Annual report : the 2008 EU budget.
Date: 2009-11-06
Institutions: European Court of Auditors
Subjects: Community budget, European Court of Auditors, European Development Fund, activity report, audit, budgetary control

INTRODUCTION 

The  European  Court  of  Auditors  is  the  EU  Institution  established  by 
the  EC  Treaty  to  carry  out  the  audit  of  EU  finances.  As  the  EU's 
external auditor, the Court’s mission is to contribute to improving EU 
financial  management  and  act  as  the  independent  guardian  of  the 
financial interests of the citizens of the Union, promoting transparency 
and accountability. Every year we audit the EU financial accounts and 
the income as well as expenditure programmes from which payments 
flow  to  millions  of  beneficiaries  across  the  Union  and  beyond.  The 
results of this audit are presented to the political authorities of the EU, 
the Parliament and the Council, in our Annual Report. 

This  information  note  sets  out  the  main  conclusions  of  the  Annual 
Report  and  provides  background  and  explanations.  Readers  are 
requested  to  refer  to  the  full  text  of  the  Annual  Report  for  further 
details.  

The information note starts with the key messages of the Annual Report giving a quick overview of the 
report. The rest of the note is divided into four sections:  

o 

o 

About the Court of Auditors and the EU budget  

This section gives general background information on the Court and the budget we audit.  

The 2008 audit opinion on the EU budget  

In this section information is given about our audit opinions on the reliability of the accounts 
and the legality and regularity of the underlying transactions in the EU budget. It is followed by 
a description of the situation for revenue and for each spending policy area. 

o 

Supervision and control  

The Commission is responsible for the management of EU funds. It has taken several steps 
intended to improve this management. This section put the problems encountered into context 
and points out future possible roads to progress.  

o 

The 2008 audit opinion on the EDFs  

This section provides information about our audit opinions on the reliability of the accounts and 
the legality and regularity of the underlying transactions in the European Development Funds 
(EDFs).  

1

 
 
 
 
 
I hope that this information note will prove useful to you. For more information on how EU funds are 
managed  I  recommend  you  also  read  the  special  reports  we  publish,  in  which  we  assess  how 
economically, efficiently and effectively EU funds are used. All our publications are available on our 
website: www.eca.europa.eu. 

             Vítor Manuel da Silva Caldeira 
  President of the European Court of Auditors

2

 
 
 
 
  
 
KEY MESSAGES  

o  The accounts for the European Union  give a fair presentation of the financial position and results. 

o  When  it  comes  to  legality  and  regularity  of  transactions,  the  overall  results  for  2008  reflect  the 

improvements in the management of the budget in recent years.  

o  The overall improvement in 2008 is a consequence primarily of the better results in the largest 
policy group “Agriculture and natural resources”.Within Rural Development, the estimated level of 
error, though still material, is lower than in previous years. For “Agriculture and natural resources” 
as a whole the Court for the first time does not give an adverse opinion. 

o  “Cohesion”, which is the second largest policy group, representing almost a third of the budget, 
remains problematic as the area most affected by errors. The Court estimates that at least 11 % 
of the total amount reimbursed should not have been paid out. 

o  Past  recommendations  made  by  the  Court  to  improve  supervisory  and  control  systems  still 
remain valid. They must be seen as parts of an ongoing process where the relevant measures will 
take time before they can be deemed to be effective. 

o  Particular  and  additional  attention  needs  to  be  directed  at  those  expenditure  areas  where  the 
Court continues to report a high level of error. In many situations the errors are a consequence of 
too complex rules and regulations. Simplification, therefore, remains a priority. 

Box 1 - Interpreting audit opinions   

Auditors can give the following kinds of opinions: 

 -   an  unqualified  opinion  (also  called  "clean")  when  there  is  evidence  that  the  accounts  are  reliable  or  the 

underlying transactions are legal and regular in all material aspects; 

-  

-  

-  

an adverse opinion when the level of error in the underlying transactions is material and pervasive, or the 
accounts are not reliable; 

a  disclaimer  of  opinion  if  auditors  are  unable  to  obtain  sufficient  appropriate  audit  evidence  on  which  to 
base an opinion, and the possible effects are both material and pervasive;  

a qualified opinion when an unqualified opinion cannot be expressed but the effect of any disagreement or 
limitation on scope is not so pervasive as to require an adverse opinion or a disclaimer of opinion.   

3

 
 
 
 
 
 
OVERALL ASSESSEMENT OF SUPERVISORY AND CONTROL 
SYSTEMS AND BROAD RESULTS OF TESTING OF REPRESENTATIVE 
SAMPLES OF TRANSACTIONS 1   

The table below summarises the overall assessment of supervisory and control systems, as outlined 
in the relevant chapters, and gives the broad results of the Court's testing of representative samples of 
transactions.  The  table  highlights  the  key  elements  but  cannot  present  all  of  the  relevant  detail  (in 
particular concerning weaknesses of supervisory and control systems and types of error) for which it is 
necessary  to  refer  to  the  body  of  the  report,  within  the  context  of  the  methodology  underlying  the 
Court's audit approach. 

Assessment of 
systems 

Error rate range 

Revenue 

Agriculture and natural resources: 55 billion euro 

Cohesion: 36,6 billion euro 

Research, energy and transport: 7,5 billion euro 

External aid, development and enlargement: 6,2 billion euro 

Education and citizenship: 1,7 billion euro 

Economic and financial affairs: 0,6 billion euro 

Administrative and other expenditure: 8,5 billion euro 

● 
●2 
●4 
● 
● 
● 
●5 
● 

● 
●3 
● 
● 
● 
● 
●6 
● 

Assessment of supervisory 
and control systems  
● 
● 

Partially effective7 

Not effective 

Range in which the estimate 
error rate (ER) is situated8 
● 
● 

2 % ≤ ER≤ 5 % 

ER > 5 % 

● 

Effective 

● 

ER < 2 %  
(below materiality) 

4

 
 
 
 
 
 
 
 
 
 
 
NOTES  

1  

2 

3 

4 

5 

6 

7 

8 

For more information on the Court's methodology, see the section How does the Court perform its audits?    

As  in  previous  years,  the  Court,  based  on  the  level  of  errors  in  transaction  testing  and  its  systems  assessment, 
reiterates that IACS generally is an effective control system for limiting the risk of error or irregular expenditure. 

For Rural development expenditure the estimated level of error is above 2 %. 

In 2007, the Court assessed the Member States' control systems as partially effective. For 2008, there were no major 
modifications in the regulatory framework affecting the control systems of the Member States. Since the programming 
period 2000-2006 is coming to an end, the Court considered that an additional full assessment of the Member States' 
2000-2006 control systems will not provide added value. As there were almost no interim payments for the 2007-2013 
period, the Court focused its assessment on the part of the Member States' systems set up for recording and correcting 
errors found by national controls and for reporting financial corrections to the Commission. 

This is not an overall assessment of the policy group systems. It relates to some of the systems examined and mainly 
reflects  the  weakness  observed  in  the  supervisory  and  control  systems  of  the  Sixth  Framework  Programme  for 
research and technological development (FP6). 

FP6 accounts for a disproportionately large part of the overall error rate. 

Systems are classified as 'partially effective' where some control arrangements have been judged to work adequately 
whilst others have not. Consequently, taken as a whole, they might not succeed in restricting errors in the underlying 
transactions to an acceptable level. 

The  Court  decided  to  present  the  error  rates  in  three  intervals.  These  error  ranges  cannot  be  interpreted  as  a 
confidence interval (in a statistical sense). 

5

 
 
 
The  year  2008  is  the  15th  year  for  which  the  Court  has  provided  a  statement  of  assurance  on  the 
legality  and regularity of the  transactions underlying the accounts  of the EU  budget. The  Court  has 
again  found  in  2008  a  material  level  of  error  in  many  areas  of  Community  expenditure,  for  which  it 
gives an adverse opinion. 

