improve the quality of the control sys-
tems implemented by beneficiaries.

(Annual Report concerning the financial year 2006, para-
graph 54(b)).

Checks performed by the Delegations before authorising pay-
ments should better scrutinise the payment requests and inten-
sify the focus on the reality, eligibility and accuracy of the
expenditure. The quality of the work performed by supervi-
sors should be better monitored.

(Annual Report concerning the financial year 2006, para-
graph 54(c)).

The quality of the controls performed by external auditors
should be enhanced by ensuring that the new terms of refer-
ence include a clear definition of the purpose of the audit; the
materiality threshold to be applied; the sampling; the nature of
the audit procedures to be performed; guidance on how errors
should be treated; and how conclusions are to be reported
upon. These standard terms of reference should also be used
for all external audits initiated by the Delegations.

(Annual Report concerning the financial year 2006, para-
graph 54(d)).

The central monitoring of the external audits organised by the
Delegations should be improved so that the results can be
effectively communicated to all relevant levels of manage-
ment. This should be enhanced by the availability, by the end
of 2007, of a management system that provides information
on the audit process and facilitates access to relevant audit
results

(Annual Report concerning the financial year 2006, para-
graph 54(e)).

EuropeAid has formalised its overall control strategy and
included it in the activity report by the Director-General of
EuropeAid. It presents a description of the control processes
for each of the various management modes. There remains a
lack of clarity as to certain important elements of the control
strategy, in particular the coverage of some controls, the coor-
dination between ex-ante and ex-post controls and key indica-
tors supporting the overall assurance to be given by the
Director General.

EuropeAid’s control strategy should include key indicators
supporting the level of assurance to be given by the Director-
General, the coverage of some controls, the coordination
between ex-ante and ex-post controls, as well as the human
resources required (Annual Report concerning the financial
year 2007, paragraph 55(a)).

EuropeAid is committed to further improving the presentation of these
elements of its control strategy.

EuropeAid has pursued its efforts to improve the quality of
projects managed in the form of programme estimates. To
that end, it has produced a new practical guide and specific
training courses are held regularly in the ACP countries.

The management of implementing organisations should be
better supported. This should involve greater presence of Del-
egation staff in the field, supporting accounting systems and
training especially for projects implemented by programme
estimates. (Annual Report concerning the financial year 2007,
paragraph 55(c)).

EuropeAid will develop several tools in order to improve the manage-
ment of implementing organisations and will introduce new terms of
reference for audits of new programme estimates.

No specific actions were taken by EuropeAid. The number of
errors revealed following the Court’s audit of individual pay-
ments corroborates the observation that the financial control
exercised by the Delegations needs to be strengthened.

Checks performed by Delegations before authorising pay-
ments should better scrutinise the payment requests and inten-
sify the focus on the reality, eligibility and accuracy of the
expenditure. The quality of work performed by supervisors
should be better monitored. (Annual Report concerning the
financial year 2007, paragraph 55(d)).

The Commission is aware that improvements need to be made to the
control of the execution of certain types of contract, and is examining
the possibility of introducing a mechanism designed to ensure that the
quality of the controls carried out by the supervisors meets the require-
ments concerning the legality and regularity of transactions. It will
remind authorising officers of the principles of clearance of advances.

In October 2007, EuropeAid has issued new terms of refer-
ence applicable to all audits. Though the effects of these have
yet to be seen due to such recent implementation, there are
positive signs that they should enable more consistent report-
ing from auditors, in particular with regard to the form of the
audit opinion given and the materiality threshold which is
applied.

Satisfactory action has been undertaken.

Modifications were made to the computerised tool, CRIS
Audit, in order to facilitate its use, which was made manda-
tory in January 2008. Certain refinements still need to be made
to allow for the assessment of the audit coverage and the use
of this system in collating, analysing and acting upon audit
findings and recommendations.

The implementation of CRIS Audit should allow monitoring
of the audit coverage and the audit results. Qualitative infor-
mation as to the recommendations made and the improve-
ments which should be put in place to address the findings is
vital to ensure that the ultimate objectives of commissioning
audits are met. (Annual Report concerning the financial year
2007, paragraph 55(e)).

The entry into force of the new CRIS-Audit module on 1 January
2008, which links the amount of the contract to be audited to the
audited amount, will facilitate the calculation of the audit coverage, as
well as the analysis of audit findings, according to typology.

The Commission agrees with the Court’s recommendation and yearly
collates and analyses audit results with a view to learning lessons and
to introducing appropriate improvements.

E
N

O

f
f
i
c
i
a
l

J
o
u
r
n
a
l

o
f

t
h
e

E
u
r
o
p
e
a
n
U
n
o
n

i

3
0
1

(Annual Report concerning the financial year 2006, para-
graph 54(f))

As the transactional ex-post controls are restricted in scope,
they can only make a limited contribution to the overall assur-
ance on systems and procedures and the legality and regular-
ity of the underlying transactions. Moreover, they are carried
out with much delay.

(Annual Report concerning the financial year 2005, para-
graphs 33 and 42).

