Introducing and explaining the 2010 annual reports.
Date: 2011-10-26
Institutions: European Court of Auditors
Subjects: Community budget, European Court of Auditors, European Development Fund, audit, budgetary control

2010 ANNUAL REPORTS - INFORMATION NOTE 

1 

PRESIDENT’S FOREWORD 

This  information  note  sets  out  the  key  findings  and 
conclusions of the 2010 annual reports of the European 
Court of Auditors (ECA) on the implementation of the EU 
budget and the European Development Funds (EDFs) for 
the 2010 financial year.  

This is the 17th year that the ECA publishes its statement 
of  assurance  -  Déclaration  d’assurance  (DAS)  -  on  the 
reliability  of  the  accounts  and  the  regularity  of  the 
transactions underlying them. The audit work necessary to 
produce  the  DAS  represents  a  challenge  to  the  ECA 
because  of  its  scale.  We  audit  the  different  and  often 
complex  revenue  and  spending  schemes  at  all  levels  of 
EU, national and regional administrations through to individual beneficiaries – of which there 
are millions – across the European Union and beyond.  

Our aim is to provide soundly evidenced results which give a good basis for assessing – and 
ultimately improving – the management of the EU and EDF budgets. Over the past 17 years 
we have developed and refined our approach to the audit, as well as the way we report the 
results. 2010 is no exception. You will notice a number of changes in the 2010 annual report, 
including: 

o 

o 

o 

o 

a  revision  in  the  presentation  and  composition  of  the  policy  groups  (and  related 
chapters) into which the ECA groups expenditure, to ensure a more rational and better 
balanced distribution between them; 

increased  clarity  in  the  way  we  report  the  results  of  testing,  with  the  inclusion  of 
estimated error rates for each policy group and the budget as a whole; 

an  enhanced  focus  on  recommendations  for  improving  financial  management, 
notably  by  systematically 
to  previous 
recommendations; and 

follow-up  given 

reporting  on 

the 

a  new  chapter  on  performance  issues,  reflecting  the  importance  of  the  economy, 
efficiency and effectiveness of spending. 

2 

2010 ANNUAL REPORTS - INFORMATION NOTE 

I hope that you find our 2010 annual reports of interest. As the independent external auditor 
of the EU finances, our aim is to produce objective and relevant audit reports and opinions 
which contribute to improving financial management of the European Union for the benefit 
of  its  citizens.  Effective  public  spending  is  even  more  important  in  the  current  financial 
climate. The ECA will continue to promote transparency and accountability in EU revenue and 
spending. 

. 
For more information on our mission, work and results, see www.eca.europa.eu

Vítor Manuel da SILVA CALDEIRA  

President of the European Court of Auditors 

 
 
 
 
 
2010 ANNUAL REPORTS - INFORMATION NOTE 

3 

TABLE OF CONTENTS  

2010 Annual Report – Key messages 

Statement of assurance 

Explaining the findings 

Revenue 

Agriculture and natural resources 

Cohesion, energy and transport 

External aid, development and enlargement 

Research and other internal policies 

Administrative and other expenditure of the institutions and  
bodies 

European Development Funds (EDF) 

Getting results from the EU budget 

Explanatory and background information  

The 2010 EU budget 

DAS approach at a glance 

The ECA and its work 

5 

7 

8 

11 

13 

15 

19 

21 

23 

25 

27 

29 

31 

33 

35 

 
 
 
2010 ANNUAL REPORTS - INFORMATION NOTE 

5 

2010 ANNUAL REPORT –  KEY MESSAGES 

  The 2010 accounts present fairly the financial position of the European Union and the 
results of its operations and its cash flows for the year.  

  In  contrast,  the  payments  underlying  these  accounts  were  affected  by  material  error, 
with an estimated error rate of 3,7 % for the EU budget as a whole. Overall, the control 
systems were partially effective in ensuring the regularity of payments. 

  The ECA’s estimated error rate for spending in Cohesion, energy and transport policy 
group  (the  most  error  prone  EU  spending  area)  was  higher  than  for  2009,  with  an 
estimated error rate of 7,7 %.  

  For the other areas of EU spending the estimated error rate remained relatively stable. 
For the Agriculture and natural resources policy group the estimated error rate was 
2,3 %,  i.e.  over  the  materiality  level.  However,  the  direct  payments  covered  by  the 
Integrated Administrative Control System (IACS) were free from material error. 

  The  proportion  of  advance  payments  –  pre-financing  -  in  the  EU  budget  has  risen 
considerably. The accounting rules and supervision have not been adjusted adequately. 

  When planning EU spending programmes, the Commission and the Member States 
should  pay  greater  attention  to  defining  objectives  that  are  SMART  –  specific, 
measurable, achievable, relevant and timed - as well as to identifying and mitigating the 
risks to implementation. 

 
2010 ANNUAL REPORTS - INFORMATION NOTE 

7 

STATEMENT OF ASSURANCE 

RELIABILITY OF 2010 ACCOUNTS 

In the ECA’s opinion, the annual accounts of the European Union present fairly, in all material 
respects, the financial position of the Union as of 31 December 2010, and the results of its 
operations and its cash flows for the year then ended, in accordance with the provisions of 
the  Financial  regulation  and  the  accounting  rules  adopted  by  the  Commission’s  accounting 
officer. 

Emphasis of matter  

in 

Without  calling  into  question  the  opinion  expressed  above,  the  ECA  draws  attention  to  a 
the  Commission’s  accounting  policy  concerning  pre-financing  payments 
change 
establishing  or  contributing  to  Financial  engineering  instruments,  which  have  not  yet  been 
used in the form of loans, guarantees or equity investments. This required the Commission to 
restate  the  2009  annual  accounts  of  the  European  Union  on  which  the  ECA  issued  an 
unmodified opinion. 

LEGALITY AND REGULARITY OF 2010 REVENUE AND EXPENDITURE 

Revenue 

In  the  ECA’s  opinion,  EU  revenue  underlying  the  2010  accounts  is  legal  and  regular  in  all 
material respects. 

Commitments 

In the ECA’s opinion, commitments underlying the 2010 accounts are legal and regular in all 
material respects. 