Within this overall picture, there have been significant changes over time.  The chart below provides a 
“year  to  year  comparison”  as  concerns  the  “legality  and  regularity”  derived  from  testing  of  the 
transactions. 

 In  the  chart  the  classification  of  policy  groups  in  green,  yellow  and  red  is  based  on  whether  the 
estimated error rate is below 2 %, between 2 % and 5 %, or above 5 %, respectively. For example, for 
2008 the percentage of red indicates that the red policy group represents 31 % of total expenditure. 

For  “Agriculture  and  natural  resources”  the  chart  distinguishes  between  component  parts  (Rural 
Development and other expenditure for 2007 and 2008; IACS and non-IACS for previous years). For 
other policy groups the relevant error range for the policy group as a whole is used.  

The  chart  shows  an  improvement  across  years.  The  percentage  of  red  policy  groups  has  been 
decreasing.  The  decrease  in  red  between  2007  and  2008  primarily  reflects  improvements  in 
agriculture.  

Year to year comparison

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

60%

2%

38%

50%

10%

40%

31%

22%

44%

11%

45%

47%

>5%

2-5%

<2%

2005

2006

2007

2008

6

 
 
 
 
 
ABOUT THE COURT OF AUDITORS 
AND THE EU BUDGET  

THE EXTERNAL AUDITOR OF THE EU BUDGET1  

The Court of Auditors  

The European Court of Auditors is the independent external audit institution of the European Union 
based  in  Luxembourg.  Through  its  work,  it  aims  to  contribute  to  improving  the  quality  of  financial 
management. The Court has three main outputs: its annual reports, which comprise the results of its 
financial  and  compliance  audit  work  for  a  specific  financial  year;  its  special  reports,  published 
throughout the year,  presenting the results  of its  other  audits, mainly  performance audits assessing 
the economy, efficiency and  effectiveness of EU spending; and its opinions on draft legislation with 
financial management impact.  

What is the Court's Statement of Assurance?  

The  Court's  annual  reports,  on  the  EU  budget  and  on  the  European  Development  Funds  (EDFs), 
include annual opinions, called statements of assurance. The EC Treaty requires the Court of Auditors 
to  give  such  statements  on  the  reliability  of  the  accounts  and  on  the  legality  and  regularity  of 
underlying  transactions.  This  statement  of  assurance  is  sometimes  referred  to  its  French  acronym, 
DAS ("Déclaration d'Assurance"). The primary aim of the DAS is to provide stakeholders - notably the 
European Parliament and the Council, but also all EU citizens - with an audit opinion as to whether EU 
income and expenditure is completely and accurately recorded in the accounts, and has been raised 

1  

For more information on the Court of Auditors please refer to our 2008 Annual Activity Report, available on the Court’s 
website. 

7

 
 
 
                                                 
or  spent  in  accordance  with  all  contractual  and  legal  obligations.  The  Court  gives  an  overall 
assessment of the legality and regularity of the transactions underlying the budget expenditure as a 
whole.  It  also  provides  assessments  covering  specific  segments  of  the  budget  made  up  of  suitable 
groups of policy areas (see Box 3). The conclusions of these assessments form the Court's Statement 
of Assurance.  

How does the Court perform its audits?1  

The Court's audit of the reliability of the EU accounts is carried out in line with international auditing 
standards.  While  such  international  standards  do  not  specifically  address  the  audit  of  legality  and 
regularity as undertaken by the Court, they are applied by analogy.  

In  order  to  provide  assurance  as  to  whether  the  payments  comply  with  the  legal  and  regulatory 
frameworks, the Court draws on the results of its examination of both supervisory and control systems 
and a sample of the transactions (payments) themselves (see Box 2). The Court carries out its audits 
of the selected transactions in most cases down to the level of the final beneficiaries, including on-the-
spot  visits.  When  systems  are  tested  and  found  to  be  reliable,  then  fewer  transactions  need  to  be 
audited  by  the  Court  in  order  to  come  to  a  valid  conclusion  on  their  legality  and  regularity.  Other 
sources, such as the analysis of annual activity reports prepared by the Commission and the work of 
other auditors, are also used to support the Court’s conclusions.  

What is an error of legality and/or regularity, according to the Court?  

An error is a deviation, identified by the auditor, from what is required by the applicable regulations. 
Some errors are quantifiable, i.e. with a direct and measurable financial impact on the amount paid out 
from the EU budget, such as over-declaration of land or beneficiaries claiming EU grants for types of 
expenditure  not  eligible  for  support.  Other  errors  have  a  non-quantifiable  impact  on  payments,  for 
example, a missing bank guarantee.  

The Court also classifies errors according to their nature: eligibility error (payment does not meet the 
eligibility rules), occurrence error (reimbursement of a cost which is not proven to have been incurred), 
accuracy error (payment incorrectly calculated or not proven as correct) or other compliance error (an 
error that does not call into question the eligibility of the payment).  

When deciding on the nature of the opinion to be given, the Court compares the estimated error rate 
against  what  it  deems  to  be  a  tolerable  limit  -  or  materiality  threshold  -  and  assesses  the 
pervasiveness of deficiencies identified. 

For  determining  the  materiality  threshold,  the  Court  applies  a  limit  of  two  percent  of  the  population 
under audit. When calculating the error rate (see Box 2) the Court includes only quantifiable errors. 
The estimated error rate is thus an indication of the percentage of funds that should not have been 
paid out. For the last two years, the Court also discloses the combined frequency of quantifiable and 
non-quantifiable errors found in the samples of transactions tested.  

1  

More  information  on  the  DAS  methodology  can  be  found  in  the  brochure  on  the  subject,  available  on  the  Court’s 
website. 

8

 
 
                                                 
For determining pervasiveness, the Court takes into consideration to what extent the deficiencies are 
confined  to  specific  areas  and  whether  they  represent  a  substantial  proportion  of  the  policy  group 
concerned. 

Errors  can  arise  from  misapplication  or  misunderstanding  of  the  often  complex  rules  of  EU 
expenditure  schemes.  Only  if  EU  funds  have  intentionally  been  improperly  claimed  can  it  be 
considered as fraud. If the Court has reason to suspect that fraudulent activity has taken place, it will 
report  this  to  OLAF,  the  Union's  antifraud  office,  which  is  responsible  for  carrying  out  any  resulting 
investigations. Over the last 5 years the average number of cases reported by the Court on the basis 
of all its audits has been 3,2.  

Box 2 - The Court's testing of a sample of payments from the EU budget 

The Court does not have the resources to audit all the transactions of the EU budget in detail. It therefore uses 
statistical  sampling  techniques  to  provide  a  result  which  is  representative  of  the  population  as  a  whole.  This 
involves randomly selecting a representative sample of underlying transactions from, for example, cohesion for 
detailed  testing.  The  Court  traces  these  transactions  down  to  the  final  beneficiaries  of  the  aid,  for  example  a 
project promoter in Poland. The Court then performs checks to verify the compliance of the claim with reality, in 
many cases on the spot.  

The representative nature of the Court's sample means the results can be extrapolated over the total population, 
i.e.  a  specific  revenue  or  expenditure  area,  and,  together  with  information  arising  from  the  evaluation  of 
management and control systems and other sources, be used as a basis for an overall audit opinion.  

EU’s Cohesion spending: approx. 36,6 billion euro 

Random selection of a 
representative sample 

Payment to a project 
promoter in Poland 

€

€

€

€

€

€

€

€

€

€

€

€

€

€

€

€

€ 

€

€ 

€

€

€

€

€

€ 

€

€

€

€

€

€

€

€

Population of all cohesion payments 

This is an illustration of how the Court identifies transactions for detailed testing. 