Compliance with the Cotonou Agreement should be bench-
marked against baseline requirements, such as the availability
of timely published and audited accounts. A clear, formal pre-
sentation of the conclusions reached would require the param-
eters of the ‘dynamic interpretation’ to be made explicit, thus
enabling the appropriateness of disbursement decisions to be
assessed

(Annual Report concerning the financial year 2006, para-
graph 55(a)).

6.

7.

8.

9.

Court observation

Action taken

Court analysis

Commission reply

3
0
2

Verification of the Delegations by EuropeAid’s central services
should be enhanced by increasing the number of missions.

The missions are well designed and provide practical recom-
mendations for improvements to control systems. However,
the number of missions has not been increased.

The scope of the transactional ex-post controls still excludes
aspects related to legal commitments as well as detailed sup-
porting documentation of expenditure of work programmes.

The number of monitoring missions should be increased. They
should maintain the focus on the examination of the set-up
and functioning of the supervisory and control systems.
(Annual Report concerning the financial year 2007, para-
graph 55(g)).

Transactional ex-post controls should include a better exami-
nation of supporting documentation to ensure that transac-
tions are not affected by errors of eligibility and occurrence as
well as to verify whether checks performed before the pay-
ment was authorised were adequate. (Annual report 2007,
paragraph 55(f)).

The standardised methodology for monitoring missions was finalised
in March 2008. The number of such missions is to be increased in
2008.

The Commission is continuously working to further improve its system
and will pay specific attention to the issue of the detail of supporting
documentation on programme estimates.

E
N

EuropeAid did not define baseline requirements. The Court’s
audit revealed that in 5 out of the 15 commitments examined,
budget support is provided to ACP States where the Court
considers that public expenditure management is not suffi-
ciently transparent, accountable and effective. For the cases
identified, the vigorous application of the Commission’s
dynamic interpretation of the budget support conditions of
the Cotonou Agreement implies a very high fiduciary risk.

Compliance with the Cotonou Agreement should be bench-
marked against baseline requirements, such as the availability
of timely published and audited accounts, to be met before
budget support is granted (Annual Report concerning the
financial year 2007, paragraph 56(a)). EuropeAid should
ensure, before the start of a budget support programme, that
there is a clear and complete assessment of the public finance
management and that the recipient country has a credible and
relevant reform programme to address all significant weak-
nesses over a foreseeable timetable. (Annual Report concern-
ing the financial year 2007, paragraph 56(d)).

During 2007 the Commission continued to apply the dynamic
approach, which it considers appropriate.

Before the start of a budget support programme, the Commission will
continue to ensure that there is an assessment of the public finance
management, preferably within the PEFA Framework, and that the
recipient country has a credible and relevant reform programme to
address significant weaknesses over a foreseeable timetable. This will
warrant a rigorous application of the dynamic interpretation of the
conditions of the Cotonou Agreement and a management of risk con-
sistent with the Commission development objectives.

In order to set out its conclusions in a structured manner, the
Commission should ensure that the data used as a basis for
disbursement decisions rely more on measurements of events
that have already taken place than on predictions of future
occurrences;

(Annual Report concerning the financial year 2006, para-
graph 55(b)).

The 2007 audit revealed that in a significant number of cases,
the Commission did not demonstrate in a structured and for-
malised way the respect of the Cotonou Agreement relating to
public finance management. The explanation in some of these
cases is that reliance put on future occurrences rather than on
events that had taken place and the inaccurate appraisal of
indicators.

In order to set out its conclusions as regards progress in pub-
lic finance management in a structured manner, the Commis-
sion should ensure that
the data used as a basis for
disbursement decisions is reliable and should rely more on
measurements of events that have already taken place than on
predictions of future occurrences. (Annual Report concerning
the financial year 2007, paragraph 56(c)).

Finally, the Commission disagrees with the Court’s assessment regard-
ing the five commitments in question.

When assessing eligibility, the Commission takes into account a bal-
ance between past performance and future commitments. At the same
time the Commission agrees that when assessing disbursements the
emphasis should be placed on demonstrating achievements.

10.

The indicators used should permit clear evidence of progress
in public finance management to emerge where appropriate.
This could be achieved by including indicators which can be
measured over time, and compared from one period to the
next, as opposed to indicators which rely on the performance
of a one-off event.

The current audit has revealed a frequent lack both of a clear
analysis of the public finance management weaknesses at the
start of the programme and of a structured approach to mea-
sure public finance management progress subsequently. As a
result, it is more difficult to assess progress thoroughly and
objectively.

The performance indicators used should permit clear evidence
of progress in public finance management to emerge where
appropriate. This could be achieved by strengthening indica-
tors which measure progress of results over time in combina-
tion with process indicators on the performance of one-off
events. (Annual Report concerning the financial year 2007,
paragraph 56(b)).

Compared to other sectors, it is more difficult and complex to define
result indicators for PFM. The Commission nevertheless favours the use
of result indicators, where available, that measure the effect of reforms,
but also uses process indicators and measures to monitor the progress
in the implementation of reform programme.

(Annual Report concerning the financial year 2006, para-
graph 55(c)).

O

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a
l

o
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t
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E
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p
e
a
n
U
n
o
n

i

.

1
0
1
1
2
0
0
8

.

10.11.2008

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Official Journal of the European Union

303