Payments 

Basis for adverse opinion  

The ECA concludes that overall the supervisory and control systems are partially effective in 
ensuring the legality and regularity of payments underlying the accounts. The policy groups 
Agriculture and natural resources and Cohesion, energy and transport, are materially affected 
by  error.  The  ECA’s  estimate  for  the  most  likely  error  rate  for  payments  underlying  the 
accounts is 3,7 %. 

Adverse opinion  

In  the  ECA’s  opinion,  because  of  the  significance  of  matters  described  in  the  above 
paragraph, the payments underlying the 2010 accounts are materially affected by error. 

For the full text, please refer to the Chapter 1 of the 2010 Annual Report. 

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2010 ANNUAL REPORTS - INFORMATION NOTE 

EXPLAINING THE FINDINGS 

2010  is  the  ECA’s  17th  statement  of  assurance  on  the  reliability  of  the  accounts  and  the 
legality  and  regularity  of  the  transactions  underlying  these  accounts.  Information  on  the 
approach used can be found in the Explanatory section of this document (page 29). 

Regularity of transactions 

Diagram 1 summarises the findings on the regularity of transactions identified by the testing. 
It shows the frequency by which transactions are affected by error, and the impact of those 
errors whose effects can be quantified. 

Diagram 1 – Results of transaction testing 

Audit 
area

Error 
frequency

Most likely 
error rate

Audit 
Conclusion

0

€ 10 bn

€ 20 bn

€ 30 bn

€ 40 bn

€ 50 bn

€ 60 bn

€ 70 bn

2,3 %

Agriculture 
and natural 
resources

Cohesion, 
energy and 
transport

External aid, 
development 
and 
enlargement

Research and 
other internal 
policies

Administrative 
and other 
expenditure

Revenue

37 %

49 %

23 %

39 %

7 %

0 %

1,7 %

1,4 %

0,4 %

7,7 %

Affected by 
material error

Overall free 
from material 
error but 
interim and 
final payments 
affected by 
material error

0,0 %

Free from 
material error

0

€ 20 bn

€ 40 bn

€ 60 bn

€ 80 bn

€ 100 bn

€ 120 bn

€ 140 bn

X %

Error frequency (share of audited transactions affected 
by one or more error) 

Y %

Most likely error rate (weighted average of the percentage 
error rates found in the sample, i.e. estimated error rate)

Note: The ECA uses standard statistical techniques to estimate the error rate. For more details see Chapter 1 Annex 1.1 of the annual report.

 
 
2010 ANNUAL REPORTS - INFORMATION NOTE 

9 

The  ECA  concludes  that  commitments  in  all  policy  groups  and  revenue  were  free  from 
material error. For payments as a whole the estimated error rate was 3,7 % (3,3 % in 2009), 
resulting in an adverse opinion on the regularity of the payments underlying the accounts. 

Comparison with previous years 

The  ECA’s  audit  results  for  2010  show  an  increase  in  its  estimated  error  rate  for  the 
payments for the Cohesion, energy and transport policy group in comparison to the results for 
Cohesion of 2009.  

The  estimated  error  rate  concerning  the  payments  for  the  other  policy  groups  remained 
relatively stable. 

Diagram 2 – Estimated error rate for the audited population of payments 
2006 to 2010 

EU 
budget

10%

9%

8%

7%

6%

5%

4%

3%

2%

1%

0%

2006

2007

2008

2009

2010

Upper error limit

Most likely error rate

Lower error limit

Note: The ECA uses standard statistical techniques to estimate the error rate. The most likely error rate 
is the weighted average of the percentage error rates found in the sample. The Court  is 95 % confident 
that the rate of error for the population lies in the range between the lower error limit and the upper error 
limit. For more details see Chapter 1 Annex 1.1 of the annual report.

 
 
10 

2010 ANNUAL REPORTS - INFORMATION NOTE 

Reliability of Commission management representations 

Each  director-general  reports  on  the  performance  of  his/her  duties  in  an  annual  activity 
report,  accompanied  by  a  declaration  on  the  use  of  resources  and  the  effectiveness  of 
control procedures. The directors-general can issue reservations as part of their declaration, 
bringing attention to issues such as a high rate of error in transactions.  

For the first year the Commission’s internal auditor has provided an overall opinion on the 
state  of  Commission’s  internal  control  framework  in  2010, and assessed  it  to be  adequate. 
The  scope  of  this  opinion  is  limited  to  the  Commission’s  own  internal  control  framework. 
However,  more  than  90 %  of  all  errors  found  by  the  ECA  are  identified  outside  the 
Commission at the level of beneficiaries. In other words, the control systems in place do not 
prevent  or  correct  errors  sufficiently  to  ensure  that  transactions  taken  as  a  whole  are  legal 
and regular. 

Through its synthesis report of annual activity reports of directors-general, the Commission 
takes  responsibility  for  the  implementation  of  the  EU  budget.  For    2010  it  notes  progress 
made  in  remedying  weaknesses,  including  increased  compliance  with  eligibility  rules  in 
declared expenditure, as well as areas for improvement. The ECA finds that: the scope and 
scale  of  reservations  made  should  have  been  greater  in  several  areas;  data  provided  on 
recoveries  is  incomplete  or  has  not  been  checked;  and  there  should  have  been  a  clearer 
distinction  between  recoveries  from  beneficiaries  and  other  financial  corrections,  whose 
burden falls on national taxpayers. 

Increased use of pre-financing 

A significant proportion of Commission payments each year is in the form of advances which 
pre-finance costs to be incurred at a later date. The proportion of advance payments in the 
EU  budget  has  risen  considerably  during  the  current  financial  framework.  The  Commission 
corrected material problems concerning the completeness of pre-financing. Nonetheless, the 
lack  of  current  information  on  the  EU  funds  actually  used  by  the  Member  States  reduces 
significantly the usefulness of the accounting information for management. The increased use 
of pre-financing makes it urgent for the Commission to revisit the relevant accounting rule and 
to improve its supervision. 

 
 
2010 ANNUAL REPORTS - INFORMATION NOTE 

11 

REVENUE  
127,8  BILLION EURO 

  Control systems were effective  

  Transactions were free from material error  

AUDIT AREA 

The European Union’s revenue finances its spending. 127,8 billion euro was raised in 2010. 
Own resources represent the vast majority of revenue.  