9

 
 
 
 
 
 
THE EU BUDGET1  

The EU's payments for 2008 totalled 117 billion euro, equivalent to around one percent of the Union's 
GNI. This can be compared with Member States' public-sector budgets, which in many cases amount 
to around half of total GNI.  

Where does the money come from? 

The EU general budget - the audit of which represents the Court's main task - is composed of revenue 
and expenditure. The revenue of the European Union mainly consists of contributions from Members 
States based on their gross national income (GNI ~ 60 %) and on a measurement connected to value 
added tax collected by the Member States (VAT ~ 15 %). Customs and agricultural duties (so-called 
traditional own resources ~ 14 %) also represent a significant share of revenue.   

Other 10,9 %

Traditional own 
resources 
14,2 %

VAT resource 
14,8 %

GNI resource  
60,1 %

1   More financial information on the general budget can be found in Annex I of the report. Audit results concerning the 
implementation of the EU budget, and the Commission's reporting on this, are covered in Chapter 3 of the report.  

10

 
 
 
 
                                                 
What is the money spent on? 

The  largest  single  element  of  European  Union  spending  is  on  agriculture  and  rural  development  - 
principally  in  the  form  of  payments  to  farmers  -  accounting  for  almost  half  of  the  budget.  Another 
significant proportion is spending on cohesion - regional and social development - cofinancing a wide 
range  of  projects,  from  road  construction  in  Estonia  to  courses  for  the  unemployed  in  Spain.  This 
constitutes about a third of the budget.  

Administrative expenditure
 7 %

Economic and financial 
affairs 
 1 %

Education and citizenship  
1 %

External aid, development & 
enlargement  5 %

Research, Energy & 
Transport 
6 %

Cohesion 32 %

Agriculture and natural 
resources  48 %

Total payments 2008: 
117 billion euro

How is the budget managed?   

The  budget  is  decided  annually  -  within  the  context  of  seven-year  financial  frameworks  -  by  the 
Council  and  the  Parliament.  Ensuring  that  the  budget  is  properly  spent  is  the  responsibility  of  the 
Commission. For around 80 % of spending – cohesion and agriculture – the task of implementation is 
shared  with  the  Union's  27  Member  States.  Depending  on  the  spending  schemes,  national 
administrations  may  be  responsible  for  setting  spending  strategies,  selecting  beneficiaries  and 
projects,  making  payments  and  checking  the  expenditure.  In  all  cases,  however,  the  Commission 
retains  the  overall  responsibility  for  the  execution  of  the  budget,  and  is  accountable  for  this  to  the 
European Parliament and Council.  

11

 
 
 
The  European  Union  budget  involves  payments  made  to  millions  of  individual  final  beneficiaries. 
Payments  made  are  based  on  the  compliance  of  the  final  beneficiaries  with  legal  or  regulatory 
conditions, as well as the accuracy and existence of the underlying activities and/or costs. Payments 
are  legal  and  regular  when  these  conditions  are  met,  and  the  right  beneficiaries  receive  the  right 
amounts at the right time.  

Internal control - through supervisory and control systems - is the range of procedures and processes 
(such as checks) by which the Union administers and manages its budgets and ensures that funds are 
collected and spent properly and in accordance with the rules.  

Primary level controls, which check compliance of final beneficiaries with their regulatory obligations. 

Secondary level controls, which check the effectiveness of the primary level controls.  

Overall supervision by the Commission, to ensure that Member States and/or Commission Directorates-
General meet their obligations and responsibilities. 

There  are  several  factors  that  determine  whether  or  not  errors  occur  in  transactions  in  the  first 
instance and whether or not they are subsequently detected and corrected by control systems. They 
include:  

o 

o 

o 

o 

o 

the complexity of the eligibility rules and obligations with which beneficiaries must comply, and 
their familiarity with them;  

the way that claims are made and processed;  

the number and extent of checks made;  

the extent of sanctions imposed on over-claiming beneficiaries when errors are detected; and 

the visibility - and associated deterrent effect - of the control procedures. 

12

 
 
 
 
 
 
 
 
 
 
 
 
 
How is the management of the budget reported?  

Since 2000 the Commission has been working on a reform programme to improve the management of 
the  EU  budget,  centred  mainly  around  its  own  responsibilities.  A  major  element  of  this  has  been 
improving  reporting,  with  e.g.  the  introduction  of  annual  activity  reports  for  the  departments  of  the 
Commission  -  the  Directorates-General  (DGs)  -  accompanied  by  declarations  by  the  Directors-
General  that  head  them.  The  annual  activity  reports  and  declarations  are  compiled  in  a  synthesis 
report signed by the Commission as a whole.  

The  accounts  of the EU  general budget have also been  modernised,  2008  being the  fourth year  of 
accruals-based accounts for the Union's financial statements. Accruals-based accounting - in contrast 
to the more traditional cash-based system - requires income and expenses to be accounted for in the 
year to which they relate rather than when cash is received or paid.  

The accounts consist of the financial statements and reports on the implementation of the budget. The 
financial statements include the balance sheet - which sets out the assets and liabilities of the Union 
at the year end -, an economic outturn account showing the income and expenditure for the year, a 
cash-flow statement and a statement of changes in net assets. The reports on budget implementation 
set out the revenue and expenditure for the year on a (modified) cash basis.  

The Commission’s Accounting Officer draws up the annual accounts, consolidating the results of the 
various EU institutions and bodies. He/she provides the Court with a representation letter confirming 
that  the  consolidated  accounts  are  complete  and  reliable  (subject  to  certain  limitations).  Similar 
management  representations  are  given  by  the  Accounting  Officers  of  the  relevant  institutions  and 
bodies. 

Box 3 - How the EU budget is organised and how the Court reports on its 
implementation  

The  main  part  of  the  general  budget  is  divided  into  31  policy  areas  covering  different  policy  objectives  or 
administrative issues. The policy areas constitute the way the Union's activities are planned and recorded, and 
those responsible for each area are held accountable for their management of EU funds.  

EU spending is also planned in seven-year cycles, the so-called financial frameworks, which have a separate 
set of headings. Policy areas relate mainly to one of these headings, but some are included in several. 2008 is 
the second year for which the Court's reporting is structured around groups of policy areas. These correspond 
closely,  but  not  entirely,  to  the  2007-2013  financial  framework  headings.  Information  in  this  note  is,  if  not 
otherwise indicated, linked to the Court's groups of policy areas. See the inside cover of this information note for 
more  information  on  what  policy  areas  are  included  in  the  Court's  policy  area  groups,  and  how  these  groups 
correspond to the financial frameworks. 

13

 
 
 
  
 
THE 2008 AUDIT OPINION - THE 
EU BUDGET1 

2008 ACCOUNTS  

Unqualified opinion on the reliability of the accounts  

The Court concludes that the 2008 annual accounts of the European Communities present fairly, in all 
material  respects,  the  financial  position  of  the  European  Communities  and  the  results  of  their 
operations and cash flows.  

Without calling this opinion into question the Court notes that weaknesses in the accounting systems 
of certain Directorates-General of the Commission  as well as in the accounting system for the fixed 
assets of the European Satellite Programme Galileo put the quality of financial information at risk. This 
is partly due to the complex legal and financial framework. 

Steps taken to strengthen the accruals-based accounting system 

The  measures  introduced  by  the  Commission’s  Accounting  Officer  in  20072,  to  improve  the 
accounting control environment at the level of individual Directorates-General, have had an impact in 
2008  and  have  contributed  to  a  strengthening  of  the  financial  reporting  framework  and  accounting 
systems. However, certain weaknesses still exist which put at risk the quality of accounting data. 

2008 LEGALITY AND REGULARITY 

Unqualified opinions  

For 2008 the Court gives unqualified opinions for “Revenue”, commitments for all policy groups and 
payments  for  the  policy  groups  “Education  and  Citizenship”  and  “Administrative  and  other 
expenditure”.   

1  

2  

For the exact wording of the Statement of Assurance as well as the complete and detailed audit findings please refer to 
Chapter 1 of the report. 

See paragraph 1.10 of the Annual Report concerning the financial year 2007. 

14

 
 
                                                
 
 
Qualified opinions 

Payments for the policy group “Agriculture and natural resources”, except for Rural Development are 
in all material respects legal and regular. 

Payments for the policy group “Economic and financial affairs”, except for expenditure in this policy 
group  concerning  the  Sixth  Framework  Programme  for  research  and  technological  development 
(FP6), are in all material respects legal and regular. 

Adverse opinions  

The Court gives adverse opinions for policy groups “Cohesion”, “Research, energy and transport”, as 
well as “External aid, development and enlargement”. Payments in these policy groups are materially 
affected by errors, although at different levels.  

Improvements needed in supervision and control systems 

The supervisory and control systems for the policy groups “Research, energy and transport”, “External 
aid, development and enlargement” and “Education and Citizenship” are partially effective in providing 
assurance  as  to  the  prevention  or  detection  and  correction  of  the  reimbursement  of  overstated  or 
ineligible costs. 

For the policy group “Agriculture and natural resources”, the Court also concludes that the supervisory 
and  control  systems  are  partially  effective.  However,  it  notes  that  the  Integrated  Administrative  and 
Control  System  (IACS)  generally  continues  to  be  an  effective  control  system.  Issues  need  to  be 
addressed in certain areas, in particular for Rural Development, where there are weaknesses.  

For the policy group “Economic and financial affairs” the supervisory and control systems were found 
to  be  effective  in  two  of  the  three  areas  assessed.  In  the  third  one,  “Enterprise”,  the  systems  were 
judged as only partially effective, mostly due to weaknesses concerning FP6.  

For  the  policy  group  "Cohesion",  the  Court  found  that  the  systems  in  Member  States  for  correcting 
errors found by national controls were in most cases at least partially effective. 

The  Commission,  the  Member  States  and  other  beneficiary  states  need  to  make  further  efforts  to 
implement the necessary improvements concerning these policy groups, so as to ensure an adequate 
management of the risk of irregular expenditure. 

Box 4 - Agencies - audit opinions published in separate reports  

The  Union's  agencies  cover  a  wide  variety  of  tasks  in  various  locations  throughout  the  Union.  The  annual 
budgets of the 29 agencies audited by the Court for 2008 totalled 1,5 billion euro. Each agency has a specific 
mandate and manages its own budget. Audits of the European Union’s agencies and other decentralised bodies 
are the subject of specific annual reports which are published separately. The Court issued unqualified opinions 
on  the  reliability  of  the  accounts  and  the  legality  and  regularity of  the  underlying  transactions  for  all  agencies 
except for the European Police College.  

15

 
 
 
 
REVENUE 

Mostly direct contributions from Member States 

GNI  and  VAT  own  resources  are  direct  contributions  from  Member  States.  In  both  cases  the 
Commission relies on macro-economic  aggregates  prepared  by the Member  States to serve as the 
basis  for  the  revenue  due.  They  are,  however,  open  to  correction  for  up  to  four  years.  If  the 
Commission  -  or  Member  States  -  finds  doubtful  elements  in  the  data  it  can  issue  a  reservation, 
thereby keeping them open for longer periods of time.  

Traditional own resources are collected by national administrations - mainly customs administrations - 
of  Member  States  on  behalf  of  the  Union.  They  are  entered  into  national  treasuries  (so-called  A 
accounts) and thereafter made available to the Communities. Where duties or levies remain unpaid 
and  no  security  has  been  provided,  or  they  are  covered  by  securities  but  have  been  challenged, 
Member  States  may  suspend  making  these  resources  available  by  entering  them  in  a  separate 
account ("the B account"). 

The  revenue  transactions  cover  the  Member  States'  statements  and  payments  of  traditional  own 
resources, the Commission's calculation of the Member States' contributions on the basis of the VAT 
and  GNI  data  received  from  the  Member  States,  and  other  types  of  revenue.  For  traditional  own 
resources the audit cannot cover imports that have escaped customs supervision. For VAT and GNI-
based contributions, the Court does not directly audit the data underlying macroeconomic aggregates 
and statistics. 

Conclusion 

The  Court  concludes  that  the  revenue  transactions  are  free  from  material  error.  The  related 
supervisory  and  control  systems  are  assessed  as  effective,  although  the  Court  draws  attention  to 
certain weaknesses. They are, however, not material to the effectiveness of the systems as a whole.  

Recommendations 

The Court recommends that the Commission should continue its efforts to ensure the correct use of B 
accounts  as  well  as  its  surveillance  of  the  establishment  and  recovery  of  duties.  The  Commission 
should address the deficiencies in control strategy by fostering, in particular, an appropriate balance 
between physical checks of imports and the post-clearance audits of operators. 

The  Court  also  recommends  that  the  Commission  should  continue  its  efforts  to  ensure  that 
reservations  on  outstanding  VAT-based  own  resources  are  lifted  within  reasonable  timescales.  The 
Commission should draw up specific rules for carrying out the examination of GNI inventories. 

16

 
 
AGRICULTURE AND NATURAL RESOURCES – 55 BILLION EURO 

Support for farmers, fisheries, rural development, and the environment  

As part of the Union's Common Agricultural Policy (CAP), the EU supports farmers and intervenes in 
agricultural  markets.  Most  CAP  expenditure  is  financed  from  the  European  Agricultural  Guarantee 
Fund  (EAGF)  but  an  increasing  share  of  spending  comes  from  the  European  Agricultural  Fund  for 
Rural  Development  (EAFRD),  including  measures  such  as  agri-environmental  schemes,  rural 
infrastructure  and  compensation  for  farming  in  less-favoured  areas.  Budgetary  allocations  in  this 
policy  group  are  also  used  for  fisheries  and  maritime  affairs  as  well  as  health  and  consumer 
protection. 

Although there is still production support to farmers for certain foodstuffs such as rice (so-called direct 
coupled payments), a large part of spending on agriculture and natural resources (56 %) is devoted to 
payments  based  on  the  number  of  hectares  of  eligible  land  in  good  agricultural  and  environmental 
condition ("decoupling" aid from production). The main scheme is called the Single Payment Scheme 
(SPS). To claim the aid, farmers need to have entitlements (one per hectare). These entitlements are 
allocated  by  Member  States,  based  on  different  models,  and  are  registered  in  the  Integrated 
Administration and Control System (IACS). IACS also includes databases of agricultural parcels and 
animals kept, and provides for controls of the eligibility of the farmers' claims.   

Virtually all agriculture and natural resources expenditure is paid out by Paying Agencies at national or 
regional  level.  They  also  carry  out  administrative  checks  on  all  claims  and  a  series  of  on-the-spot 
checks of a sample of claims. Paying Agencies prepare annual accounts which, after being audited by 
a certifying body, provide the basis for the Commission's approval of expenditure - in technical terms, 
the clearance of accounts. Moreover, clearance of accounts procedures include wider-ranging multi-
annual  conformity  clearances,  where  corrections  are  made  based  on  detected  irregularities  in 
previous expenditure. Clearance is carried out in order to establish the amounts definitively charged to 
the EU budget.  

Conclusion: no material level of error except for Rural Development 

The Court concluded that, except for Rural Development, the transactions underlying the expenditure 
declared for the policy group are free from a material level of error of legality and/or regularity. The 
Court’s assessment of the supervisory and control systems is that most of them are partially effective 
in ensuring the regularity of payments. 