The  GNI  and  VAT-based  own  resources  provide  71,2 %  and  10,5 %  of  the  EU  budget 
respectively. They are calculated on the basis of value added tax (VAT) collected by Member 
States  and  Member  States’  gross  national  income  (GNI).  For  these  own  resources  the 
Commission  uses  macroeconomic  aggregates  prepared  by  Member  States  to  serve  as  the 
basis for the EU revenue due. The ECA audit covers the Commission’s actions in processing 
the macroeconomic data provided by Member States. 

Traditional  own  resources  (TOR)  i.e.  customs  duties  collected  on  imports  and  the  sugar 
production charge that are collected by national administrations of Member States on behalf 
of the EU amount to 12,2 % of the EU budget. 

FINDINGS AND CONCLUSIONS  

Based on its audit testing, the ECA concluded that the transactions were free from material 
error. However, some systems weaknesses were found in transaction testing. With regard to 
traditional own resources it was not possible to reconcile the amount of TOR declared with 
the underlying records for one of the countries audited. 

The  ECA’s  audit  found  an  error  in  the  Commission’s  definitive  calculation  for  the  UK  2006 
correction  carried  out  in  2010.  The  amount  to  be  deducted  from  the  UK’s  own  resource 
payments  was  overstated  by  189  million  euro,  which  although  not  material  for  revenue 
overall,  represents  3,5 %  of  the  total  correction.  This  error  has  been  corrected  by  the 
amendment of the 2011 budget. 

The ECA found that control systems were in general effective in ensuring the regularity of 
transactions.  However,  as  in  previous  years  the  ECA  detected  problems  in  the  procedures 
and  systems,  which  affect  the  values  of  suspended  amounts  of  TOR.  For  VAT-based  own 
resources, long-standing reservations still exist, but the backlog is being cleared. There are 
delays in monitoring of the application of the VAT directives. For GNI-based own resources  
some weaknesses persist and verification of GNI inventories is not yet complete. 

 
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2010 ANNUAL REPORTS - INFORMATION NOTE 

RECOMMENDATIONS 

In  following  up  on its  previous  recommendations,  the ECA  found  that  while  some  progress 
had  been  made,  further  work  is  required  in  respect  of  the  implementation  of  a  common 
revision policy  for the GNI-based own resources in the EU and to ensure that customs debts 
incurred on seized goods are booked correctly. 

For 2010 the ECA recommends the Commission pursues its efforts to: 

o 

o 

in  respect  of  traditional  own  resources,  ensure  the  correct  use  and  completeness  of 
Member  States’  account  statements,  and 
further  strengthen  national  customs 
supervision; and 

present the GNI Committee with assessment reports on Member States’ GNI data in 
order  to  replace  all  existing  general  reservations  with  specific  reservations  since  the 
2002 financial year. 

 
 
 
 
 
2010 ANNUAL REPORTS - INFORMATION NOTE 

13 

AGRICULTURE AND NATURAL RESOURCES  
56, 8 BILLION  EURO 

  Control systems were partially effective 

  Direct payments covered by IACS control system were free from material error 

  Rural development was particularly prone to error 

  37 % of payments to beneficiaries tested were affected by error, with an estimated error 
rate of 2,3 % 

AUDIT AREA 

The majority of the direct payments of the European Agricultural Guarantee Fund (EAGF) are 
paid  to  beneficiaries  based  on  the  land  area  farmed.  The  European  Agricultural  Fund  for 
Rural  Development  (EAFRD)  co-finances  projects  for  developing  farming,  rural  life  and 
environmental  protection  measures.  The  Integrated  Administration  and  Control  System 
(IACS)  is  the  main  control  system  for  ensuring  the  regularity  of  both  EAGF  and  EAFRD 
transactions.  Farmers  have  to  comply  with  a  number  of legal  obligations  in  respect  of  land 
stewardship practices and environmental protection. Management of the spending is shared 
with Member States.  

The  EU’s  policy  on  the  Environment,  Maritime  Affairs  and  Fisheries,  Health  and  Consumer 
Protection  aims  to  contribute  to  protecting  and  improving  the  quality  of  the  environment, 
human health and rational utilisation of natural resources. 

FINDINGS AND CONCLUSIONS  

Based  on  its  audit  work  the  ECA  concludes  that  for  the  Agriculture  and  natural  resources 
policy group the payments tested were affected by material error. The estimated error rate is 
2,3 %. However, the direct payments covered by IACS control system were free from material 
error representing 39,7 billion euro. Testing of rural development spending showed a higher 
frequency of error than in EAGF payments: 27 % of EAGF payments tested were affected by 
error, against 50 % of payments for rural development. The most frequent type of error was 
over-declaration of land by beneficiaries. 

Example of errors in payments to farmers due to outdated database information 

The ECA found payments to around 12 500 EAGF beneficiaries were made on the basis of outdated 
land  area  data  in  the  LPIS,  leading  to  an  overall  overpayment  of  11  million  euro.  Contrary  to  EU 
legislation the national authorities funded the repayment to the EU budget from the national budget 
rather than recovering the overpayments from the farmers. This constitutes unapproved national aid. 

14 

2010 ANNUAL REPORTS - INFORMATION NOTE 

The  ECA  found  that  the  supervisory  and  control  systems  audited  for  the  Agriculture  and 
natural resources policy group were partially effective in ensuring the regularity of payments. 
There  were  weaknesses  in  certain  paying  agencies,  for  example  in  the  Land  Parcel 
Identification System (LPIS), which forms the basis for payments to farmers, and in the quality 
and reliability of the checks by national inspections. 

Example of weaknesses in land area measurements checks national inspectors 

The ECA re-performed land area measurements related to EAGF carried out by national inspectors in 
Bulgaria, Greece, Romania, Czech Republic and the Netherlands. The eligible areas reported by the 
national inspectors were found to be incorrect for 13 out of 43 parcels in Bulgaria, 6 out of 32 parcels 
in Greece, 12 out of 29 parcels in Romania, 35 out of 67 parcels in the Czech Republic and 16 out of 
174 parcels in the Netherlands. 