Regularity of transactions 

For the policy group taken as a whole, the Court estimates the value of the overall error rate to be 
slightly  below  2 %.  The  Court  found  eligibility  errors  of  Single  Area  Payment  Scheme  (SAPS) 
payments to beneficiaries not meeting the farmer definition as they had not carried out any agricultural 
activity nor maintained the land in good agricultural and environmental condition (GAEC). The Court 
also  found  accuracy  errors  relating  to  over-declarations  of  areas  claimed,  leading  to  overpayments. 
Furthermore the Court found failure to collect milk levy from producers, animal registers which were 
not updated and databases which were not in operation.  

17

 
 
Rural development, which represents 19 % of all spending, is still affected by a higher level of errors 
than  the  rest  of  agricultural  expenditure  (EAGF),  although  the  estimated  error  level  is  lower  than  in 
previous years and relatively small in financial terms. The Court found errors relating to eligibility rules 
such  as  non-respect  of  specific  conditions  attached  to  the  aid  for  agri-environmental  and  forestry 
measures and ineligible areas claimed under agri-environmental measures. There were also errors of 
accuracy, such as the incorrect calculation of eligible costs and of the amounts payable, as well as 
over-declarations of claimed areas and non-respect of the minimum amount per hectare stipulated by 
Community  rules.  The  Court  also  found  an  error  of  occurrence1  due  to  the  non-execution  of  the 
totality of the works financed. 

Example – agri-environmental measures 

Support was granted to a project to fence a pasture area and clear a portion of the ground partially covered with 
shrubs.  The  objective  was  to  create  larger  areas  for  extensive  grazing.  This  was  needed  to  avoid  that  the 
concentration of cattle  in existing cleared areas lead to  overgrazing. The Court’s auditors found that the area 
cleared  did  not  correspond  to  the  area  for  which  aid  had  been  applied  and  was  slightly  less  than  the  total 
claimed. 

IACS - an effective system given certain conditions   

IACS  is  effective  in  limiting  the  risk  of  irregular  expenditure  where  properly  implemented  and  if 
accurate  and  reliable  data  on  entitlements  are  introduced.  The  correct  calculation  and  allocation  of 
entitlements is a prerequisite for correct payment in the first and all subsequent years. 

IACS covers the main schemes audited at Member State level financed by EAGF, namely SPS and 
SAPS. In the case of rural development, and especially for agri-environment and less-favoured areas, 
certain basic elements such as surface and number of animals are covered by IACS and others by 
specifically designed controls. 

The  Court  identified  the  following  systems  weaknesses:  incorrect  administrative  procedures  and 
controls  to  ensure  correct  payments  and  reliable  entitlements  databases;  insufficient  and  or 
inadequate  on-the-spot  checks  leading  to  non-detection  of  ineligible  areas  and  shortcomings 
concerning  Member  States’  definition  of  requirements  to  maintain  land  in  good  agricultural  and 
environmental condition. 

For all agricultural expenditure - IACS and non-IACS - the Court notes that the Commission's yearly 
financial clearance decisions are limited to ensuring that the Paying Agencies' accounts are complete 
and accurate. The legality and regularity of payments are only addressed in multi-annual conformity 
decisions. Therefore, financial clearance decisions do not mean that expenditure "cleared" is free from 
irregular payments. In addition, the Commission’s method of calculating the conformity adjustments, 
largely based on the use of flat-rate corrections, means that no valid link can be made between the 
amounts thus recovered and the real amount of irregular payments. 

1  

The claimed cost or action did not exist. 

18

 
 
                                                
 
 
 
Recommendations 

The  Court  recommends  that  system  weaknesses  leading  to  errors  should  be  resolved,  e.g.  further 
significant efforts are needed to ensure that beneficiaries respect their obligations in the area of rural 
development. Concerning the SPS and SAPS in particular, the Court recommends:  

o 

o 

o 

overcoming the systems  weaknesses  leading to errors relating to  over-declarations of land  or 
inaccurate entitlements, notably by ensuring that databases are reliable; 

further tightening the rules so that EU direct aid is not paid to claimants who have neither used 
the land for farming nor actively maintained it in good agricultural and environmental condition; 
and 

enforcing minimum requirements for grassland for EU direct aid. 

The Court also reiterates that further efforts are required in the area of Rural Development to ensure 
the respect by beneficiaries of their obligations and to further simplify the rules and conditions. 

COHESION – 36,6 BILLION EURO 

Promoting structural adjustment, economic and social cohesion, interregional 
cooperation and employment opportunities  

EU  spending  on  cohesion  is  planned  in  multi-annual  'programming  periods',  which  means  that 
payments  relating  to  each  programming  period  continue  for  at  least  two  years  beyond  its  end.  The 
Court's 2008 audit findings relate to payments in respect of the 2000-2006 period, as spending for the 
2007-2013 period for 2008 is almost only in the form of advances. For the 2000-2006 period the two 
biggest  Structural  Funds  are  the  European  Regional  Development  Fund  (ERDF),  financing,  for 
example, infrastructure and activities of small and medium-sized companies, and the European Social 
Fund  (ESF),  where  typical  projects  concern  unemployment  and  labour  market  integration.  There  is 
also a Cohesion Fund, which supports the improvement of environment and transport infrastructure in 
economically less developed Member States.  

EU funding of cohesion takes the form of co-financing, part of the funds being provided by Member 
States. The unit of financing in cohesion is a project, with reimbursement based on a cost declaration 
by  the  project  promoter.  The  Member  States  are  required  to  set  up  control  systems  which  are 
intended  to  prevent  or  detect  and  correct  the  incorrect  reimbursement  of  project  costs  and  other 
irregularities.  

19

 
 
 
 
Conclusion: a material level of error  

The  Court  concludes  that  the  reimbursement  of  expenditure  to  Cohesion  projects  is  affected  by  a 
material  level  of  error  of  legality  and/or  regularity.  It  also  found  that  the  majority  of  supervisory  and 
control systems, both at Commission and Member State level, are only partially effective in ensuring 
the legality and regularity of reimbursements of expenditure.  

Eligibility errors  

In 2008 again a large number of reimbursements to the Cohesion projects were affected by errors, i.e. 
a  large  number  of  projects  were  over-reimbursed.  The  Court  has  established  a  sample  estimate, 
based on which it concludes that at least 11 % of the total amount reimbursed should not have been 
paid out. In the cases audited by the Court this year the most frequent causes of incorrect expenditure 
reimbursements  in  the  Structural  Funds  were  related  to  eligibility  of  funding,  such  as  projects  or 
beneficiaries  not  meeting  specific  fund  conditions,  serious  failure  to  respect  procurement  rules  and 
inclusion of costs which are not reimbursable.  

Example – European Regional Development Fund 

One ERDF project supported the construction of three equalization towers on a water pipeline distributing water 
from a local dam. It was implemented during 2000 – 2004. The pipeline was never used because the dam was 
never filled with water. The Managing Authority knew that the project could not attain the specific objectives set 
and  that  it  was  thus  ineligible.  However,  it  decided  to  include  it  into  the  Operational  Programme  to  replace 
another project rejected by the Commission. Amount of expenditure declared to the Commission for this project 
was 5,7 million euro. 

Member State systems and Commission supervision partially effective 

The Court identified several weaknesses in the control systems at Member State level for the 2000-
2006  programming  period  relating  to  recoveries  and  the  reporting  of  financial  corrections  to  the 
Commission  impeding  complete  and  reliable  information  on  these  financial  corrections  from  all 
Member States. 

The Commission’s key supervisory activities comprise ex-post audits undertaken by the Commission 
and the application of suspension and financial correction procedures. 94  % of financial corrections 
relating to the 2000-2006 period have been carried out by the Member States by withdrawing ineligible 
expenditure and replacing it with additional new eligible expenditure. The Court highlights the fact that 
without effective ex-ante verification by Member States, this practice does not ensure that all irregular 
expenditure will be excluded from EU funding by programme closure. 