RECOMMENDATIONS 

taken  remedial  action 

The  Commission  has 
the  ECA’s  previous 
recommendations,  including  simplifying  rural  development  measures  and  addressing  the 
reliability and completeness of information recorded in the LPIS. However, the new Council 
regulation for setting EU minimum maintenance requirements for grassland, and for excluding 
direct  aid  from  beneficiaries,  exercising  no  or  only  marginal  agricultural  activity,  is  elective 
rather than compulsory leaving these issues to the discretion of Member States.  

implementing 

in 

For 2010 the ECA recommends that the Commission ensures: 

o 

o 

o 

the mandatory use of ortho-photos (uniform-scale aerial photos) and their update in the 
LPIS database of agricultural parcels; 

that the on-the-spot inspections within the control systems run by Member States are 
carried out properly; and 

that the quality of national inspections is adequately checked and reported on by the 
certification bodies. 

 
 
2010 ANNUAL REPORTS - INFORMATION NOTE 

15 

COHESION, ENERGY AND TRANSPORT 
40,6 BILLION EURO  

  Audit authorities were partially effective in ensuring the regularity of transactions 

  Cohesion continues to be the most error prone EU spending area 

  49  %  of  the  payments  audited  were  affected  by  error,  with  an  estimated  error  rate  of 
7,7 % 

  The  main  sources  of  error  were  the  inclusion  of  ineligible  project  costs  and  failures  to 
comply with public procurement rules 

AUDIT AREA  

Cohesion policy aims to strengthen economic and social cohesion within the EU. Energy and 
transport spending supports sustainable and competitive energy and transport systems and 
services.  EU-supported projects  are undertaken by  private  individuals,  associations,  private 
or public undertakings or local, regional and national public bodies.  

The management of the Cohesion spending, which represents more than 90 % of this policy 
group, is shared between the Commission and the Member States. The latter are responsible 
for  selecting  and  monitoring  projects,  including  administering  and  checking  the  payments 
involved.  Member  States  make  periodic  declarations  of  the  costs  incurred  by  the  project 
promoters  to  the  Commission,  which  reimburse  part  of  those  costs  (co-financing).  To  be 
eligible for reimbursement, the declared costs must comply with EU and national rules. 

Energy and transport expenditure is largely implemented by the Commission. 

FINDINGS AND CONCLUSIONS  

Based on its audit testing, the ECA concluded that the payments for the Cohesion, energy 
and transport policy group was materially affected by error. Out of the 243 payments audited 
49 % were affected by error, with an estimated error rate of 7,7 %.  

For Cohesion expenditure, Member States’ authorities are required to check expenditure for 
errors before sending it to the Commission for reimbursement. The ECA considers that the 
Member  States’  authorities  had  sufficient  information  available  to  have  detected  and 
corrected at least some of the errors for 58 % of the transactions affected by error. 

Around 3 % of the payments audited were for wholly ineligible projects, which accounted for 
more than one third of the estimated error rate. 

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2010 ANNUAL REPORTS - INFORMATION NOTE 

Example of a project not eligible for ERDF funding 

In the case of an European Regional Development Fund project, the feasibility study forming part of 
the project application showed that the project was expected to generate revenue exceeding the cost 
of the project. This rendered the project ineligible for EU co-financing.   

One  fifth  of  transactions  tested  were  affected  by  breaches  of  public  procurement  rules. 
Serious  breaches  of  EU  and  national  public  procurement  rules  were  found  in  5 %  of 
payments tested and accounted for 24 % of all quantifiable errors and almost one third of the 
estimated error rate. 

Example of a serious failure to respect public procurement rules 

Works and services related to making a river navigable for cruise ships were contracted in an irregular 
manner. The contracting authority apportioned the works in order to reduce the contract values below 
the thresholds for applying EU and national procurement rules, effectively  circumventing the normal 
tendering requirements. Several of the contracts were awarded to the same contractor. 

Declarations of various ineligible costs such as excessive costs charged to projects or lack of 
supporting evidence for costs claimed accounted for about one quarter of the estimated error 
rate. 

Funds implementing Financial Engineering Instruments (FEIs) in Member States account for 
an increasing share of expenditure in Cohesion. At the end of 2010 FEIs had been set up with 
an approximate endowment value of 8,1 billion euro. Key regulatory requirements were not 
respected  in  seven  out  of  the  13  audited  payments  to  such  funds.  In  addition,  the 
Commission does not have sufficient monitoring information on the actual implementation of 
FEI operations at recipient level. 

The  ECA  concluded  that  the  audit  authorities  were  partially  effective  in  ensuring  the 
regularity of Cohesion payments. The weaknesses found in the work of the audit authorities – 
a  key  element  of  Member  State  control  arrangements  -  included  delays  in  carrying  out  the 
audits and insufficient guidelines by the Commission on the scope and extent of the checks to 
be undertaken for the audit of projects. 

 
 
2010 ANNUAL REPORTS - INFORMATION NOTE 

17 

RECOMMENDATIONS 

The follow up of the ECA’s previous recommendations shows that progress has been made: 
The Commission reinforced its supervision of the national management and control systems 
for the 2007-13 programming period, in particular through its monitoring of the work of audit 
authorities  and 
interruptions  and  suspensions  of  payments.  The 
Commission  has  also  continued  its  efforts  for  providing  guidance  to  national  authorities 
implementing  operational  programmes  (OPs)  and  to  simplifying  the  eligibility  rules  for 
structural funds. 

increased  use  of 

For 2010 the ECA recommends that the Commission: 

o 

o 

o 

o 

continues  to  monitor  compliance  with  eligibility  requirements,  including  the  EU  and 
national procurement rules; 

encourages national authorities to apply rigorously the corrective mechanisms prior to 
approving  the  expenditure  and  passing  it  for  payment  by  the  Commission,  and 
continue to interrupt or suspend payments to the OPs until corrective action has been 
taken by the Member State; 

assesses  national  eligibility  rules  for  the  2007-13  programming  period  to  identify 
possible areas for simplification and potential sources of error; and 

provides further guidance for audit authorities of the Member States on sampling, the 
scope of verifications to be undertaken for audits of projects and the reporting of audit 
findings. 