20

 
 
 
 
For  the  2007-2013  programming  period,  the  Court  sees  a  risk  that  late  approvals  of  the  Member 
States’  system  descriptions,  compliance  assessments  and  audit  strategies  increase  the  probability 
that these new elements introduced into the control systems will not prevent and detect errors at the 
start-up phase. 

The  impact  of  the  “Action  plan  to  strengthen  the  Commission’s  supervisory  role  under  shared 
management  of  structural  actions”,  which  was  adopted  in  early  2008,  cannot  yet  be  assessed,  as 
errors committed in previous years are still affecting the expenditure reimbursed by the Commission. 

Recommendations  

The Court recommends that the Commission:  

o 

o 

o 

o 

focus the guidance given to the Member States on the most error-prone areas, i.e. on eligibility 
issues and procurement;  

seek  to  ensure  that  the  detection  and  correction  of  errors  work  efficiently  at  Member  State 
level, including the recovery procedures and reporting to the Commission; 

continue risk-based auditing of the Operational Programmes, focusing on the most error-prone 
issues and programmes;  

ensure the rigorous application of the corrective mechanisms on Operational Programmes for 
which problems have been detected, at the same time ensuring that new errors do not stem 
from this process.  

21

 
 
 
RESEARCH, ENERGY & TRANSPORT - 7,5 BILLION EURO 

Increasing competitiveness through research and technology 

Research,  energy  and  transport  cover  a  wide  range  of  activities,  with  the  aim  of  increasing 
competitiveness and growth. The bulk of expenditure is on research and technological development.  

Research  funding  is  provided  in  multi-annual  Framework  Programmes  (FPs),  which  have  multiple 
funding schemes, supporting various types of projects. Research projects are carried out by institutes 
and  universities,  but  also  by  individuals,  companies  or  public  administrations.  They  usually  involve 
several research partners from a number of EU Member States and associated countries. Although 
each  partner  signs  a  grant  agreement  with  the  Commission,  one  is  nominated  as  a  coordinator  to 
oversee finance and administration as well as maintaining contacts with the Commission.  

Since 2008, the EU contribution to certain major research projects has been channelled through Joint 
Undertakings,  which  are  Community  bodies  that  manage  funding  provided  by  the  Commission  and 
other public and private partners. EU grants to individual projects range from a few hundred euros to 
tens of millions. 

The other main category of expenditure in this policy group concerns the Trans-European Networks 
(TEN)  Energy  and  Transport  programme.  This  supports  major  energy  and  transport  projects,  with 
average grants of over 16 million euro for transport projects and of 1,3 million euro for energy projects. 
The beneficiaries are usually Member State authorities but may also be public or private companies.  

Conclusion: The Commission has reinforced its control systems and simplified the 
funding rules, but there remains a material level of error   

The Court concludes that payments in 2008 for the policy group Research, energy and transport are 
affected by a material level of error, although the remedial measures taken by the Commission have 
contributed  to  a  reduction  in  the  level  of  error  in  comparison  to  previous  years.  The  Court's 
assessment  of  the  supervisory  and  control  systems  for  this  policy  group  is  that  they  are  partially 
effective.  

Errors mainly due to reimbursement of ineligible costs  

Most  errors  occur  because  the  Commission  reimburses  ineligible  costs  declared  by  beneficiaries. 
Errors mainly concern the reimbursement of ineligible personnel and indirect costs for FP6 research 
projects. One reason for the errors is the complex legal framework, with a large number of eligibility 
criteria,  including  requirements  to  prove  that  costs  are  real,  eligible  and  necessary  for  the 
implementation of the project. 

22

 
 
Example – personnel costs 

In  a  research  and  development  project  concerning  transport  systems,  a  beneficiary  calculated  the  costs  of 
personnel to be charged to the project on the basis of hourly rates for the two categories of personnel (senior 
engineer/project manager and engineer/technician) who worked on the project. The Court found that the rates 
used did not reflect the actual expenditure incurred by the beneficiary in performing the project activities set out 
in the grant agreement. 

The  Court’s  auditors  recalculated  the  personnel  costs  on  the  basis  of  the  actual  salary  costs  recorded  in  the 
accounts of the beneficiary. This showed that the beneficiary had overcharged personnel costs for the project by 
more than 13 000 euro. This also requires a proportionate reduction of the eligible indirect costs to be charged to 
the project. 

Partially effective control systems 

Beneficiaries'  cost  statements  submitted  for  reimbursement  have  to  be  accompanied  by  an  audit 
certificate  issued  by  an  independent  auditor,  certifying  that  the  claimed  costs  meet  the  eligibility 
requirements.  However,  in  almost  half  the  cases  where  the  Court  found  errors  in  cost  statements, 
audit certificates had been provided giving an unqualified opinion.  

The  Commission  has  introduced  a  new  form  of  ex-ante  certification  for  FP7,  reducing  the 
administrative  burden  on  beneficiaries  and  promoting  the  use  of  correct  costing  methodologies.  In 
2008, this measure was still in the preliminary phase. At the end of the year, the Commission had not 
yet developed a clear definition of the criteria for assessing beneficiaries’ costing methodologies and 
the new form of certification had been approved in only one case. 

The  other  main  element  of  the  Commission’s  control  system  is  its  programme  of  ex-post  (i.e.  after 
reimbursement)  financial  audits  at  beneficiaries,  aiming  to  detect  and  correct  errors  which  have  not 
been  prevented  or  detected  by  earlier  controls.  The  Court  found  that,  despite  the  considerable 
increase in the coverage of expenditure by ex-post audits, efforts are still needed in the coordination 
and  implementation  of  the  FP6  audit  strategy  as  well  as  to  improve  guidance  and  support  to 
beneficiaries and certifying auditors. 

Although the increased  ex-post audit coverage provides a broader base for corrective action by the 
Commission, only a low amount of recoveries had been initiated at the end of 2008 and no sanctions 
had been imposed.  

23

 
 
 
 
 
 
Recommendations  

In recent years, the Commission has reinforced its control systems and simplified the funding rules for 
research projects. These measures have contributed to a reduction in the level of error for this policy 
group. In order to maintain this positive trend, the Court recommends the Commission should: 

o 

o 

ensure  rigorous  application  of  the  controls,  in  particular  by  improving  the  reliability  of  audit 
certificates  and  through  effective  implementation  of  its  ex-post  audit  strategy,  imposing 
penalties where appropriate and making timely recoveries or adjustments in cases of undue 
reimbursement of claimed costs; 

in  line  with  the  recent  Commission  paper  on  streamlining  financial  rules,  further  simplify  the 
funding  rules  for  the  next  research  Framework  Programme  (FP8),  while  maintaining  the 
objective of a cost-effective control system sufficient to provide reasonable assurance of the 
regularity of the expenditure. 

EXTERNAL AID, DEVELOPMENT, ENLARGEMENT  – 6,2 BILLION EURO 

External relations, development cooperation, humanitarian aid and support for 
enlargement  

External relations and development spending, which account for about two thirds of expenditure in this 
policy group, include assistance to and cooperation with other countries generally, as well as specific 
programmes such as food security and the European Instrument for Democracy and Human Rights. 
The  rest  of  the  spending  is  devoted  to  enlargement  (27 %),  i.e.  transition  and  institution-building 
assistance,  and  to  humanitarian  aid.  Most  of  the  expenditure  is  administered  by  one  of  three 
Commission  Directorates-General:  the  DG  for  Humanitarian  Aid  (ECHO),  EuropeAid  (external 
relations and development projects) or the DG for Enlargement. In addition to expenditure covered in 
this  section  there  is  also  significant  spending  through  the  European  Development  Funds  (see  the 
section “The 2008 audit opinion - The EDFs”).  