 
2010 ANNUAL REPORTS - INFORMATION NOTE 

19 

EXTERNAL AID, DEVELOPMENT AND ENLARGEMENT 
6,5 BILLION  EURO 

  Control systems were partially effective   

  Overall free of material error, with an estimated error rate of 1,7 %  

  However,  a  material  level  of  error  was  found  in  interim  and  final  payments  to 
beneficiaries  

  Most of the quantifiable errors concern expenditure incurred outside the eligibility period, 
inclusion of ineligible expenditure in the cost claims, expenditure without adequate documentary 
proof and payments made not covered by contracts 

AUDIT AREA 

Expenditure  in  this  policy  area  is  related  to  development  assistance  for,  and  economic 
cooperation with, countries in Asia, Latin America and African, Caribbean and Pacific (ACP) 
states,  thematic  programmes  in  this  area,  European  neighbourhood  policy,  enlargement 
strategy, humanitarian aid and actions implemented under the Common Foreign and Security 
Policy.  

The management of this policy area is implemented directly by the Commission DGs, either 
from their headquarters in Brussels or by the EU delegations in recipient countries, or jointly 
with international organisations. The spending involves the reimbursement of costs incurred 
through projects, and, to a lesser extent, through budget support. Development assistance for 
ACP states is also provided from European Development Funds. 

FINDINGS AND CONCLUSIONS 

Based  on  its  audit  work,  the  ECA  concludes  that  taken  as  a  whole  the  External  aid, 
development and enlargement policy group was free from material error, with estimated error 
rate of 1,7 %. However, the interim and final payments were subject to material error.  

The ECA found 23 % of payments to beneficiaries to be affected by error. All the quantifiable 
errors  were  found  in  interim  and  final  payments,  two  thirds  of  them  were  found  in  final 
payments,  which  had  not  been  detected  by  Commission  controls.  A  high  frequency  of  non 
quantifiable  errors  was  found,  including  in  procurement  procedures  and  extensions  of 
contracts. 

20 

2010 ANNUAL REPORTS - INFORMATION NOTE 

Example of ineligible costs reimbursed in a final project payment 

Several  types  of  errors  were  found  in  a  final  payment  to  a  project  supporting  rural  families  in  the 
production and marketing of organic cashew nuts in Nicaragua representing 21,7 % of the total project 
costs.  These  included  missing  invoices  and  proofs  of  payments,  non-compliance  with  procurement 
rules and missing certificates of origin and amounts declared not included in the accounting records. 
The Commission had not detected these errors at the stage of final payment.  

The ECA found that the control systems for the External aid, development and enlargement 
policy group were partially effective in ensuring the regularity of payments. 

RECOMMENDATIONS 

The follow up of the ECA’s previous recommendations shows that progress has been made, 
although a number of the recommendations remain to be addressed. 

For 2010 the ECA recommends that: 

o  the Directorate General for Enlargement (1) defines in more detail the criteria for lifting 
ex-ante  control  and  suspending  the  “conferral  of  management”  to  decentralised 
countries  and  tests  the  effectiveness  of  the  systems  used  by  national  authorities;  (2) 
develops  a  tool  allowing  the  consolidation  of  the  outcomes  of  monitoring  visits;  (3) 
improves the quality of data in its management information system; (4) and increases 
the ex-post reviews of transactions for centralised management; and 

o  the Commission defines a coherent methodology for the external relations directorates 

to calculate the residual error rate. 

 
 
 
2010 ANNUAL REPORTS - INFORMATION NOTE 

21 

RESEARCH AND OTHER INTERNAL POLICIES 
9,0 BILLION  EURO 

  Control systems were partially effective 

  Overall free from material error, with an estimated error rate of 1,4 %  

  However,  there  was  a  significant  level  and  frequency  of  errors  in  interim  and  final 
payments in the 6th and 7th research framework programmes  

  Principal source of error remains the incorrect calculation of personnel and indirect costs 

AUDIT AREA 

Research  policy  seeks  to  foster  investment  in  research  and  the  transition  towards  a 
knowledge-based  economy.  The  payments  are  made  under  the  6th  and  7th  multiannual 
research framework programmes (FP6 and FP7) and are for the most part implemented by 
the  Commission  under  direct  centralised  management.  Beneficiaries  may  be  research 
centres, universities, individuals, commercial firms or public administrations. They undertake 
projects  which  are  eligible  for  EU  co-financing  under  certain  conditions.  At  first  projects 
receive  advance  payments,  with  only  limited  conditions  attached  to  them.  The  interim  and 
final  payments  that  follow  are  subject  to  compliance  with  the  full  range  of  eligibility 
requirements. 

The Lifelong Learning Programme (LLP) aims to enable people at all stages of their lives to 
take part in learning experiences. It also seeks to develop the education and training sector 
across  the  EU.  LLP  is  implemented  through  centralised  indirect  management  by  national 
agencies, who manage the numerous but small amounts of grants to teachers and students. 

FINDINGS AND CONCLUSIONS  

Based  on  its  audit  testing,  the  ECA  concludes  that  overall  the  policy  group  Research  and 
other  Internal  Policies  was  free  from  material  error,  with  the  estimated  error  rate  of  1,4 %. 
However,    interim  and  final  payments  for  research  framework  programmes  were  subject  to 
material error. 

The  ECA  found  that  39 %  of  payments to  beneficiaries  tested  were  affected  by  error:  The 
majority  (88 %)  of  these  errors  were  found  in  interim  and  final  payments  and  95 %  of  the 
quantifible errors concerned the reimbursement of ineligible or inaccurately declared costs to 
projects  funded  by  the  research  framework  programmes.  Other  sources  of  error  include 
indirect  taxes  claimed,  incorrect  application  of  depreciation  and  interest  generated  by  pre-
financing. 

22 

2010 ANNUAL REPORTS - INFORMATION NOTE 

Example of error in flat rate calculation of indirect costs  

A beneficiary managing an FP6 project claimed overheads using a flat rate which was based on direct 
staff  costs.  Following  an  earlier  ex-post  audit,  the  beneficiary  changed  its  allocation  of  overheads 
methodology  without  fully  and  correctly  implementing  the  recommendations  made  by  the  ex-post 
auditors. Errors and inconsistencies, noted during the Court’s audit led to an over-claim of 0,7 million 
euro. 

The ECA again found that supervisory and control systems for Research and other Internal 
Policies were partially effective in ensuring the regularity of payments.  

The  ECA  re-performed  the  audit  of  33  cost  claims  at  beneficiary  level  already  certified  by 
independent  auditors  as  part  of  internal  control.  Errors  were  found  in  27  of  these  claims, 
including 14 with significant financial impact. In addition, the ECA found weaknesses in the 
Commission’s ex-ante desk checks in 47 cases of 97 research FP payments audited. These 
checks were often limited to arithmetical verification of the cost claim even when there was 
evidence that the costs declared were not eligible. ECA also found that primary controls for 
LLP were not fully implemented by national agencies. 

Example of weakness in Commission pre-payment checks  

The beneficiary of an FP6 project calculated the staff costs based on budgeted average hourly rates 
for three categories of staff: senior engineer, scientific graduate engineer and technician. The actual 
hourly rate paid to staff showed a significant divergence from that claimed for EU financing, leading to 
an  over-claim  of  more  than  10 %  of  the  total  declared  staff  costs  of  0,5  million  euro.  Despite  this 
information  being  available,  the  Commission  did  not  question  the  declared  amount  in  its  ex-ante 
check. 

RECOMMENDATIONS 

The  Commission  has  made  efforts  to  implement  the  ECA’s  previous  recommendations,  in 
particular 
recovering 
overpayments  either  directly  or  by  off-setting  against  subsequent  payments  to  the  same 
beneficiaries. 

including  ex-post  audits  and 

improving  control  systems, 

for 

For 2010 the ECA recommends that the Commission: 

o  in the area of the research FPs should: (i) further enhance its ex-ante checks in view of 
identifying  high-risk  payments,  and  (ii)  in  order  to  further  improve  the  reliability  of  the 
audit certificates, raise the independent auditors’ knowledge of the eligibility rules; and 

o 

in  the  area  of  the  LLP  should:  continue  to  strengthen  the  implementation  of  primary 
controls.  The  National  Agencies  should  check  the  files  on  a  regular  basis  and 
document the checks properly. 

 
 
 
2010 ANNUAL REPORTS - INFORMATION NOTE 

23 

ADMINISTRATIVE AND OTHER EXPENDITURE  
OF THE INSTITUTIONS AND  BODIES 
9,3 BILLION EURO 

  Control systems were effective 

  Overall free from material error, with an estimated error rate of 0,4 % 

  Errors and weaknesses found in procurement procedures  

AUDIT AREA 

The  biggest  proportion  of  the  Administrative  and  other  expenditure  policy  group  spending 
(63 %)  relates  to  staff  costs,  such  as  salaries  and  pensions.  The  remainder  is  mostly 
spending on buildings, equipment, energy, communications and information technology. 

The  results  of  the  ECA  audits  of  the  European  Union  agencies  and  other  decentralised 
bodies are reported in specific annual reports, which are published separately. 

FINDINGS AND CONCLUSIONS  

Based  on  its  audit  testing,  the  ECA  concludes  that  the  payments  for  the  policy  group 
Administrative  and  other  expenditure  were  on  the  whole  free  from  material  error.  The 
estimated error rate was 0,4 %. 

The  ECA  found  that  supervisory  and  control  systems  for  administrative  and  other 
expenditure were effective in ensuring the regularity of payments.  

However,  the  ECA  found  a  number  of  errors  and  weaknesses  in  the  implementation  of 
procurement  procedures  by  the  EU  institutions  and  bodies,  and  in  one  institution  repeated 
under-utilisation  of  certain  budget  lines  resulting  in  significant  budget  transfers  to  finance 
building  projects.  Recruitment  decisions  were  also  not  always  appropriatedly  documented. 
These weaknesses were not material for the policy group as a whole, but were significant in 
the context of the individual institution or body concerned and need to be addressed by their 
administrations. 

 
24 

2010 ANNUAL REPORTS - INFORMATION NOTE 

RECOMMENDATIONS 

The ECA noted that its previous recommendation related to the calculation of staff allowances 
and their monitoring have been widely implemented.   

For 2010, the ECA recommends the EU institutions and bodies should ensure that: 

o 

o 

appropriate  documentation  is  established  to  justify  recruitment  decisions  and  that 
eligibility criteria set out in vacancy notices are respected; and 

authorising officers establish appropriate checks and benefit of better guidance in order 
to improve the design, coordination and performance of procurement procedures. 

 
2010 ANNUAL REPORTS - INFORMATION NOTE 

25 

EUROPEAN DEVELOPMENT FUNDS (EDF) 
3,2 BILLION EURO 

  EDF control systems were partially effective 

  EDF accounts and revenue were legal and regular in all material respects 

  EDF  commitments  were  legal  and  regular  in  spite  of  non-quantifiable  errors  found  in 
procurement 

  Material level of error found in the EDF payments to projects, with an estimated level of 
error of 3,4 % 

  Errors found were related to non respect of eligibility conditions 

AUDIT AREA 

The European Development Funds (EDF) are funded by the Member States and are subject 
to their own financial regulation. They are not part of the EU general budget.  

The Commission implements most the expenditure in association with Africa, Caribbean and 
Pacific  (ACP)  countries  through  the  Development  and  Cooperation  Directorate  General  - 
EuropeAid  in  2010.  The  investment  facility  part  of  the  EDF  is  managed  by  the  European 
Investment  Bank  and  is  not  included  in  the  ECA’s  audit  mandate,  nor  in  the  European 
Parliament’s discharge procedure. The EDF contribution is implemented through projects and 
budget  support  and  managed  either  directly  by  the  Commission,  jointly  with  international 
organisations such as the UN agencies and the World Bank or in decentralised management 
with beneficiary countries. 

FINDINGS AND CONCLUSIONS  

Based on its audit testing, the ECA concludes that the accounts of the EDFs for the financial 
year  2010  fairly  present  the  financial  position  and  the  results  of  the  operations  and  cash 
flows. However, EuropeAids’s transactional ex-post controls and the ECA’s own audit again 
identified a high frequency of encoding errors, which, while not being material, may affect the 
accuracy of data in the annual accounts and the reliability of EuropeAid’s management data. 

The ECA concludes that  the EDF revenue was free from material error. 

The  ECA  also  concludes  that    the  individual  EDF  commitments  tested  were  free  from 
material error. However, four out of 14 individual commitments for projects tested under the 
decentralised management were affected by non-quantifiable errors related to tendering rules 
and delays in signing of contracts. 

26 

2010 ANNUAL REPORTS - INFORMATION NOTE 

The ECA concludes that the EDF payments were affected by a material level of error, with 
3,4 % overall estimated level of error found in its testing. 26 % of the 165 payments tested 
were  affected  by  error.  The  majority  of  errors  related  to  eligility  conditions,  such  as 
compliance with procurement procedures, undue VAT payment, expenditure incurred outside 
the implementation period, or ineligible activities or services. 