A large part of the expenditure is managed by the Commission's Delegations in the countries in which 
the  EU  finances  projects.  The  implementing  organisations  that  carry  out  the  projects  may  be 
international organisations and both local and international NGOs as well as government institutions. 
Part of development aid is given as budget support, where the funds are merged into the budget of the 
partner country, given certain conditions.  

Conclusion: a material level of error  

The  Court  concludes  that  transactions  underlying  the  expenditure  in  the  policy  group  External  aid, 
development and enlargement are affected by a material level of error of legality and/or regularity. Its 
assessment of the supervisory and control systems is that they are only partially effective in ensuring 
the regularity of payments. 

24

 
 
Errors concerning eligibility and irregularities in procurement procedures 

The  Court  found  eligibility  errors,  such  as  not  meeting  essential  conditions  required  for  expenditure 
and inclusion of VAT and other ineligible taxes. In other cases the supporting evidence (e.g. invoices, 
receipts  and  bank  statements)  for  payments  was  not  provided,  time  limits  were  not  respected  and 
procurement procedures presented irregularities. 

Systems still only partially effective for all DGs but for different reasons  

EuropeAid:  The  Commission’s  system  of  checks  at  Headquarter  level  continued  to  be  generally 
effective.  However,  controls  at  Delegation  level  were  still  showing  weaknesses.  These  were  mainly 
related  to  ex-ante  checks  (ineffective  and  insufficient  preventive  controls,  insufficient  monitoring  of, 
and  support  to  organisations  at  project  implementation  level,  weaknesses  in  the  processes  for 
verification of fulfilment of payment conditions for budget support payments).  

DG  RELEX:  Important  shortcomings  were  noted  in  respect  of  ex-post  controls  and  weaknesses 
concerning the financial management and supervision of financial information concerning the projects. 

DG ELARG: Weaknesses were identified in the DG’s Internal Audit Capability and its ex-post controls. 
In addition, fundamental weaknesses remain concerning potential irregularities in the management of 
Phare funds in Bulgaria. 

DG ECHO: The DG’s  own Internal Audit Capability was only created in  2008. Therefore this was  a 
transitional year, with the full benefit of the new organisation being expected from 2009 onwards. 

Recommendations  

The Court recommends that: 

o 

o 

o 

o 

o 

o 

measures should be adopted to improve the effectiveness of the Commission’s ex-ante control 
system for payments and contracts (EuropeAid and DG RELEX); 

further support should be provided to the organisations implementing EU-funded projects and 
they should be subjected to closer monitoring; 

audits and ex-post controls should be planned in a more realistic way, taking into account the 
resources available for the purpose, so that the resulting plans may be duly accomplished; 

the implementation of the audits and ex-post controls planned should be closely followed up, 
so that any deviations may be promptly noted and remedied; 

the  results  of  the  audits  and  ex-post  controls  carried  out  should  be  properly  recorded  and 
systematically analysed;  

a further developed strategy for ex-post audits in centralised management should be approved 
and implemented (DG ELARG). 

25

 
 
EDUCATION AND CITIZENSHIP - 1,7 BILLION EURO 

Funds for education, culture, solidarity as well as for justice and security  

Spending on Education and Citizenship is mostly managed by the Commission in a centralised way or 
through the Member States. EU support in this policy group is characterised by a multiplicity of funding 
schemes  for  various  thematic  areas  and  types  of  projects,  such  as  grants  to  actions  in  favour  of 
citizenship  or for mobility in the  education and training sectors. Projects  are  not only carried  out by 
teaching organisations, but also by private firms and public administrations. The final beneficiaries are 
individuals, mostly EU citizens. 

Conclusion 

The Court concludes that payments (which mostly consist of advance payments) underlying the policy 
group  Education  and  Citizenship  are  free  from  a  material  level  of  error  of  legality  and  regularity. 
However, the Court’s testing suggests that the interim and final payments were affected by material 
error. Its assessment of the supervisory and control systems is that they are only partially effective for 
the policy group as a whole.  

Recommendations  

The Court recommends that:  

o 

o 

the Commission should introduce a more prescriptive framework showing the specific actions 
to be taken by the National Authorities;  

the  Commission  should  engage  in  closer  supervision  of  the  annual  ex-post  declaration 
process, with more thorough monitoring visits and direct verification that the controls described 
are adequate and fully applied. 

26

 
 
ECONOMIC AND FINANCIAL AFFAIRS – 0,6 BILLION EURO 

 Promoting economic and business development as well as competition and trade 

This  policy  group  covers  various  types  of  investment  and  assistance  programmes  under  the 
Enterprise  and Economic and Financial Affairs  policy  areas, such as support to small and medium-
sized enterprises, financial instruments for balance-of-payments support to third countries, European 
space projects or promotion of technological innovation. This policy group also covers the Guarantee 
Fund  for  External  Actions  and  the  European  Coal  and  Steel  Community  in  Liquidation.  Part  of  the 
expenditure is related to the same research and technological development Framework Programmes 
(FPs) covered in the policy group Research, energy and transport.  

Conclusion 

The Court concludes that the payments for the policy group were free from material error, except for 
the  payments  made  under  the  Sixth  Framework  Programme  for  research  and  technological 
development  (FP6).  The  Court  examined  three  supervisory  and  control  systems  for  policy  group 
Economic  and  Financial  affairs.  While  two  were  assessed  as  effective,  one  was  only  partially 
effective1 in ensuring legality and regularity of payments.  

Recommendations 

The Court recommends that the Commission should intensify its actions with the aim of reducing the 
errors arising as a result of the declaration of ineligible costs in the beneficiaries’ cost statements. 

1   This is mostly due to the supervisory and control systems of the Sixth Framework programme for research and 

technological development. 

27

 
 
                                                 
ADMINISTRATIVE AND OTHER EXPENDITURE – 8,5 BILLION EURO 

Expenditure for the administration of the European Union  

Administrative  expenditure  mainly  comprises  expenditure  for  human  resources  (such  as  salaries, 
allowances and pensions) and expenditure for buildings (such as rent payments), equipment, energy, 
communications, and information technology as well as purchases and miscellaneous expenses of the 
European  Parliament,  Council,  Commission,  Court  of  Justice,  European  Economic  and  Social 
Committee,  Committee  of  the  Regions,  European  Ombudsman  and  the  European  Data  Protection 
Supervisor, as well as the Court of Auditors itself.  

Conclusion 

The Court concludes that transactions in this area are free from material error and that the supervisory 
and control systems in place comply with the requirements of the Financial Regulation.  

Recommendations 

The Court did not issue any recommendations. 

28

 
 
SUPERVISION AND CONTROL1  

Developments in 2008 

The  Court  examined  the  Commission’s  progress  in  2008  in  addressing  the  weaknesses  in  its 
supervisory and control systems in order to ensure the regularity of transactions financed by the EU 
budget. 

For  2008,  the  Court  has  identified  further  progress  in  the  Commission’s  supervisory  and  control 
systems, in particular, the impact of the relevant reservations on the assurance given in the Directors-
General declarations. 

The Court found persisting weaknesses in the scope and scale of reservations in some annual activity 
reports  and  declarations.  Other  weaknesses  were  found  in  the  assessment  and  functioning  of  the 
supervisory and control systems. 

The  Commission  has  made  progress  on  managing  the  Annual  Summaries2  such  that  they  provide 
additional assurance and are used to add value to the declarations made by the Directors-General. 
However, not all Member States complied fully with the Financial Regulation. 

Furthermore,  the  Court  found  that  the  Commission  was  able  to  demonstrate  the  almost  full 
implementation of the revised internal control standards that were applicable as of 1 January 2008. 