The ECA concludes that overall the EDF control systems were again only partially effective 
in ensuring the regularity of payments. 

RECOMMENDATIONS 

Many of ECA’s previous recommendations were addressed by the Commission, such as the 
launching of the Action Plan for strengthening EuropeAid’s management and control pyramid 
end of 2010. However, weaknesses remain in certain areas. 

For 2010 the ECA recommends that the Commission finalises the following actions: 

o 

o 

assesses  the  cost-effectiveness  of  controls    and  develops  a  key  indicator  for  the 
estimated impact of error after all ex-ante and ex-post controls; and 

strengthens the effectiveness of project monitoring on the basis of multiannual plans. 

EuropeAid should: 

o 

o 

o 

review the reliability of the certificates of external controls; 

introduce  management  information  systems  for  improved  monitoring  of  results  of on-
the-spot visits, external audits and expenditure verifications and continue its efforts to 
improve CRIS information system; 

for  budget  support  payments,  ensure  that  delegations  consistently  apply  the  new 
format and scheme for the assessment of recipient countries’ reforms of public finance 
management systems and promote further, through policy dialogue, the set up of clear 
assessment 
financial 
mananagement reform programmes. 

in  recipient  countries’ 

to  measure  progress 

frameworks 

 
 
 
2010 ANNUAL REPORTS - INFORMATION NOTE 

27 

GETTING RESULTS FROM THE EU BUDGET  

This new section of the annual report presents the ECA’s observations on the Commission’s 
self-assessment  of  performance  in  its  annual  activity  reports  and  the  main  results  of  the 
ECA’s own performance audits over the last year. 

THE COMMISSION’S SELF-ASSESSMENT OF PERFORMANCE 

The directorates-general establish performance objectives in their annual management plans, 
and report on the results achieved in their annual activity reports. 

The ECA assessed the relevance, comparability and reliability of the performance information 
presented  by  the  Directorates  General  for  Agriculture  and  Rural  Development  (DG  AGRI), 
Regional Policy (DG REGIO) and Research and Innovation (DG RTD).  

The ECA observed that the differences between planned targets and the achievements were 
often  not  analysed  and  that  the  framework  for  reporting  on  effectiveness  did  not  cover 
economy and efficiency of the spending. The absence of appropriate interim milestones made 
it  difficult  to  assess  whether  the  progress  made  could  be  considered  on  track  towards  the 
achievement of multiannual objectives. 

The ECA noted that the objectives, indicators and targets set in the management plans were 
generally those used for reporting in the annual activity reports. Legal limitations and practical 
constraints impaired the reliability of the planning and reporting information collected by the 
directorates-general from Member States regarding programmes under shared management.   

FINDINGS OF ECA PERFORMANCE AUDITS IN 2010 

The 14 special reports adopted by the ECA in 2010 examine whether the EU’s intervention 
was  managed  in  accordance  with  the  principle  of  sound  financial  management  (economy, 
efficiency and effectiveness). 

The special reports highlight positive examples as well as areas for improvement throughout 
the  expenditure  cycle.  The  findings  cover  the  strategic  planning,  the  identification  of  the 
needs,  the  adequacy  of  the  means,  the  measures  to  avoid  overspending  or  delays,  the 
regular monitoring of results and the need for reporting on performance. 

The ECA concludes that the quality of the planning phase is important in determining how the 
intended  results  can  be  obtained.  Insufficient  or  weak  planning,  including  the  absence  of 
SMART1

 objectives, may produce delays, additional costs, and affect the results achieved. 

1 

Specific, measurable, achievable, relevant and timed. 

                                                
28 

2010 ANNUAL REPORTS - INFORMATION NOTE 

It is important for the management’s accountability that the results reported correspond to the 
objectives  and  indicators  set  in  the  management  plan  and  that  appropriate  monitoring  and 
control systems are in place to obtain reliable information for reporting on results. 

The ECA recommends: 

o 

o 

o 

o 

o 

o 

increased  focus  on  performance  in  the  DG  Annual  Activity  Reports,  in  particular  by 
analysing  differences  between  planned  targets  and  achievements  as  well  as  by 
reporting on the economy and efficiency of EU funding; 

defining appropriate interim milestones for multiannual targets, so that progress can be 
assessed adequately; 

that  the  Commission  and  the  Member  States  agree  on  consistent  performance 
indicators on planned targets and achieved results, and to ensure the reliability of the 
information; 

that  when  planning  EU  spending  programmes,  the  Commission  and  the  Member 
States  should  pay  greater  attention  to  defining  SMART  objectives,  as  well  as  to 
identifying and mitigating the risks to implementation; 

accountability  of  management  should  also  be  understood  to  include  reporting  on 
results  with  a  correspondence  between  achievements  expected  in  the  management 
plan and achievements reported in the annual activity report; and 

that  the  Commission,  together  with  the  Members  States  where  appropriate,  should 
design and operate monitoring and control systems to produce complete and accurate 
information on results. 

 
2010 ANNUAL REPORTS - INFORMATION NOTE 

29 

EXPLANATORY AND BACKGROUND 
INFORMATION 

 
 
 
 
2010 ANNUAL REPORTS - INFORMATION NOTE 

31 

THE 2010 EU BUDGET 

The EU’s payments for 2010 totalled 122,2 billion euro, equivalent to around one percent of 
the  Union’s  gross  national  income  (GNI).  This  can  be  compared  with  respective  Member 
States’ public sector budgets, which in many cases amount to around half of their total GNIs. 
The EU budget is decided annually – within the context of seven year financial frameworks – 
by  the  European  Parliament  and  the  Council.  Ensuring  that  the  budget  is  properly  spent  is 
primarily  the  responsibility  of  the  Commission.  For  around  80 %  of  the  spending  –  the 
Cohesion,  energy  and  transport  and  Agriculture  and  natural  resources  policy  groups  –  the 
task of implementation is shared with the EU’s 27 Member States. 

WHERE DOES THE MONEY COME FROM? 

The EU revenue mainly consists of contributions from Member States based on their gross 
national income (GNI) and on a measurement connected to value added tax collected by the 
Member  States  (VAT).  Customs  and  agricultural  duties  –  Traditional  own  resources  –  also 
represent an important share of revenue. 

2010 Revenue 

Other 6 %

Traditional own 
resources 
12 %

VAT own 
resource 
11 %

GNI own 
resource  
71 %

Total revenue 2010: 
127,8 billion euro

 
 
32 

2010 ANNUAL REPORTS - INFORMATION NOTE 

WHAT IS THE MONEY SPENT ON? 

The  largest  single  share  of  the  European  Union  spending  is  on  Agriculture  and  natural 
resources – principally in the form of payments to farmers – accounting for almost half of the 
EU  budget.  Another  significant  proportion  is  spending  on  Cohesion  (regional  and  social 
development), energy and transport co-finances a wide range of projects from renovation of a 
university  building  in  Hungary  to  construction  of  railways  networks  across  Europe.  This 
constitutes about one third of the EU budget. 

2010 Expenditure 

Administrative 
expenditure
8 %

External aid, development 
& enlargement
5 %

Research and other 
internal policies
7 %

Cohesion, energy and 
transport
33 %

Agriculture and natural 
resources 
47 %

Total payments 2010: 
122,2 billion euro

 
2010 ANNUAL REPORTS - INFORMATION NOTE 

33 

DAS APPROACH AT A GLANCE  

The ECA’s statement of assurance opinions – déclaration d’assurance (DAS) - are based on 
objective  evidence  obtained  in  particular  from  audit  testing  in  accordance  with  international 
auditing standards. This is how it is done. 

RELIABILITY OF THE ACCOUNTS 

Do the EU annual accounts provide complete and accurate information? 

The  EU  budget  is  complex.  Hundreds  of  thousands  of  accounting  entries  are  initiated  by 
Commission  DGs  each  year,  which  capture  information  from  many  different  sources 
(including Member States). The ECA checks that accounting processes work properly and the 
resulting accounting data are complete, correctly recorded and properly presented.   

o 

o 

Evaluation of the accounting system to ensure it provides a good basis for reliable 
data (complete and accurate). 

Verification of key accounting procedures to ensure they function correctly. 

o  Analytical checks of accounting data to ensure they are presented consistently and 

appear reasonable. 

o  Direct  checking  of  a  sample  of  accounting  entries  to  ensure  the  underlying 

transaction exists and is accurately recorded. 

o  Check of financial statements to ensure they fairly present financial situation. 

REGULARITY OF TRANSACTIONS 

Do the EU income and payment transactions underlying the EU accounts 
comply with the rules governing them?  

The EU budget involves millions of payments to beneficiaries both in the EU and the rest of 
the  world.  The  majority  of  this  spending  is  managed  by  Member  States.  To  obtain  the 
evidence it needs, the ECA tests payments directly and assesses the systems by which they 
are administered and checked. 

34 

o 

o 

o 

o 

o 

2010 ANNUAL REPORTS - INFORMATION NOTE 

Samples  of  transactions  are  drawn  from  across  the  EU  budget  using  statistical 
techniques to provide a basis for detailed testing by ECA auditors. 

The  sample  transactions  are  audited  in  detail,  usually  on-the-spot  to  obtain  direct 
evidence that the underlying event ‘exists’, is properly recorded and complies with the 
rules under which the payments concerned are made. 

Errors are analysed and classified as either quantifiable or not. 

The impact of errors is calculated through the extrapolation of quantifiable errors in the 
form of a ‘most likely’ error rate. 

The quality of a sample of control systems is assessed to determine their effectiveness 
in making sure the transactions they manage are legal and regular. 

o  Other  relevant  information  is  taken  into  account,  such  as  Annual  activity  reports  and 

reports of other auditors. 

o 

o 

All  findings  are  discussed  with  both  the  national  authorities  and  the  Commission  to 
ensure the facts are correct. 

The ECA adopts its opinions based on the work done and results achieved. 

Note:  this  provides  only  an  outline  of  the  complex  audit  process.  More  information  can  be 
found in Annex 1.1 of the 2010 Annual Report. 

 
 
 
 
2010 ANNUAL REPORTS - INFORMATION NOTE 

35 

THE ECA AND ITS WORK   

The European Court of Auditors - ECA - is the independent audit institution of the European 
Union. We are based in Luxembourg and employ around 900 professional and support staff 
of all EU nationalities. Since the creation of the ECA in 1977 we have focused attention on 
the importance of EU financial management and contributed to its improvement. 

The  ECA’s  audit  reports  and  opinions  are  an  essential  element  of  the  EU  accountability 
chain. Our output is used to hold to account those responsible for managing the EU budget. 
This is mainly the Commission, but also the other EU institutions and bodies. Member States 
also play a major role in shared management.  

OUR PRINCIPAL TASKS ARE: 

o 

o 

o 

financial and compliance audits, principally in the form of the statement of assurance 
(or DAS); 

performance audits of topics selected to maximise the impact of our work; and 

opinions  on  regulations  related  to  budgetary  management  and  other  issues  of 
importance. 

We aim to manage our resources in a way that ensures an appropriate balance between our 
various  activities,  helping  achieve  robust  results  and  a  good  coverage  across  the  different 
areas of the EU budget. 

OUR OUTPUT 

We produce: 

o 

o 

o 

o 

o 

annual reports on the general budget and European Development Funds. The annual 
reports mainly comprise the DAS opinions and results, and are published each year in 
November; 

specific annual reports setting out the ECA’s financial audit opinions on each of the 
EU’s various agencies and bodies. 37 published for 2010; 

special  reports  on  selected  audit  topics,  published  throughout  the  year.  They  are 
mainly performance audits. Around 16 will be published in 2011; 

opinions  used  by  the  European  Parliament  and  the  Council  when  drafting  and 
approving  rules  and  regulations  with  a  financial  management  impact.  4  published  in 
2011; 

annual activity report providing information and insight on our activities for the year. 

36 

2010 ANNUAL REPORTS - INFORMATION NOTE 

Our  work  contributes  to  raising  awareness  and  increasing  transparency  about  EU  financial 
that  management  and  making 
management,  providing  assurance  on 
recommendations for further improvement. We do so in the interests of the citizens of the 
European Union. 

the  state  of 

For  more  information  on  our  role  and  work  please  see  our  website  www.eca.europa.eu  or 
contact eca-info@eca.europa.eu

.