The  Commission  has  implemented  a  series  of  sub-actions  (as  identified  by  the  Court  in  its  Annual 
Report 2007) in its action plan towards an integrated internal control framework. The Commission has 
however not been able to demonstrate a measurable impact of the Action Plan on the supervisory and 
control systems and ultimately on the regularity of transactions. 

Finally, the Court notes that the Commission was not able to demonstrate that its actions to improve 
supervisory and control systems have been effective in mitigating the risk of error. 

1  
2  

A brief description of supervision and control systems (internal control) can be found on page 12. 

Annual  summaries  are  produced  by  Member  States  and  contain  information  concerning  audits  on  budgetary 
management in the respective countries. In its Annual Report 2007 the Court had found that annual summaries did 
not provide  a reliable assessment  of the functioning and effectiveness of the supervisory and control systems and 
recommended that the Commission take steps to improve the information provided. 

29

 
 
 
                                                 
Recommendations 

Improving supervisory and control systems must be seen as an ongoing process where the relevant 
measures will take time before they can be deemed to be effective. This means that many of the past 
recommendations made by the Court remain valid. 

Particular and additional attention needs to be directed at those expenditure areas where the Court 
continues to report a high level of error. 

This must include: 

o 

o 

o 

assessing the cost and value of controls in policies; 

favouring simplification in the conception of future policy proposals; 

improving  the  mechanism  through  which  financial  corrections,  withdrawals  or  recoveries  are 
intended to correct errors incurred, as well as taking the necessary steps such that this impact 
can be demonstrated in practice. 

In  those  policy  areas  where  there  are  legal  requirements  for  annual  submissions  from  the  Member 
States, the Commission should ensure that maximum benefit is derived from such submissions. Due 
attention should also be given to voluntary initiatives by the Member States (in the form of National 
Declarations) or by Supreme Audit Institutions to obtain additional insight into all matters that could be 
relevant in ensuring the legality and regularity of expenditure under the EU budget. 

Need for simplification 

The rules governing the way the money is spent are established to ensure that the aid achieves the 
policy objectives sought - ‘spending on the right things at the right time’. Some rules are common to all 
payment  types  whilst  others  depend  on  the  type  of  spending.  The  type  and  complexity  of  the  rules 
therefore may also be a function of the complexity of the policy objectives. 

The more onerous and complex are the rules, the greater is the risk that they will not be followed, so 
increasing  the  risk  of  errors  occurring  in  transactions  and  policy  objectives  not  being  met. 
Concurrently,  excessive  fine-tuning  in  establishing  very  specific  programme  targets  is  bound  to 
increase the cost in checking whether such targets have been met. Otherwise put: well designed rules 
and regulations which are clear to interpret and simple to apply, decrease the risk of error. 

Simplifying rules merely in order to reduce the risk of irregularity might have some disadvantages if 
more  generic  rules  were  to  result  in  less  focused  spending.  Furthermore,  ‘simplification’  could 
suggest, in some areas, the relaxation of the conditions for receiving advances and an increase in the 
amounts that can be paid as such.  

Notwithstanding these qualifications, simplification needs to remain an overriding objective. 

30

 
 
 
Benefits and costs of control 

Management  of  the  EU  budget  has  evolved  piecemeal  over  time  in  response  to  the  type  of 
expenditure  programmes  which  were  introduced  at  subsequent  stages.  The  rules  governing  the 
spending  as  well  as  the  management  methods  need  to  take  into  account  the  specificities  of  the 
various  targets  of  budgetary  spending.  These  targets,  however,  should  not  be  overly  detailed, 
resulting  in  an  excessive  administrative  burden  and  regulations  which  are  difficult  to  observe.  This 
requires, on the part of the Commission, a judicious review of the underlying regulatory framework and 
management structure of specific expenditure programmes. 

In  this  context,  the  first  and  essential  task  must  be  to  ensure  that  reliable  and  comprehensive 
information is compiled to allow a credible evaluation of the existing costs of controls. 

Alongside necessary actions aiming to ensure effectiveness of systems, the indicated objective must 
be to determine the appropriate balance between the cost of controls and the benefits they bring1. 

○○○○○○○○○ 

The Court underlines the importance of reflecting further on simplification and the costs and benefits 
of  controls.  This  review  should  be  done  in  good  time  before  proposals  for  the  new  multi-annual 
financial perspective framework are prepared. 

1  

See recommendation by the Court in the Annual Report for the financial year 2007, paragraph 1.52. 

31

 
 
 
 
 
                                                 
THE 2008 AUDIT OPINION - THE EDFs1

2,7 billion euro for development aid paid in 2008 from the European Development 
Funds (EDFs)  

The EDFs are the result of international conventions and agreements between the Community and its 
Member  States,  on  the  one  hand,  and  certain  African,  Caribbean  and  Pacific  (ACP)  States,  on  the 
other  hand,  as  well  as  Council  decisions  on  the  association  of  overseas  countries  and  territories 
(OCT).  Despite  the  fact  that  the  EDFs  are  not  part  of  the  general  EU  budget,  the  Commission 
manages most of the expenditure in association with ACP countries through EuropeAid (see the policy 
area group External aid, development and enlargement) and  its Delegations in the recipient countries. 
The investment facility part of the EDFs is managed by the European Investment Bank (EIB) and is 
not included in the Court's audit mandate.  

Conclusion 

The Court concludes that the 2008 accounts of the EDFs present fairly, in all material respects, the 
financial position of the EDFs. Without qualifying this opinion the Court draws attention to the fact that 
the method used to estimate the provision for costs incurred is not valid for certain types of contracts 
and to the Commission’s decision to refine it from the financial year 2009 onwards. 

As regards the legality and regularity of the transactions the Court gives an unqualified opinion for the 
revenue  and  commitments  of  the  EDFs.  Without  calling  into  question  this  opinion,  the  Court  draws 
attention to the high level of non-quantifiable errors affecting budget support commitments. 

As to the payments of the EDFs, the Court concludes that they are affected by material error. 

The Court’s assessment of the supervisory and control systems for the EDFs is that they are partially 
effective. 

1  

These  funds  are  not  part  of  the  Union’s  budget  and  are  therefore  subject  to  a  separate  Statement  of  Assurance 
(DAS) by the Court. For the complete and detailed audit findings, as well as the exact wording of the Statement of 
Assurance, please refer to the Annual Report for the European Development Funds. 

32

 
 
 
                                                 
Recommendations  

The  Court  makes  a  number  of  recommendations  to  further  improve  EuropeAid's  design  and/or 
implementation of control systems, including further developing its control strategy and continuing its 
efforts  to  ensure  more  efficient  and  effective  implementation  of  controls.  Ex-ante  checks  should  be 
improved by focusing more on key risks.  

Annual audit plans should be prepared on the basis of more structured risk analysis and more realistic 
assessment of the resources available for the purpose. They should be closely monitored throughout 
the year in order to detect significant deviations and take corrective action in a timely manner. 

EuropeAid  should  ensure  that  the  Delegations  record  data  in  CRIS  (EuropeAid’s  financial 
management information system) Audit in a comprehensive and timely manner. Also EuropAid should 
carry out a review of the transactional ex-post control system with a view to assessing the need for 
and feasibility of extending the scope of such controls. 

For budget support, the Court recommends that EuropeAid pursue its efforts to support its decisions 
on the eligibility of budget support with a structured, formal demonstration that the recipient country 
has a relevant reform programme. This programme should address all significant weaknesses over a 
foreseeable timetable and there should be a commitment on the country’s part to implement it.  

Furthermore, EuropeAid should ensure that all future financing agreements provide a comprehensive 
and clear basis for the assessment of compliance with payment conditions.  

33