Information note, introducing and explaining the 2011 annual reports.
Date: 2012-10-25
Institutions: European Court of Auditors
Subjects: Community budget, European Court of Auditors, European Development Fund, activity report, audit, budgetary control

2011 ANNUAL REPORTS - INFORMATION NOTE 

1 

PRESIDENT’S FOREWORD 

In 2011, the EU spent € 129,4 billion, mostly on agriculture 
and cohesion policies, where the task of implementing the 
EU budget is shared by the Commission and EU Member 
States.  This  information  note  sets  out  the  key  findings 
and  conclusions  of  the  European  Court  of  Auditors’ 
annual report on the implementation of the EU budget and 
the  European  Development  Funds  for  the  2011  financial 
year.  

The  objective  of  the  annual  reports  is  to  provide  findings 
and  conclusions  that  help  the  European  Parliament, 
Council and citizens to assess the quality of EU financial 
management,  and  to  make  useful  recommendations  for 
improvement.  Central  to  the  2011  annual  reports  are  the 
18th  annual  statements  of  assurance  (or  ‘DAS’)  on  the 
reliability  of  the  EU  accounts  and  the  regularity  of  the 
transactions underlying them. 

The 2011 annual report on the implementation of the EU budget includes two new chapters 
in order to provide more focused results on agriculture and cohesion. The previous chapter 
on agriculture and natural resources is replaced by chapters on agriculture: market and direct 
support  and  rural  development,  environment,  fisheries  and  health.  In  addition,  separate 
chapters on regional policy, energy and transport; and on employment and social affairs have 
replaced the previous chapter on cohesion, energy and transport. 

It  is  important  that  our  audit  findings  provide  a  good  basis  for  assessing  the  regularity  of 
income and spending, as well as measuring progress over time. The 2011 annual report on 
the implementation of the EU budget aids comparison between different areas and years by 
including  comparative  figures  related  to  2010  for  the  estimated  error  rate  for  the  overall 
budget and the estimated error rates for the different spending areas. 

Our 2011 annual report on the implementation of the EU budget also brings more insight into 
EU  performance  management  and  measurement,  a  vital  issue  whose  importance  has 
increased  as  a  result  of  the  on-going  economic  and  financial  crisis.  Chapter  10  on  getting 
results from EU spending builds on the well-received introduction of this subject in the 2010 
annual report.  

The annual reports include a large number of recommendations for improving the financial 
management  of  EU  funds,  as  well  as  a  follow-up  to  recommendations  made  in  previous 
reports.  We  have  also  made  a  contribution  to  the  rules  being  prepared  for  the  next 
programming period (2014-2020) in the form of opinions covering own resources, agriculture, 
cohesion and research.  

 
2 

2011 ANNUAL REPORTS - INFORMATION NOTE 

The 2011 annual reports are published during our 35th anniversary year. We continuously 
strive  to  improve  the  way  we  work,  and  what  we  produce,  within  our  role  as  independent 
guardian of the financial interests of the citizens of the Union. 

For  more  information  on  our  mission,  work  and  results  see  www.eca.europa.eu.  You  can 
also follow us on Twitter @EUAuditorsECA. 

Vítor Manuel da SILVA CALDEIRA  

President of the European Court of Auditors 

 
 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

3 

TABLE OF CONTENTS  

2011 Annual Report – Key messages 

Statement of assurance 

Results in more detail 

Revenue 

Agriculture: market and direct support 

Rural development, environment, 
fisheries and health 

Regional policy, 
energy and transport 

Employment and social 
affairs 

External relations, aid and enlargement 

Research and other 
internal policies 

Administrative and other 
expenditure 

European Development Funds (EDFs) 

Getting results from the EU budget 

Explanatory and background information  

The 2011 EU budget 

DAS approach at a glance 

The ECA and its work 

  5 

  7 

8 

15 

17 

19 

21 

25 

27 

29 

31 

33 

37 

41 

43 

45 

 
 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

5 

2011 ANNUAL REPORT – KEY MESSAGES 

  The 2011 accounts present fairly the financial position of the European Union and the 
results  of  its  operations  and  its  cash  flows  for  the  year.  Revenue  and  commitments 
were free from material error. In contrast, payments were affected by material error, with 
an  estimated  error  rate  of  3,9 %  for  the  EU  budget  as  a  whole.  The  level  of  error 
remained similar to 2010 when it was 3,7 %.  

  All individually assessed areas of EU spending were affected by material error with the 
exception  of  external  relations,  aid  and  enlargement  and  administrative 
expenditure.  This  shows  that  improvements  are  needed  in  the  management  of  EU 
funds. 

  The error rate estimated by the ECA for spending in rural development, environment, 
fisheries and health policy group (the most error prone spending area) was 7,7 %. The 
estimated error rate for policy group regional policy, energy and transport remained 
high at 6,0 %.  

  There was an increase in Commission reservations, with the amount the Commission 
directors-general consider to be at risk rising from € 0,4 billion in 2010 to € 2,0 billion in 
2011. This reflects the Commission’s recognition of a high risk of error in some areas, 
notably rural development, cohesion and research. 

 
 
 
 
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2011 ANNUAL REPORTS - INFORMATION NOTE 

  Overall,  the  control  systems  examined  were  only  partially  effective  in  ensuring  the 
regularity  of  payments  and  are  not  realising  their  potential  to  prevent  or  detect  and 
correct errors. Many instances of control failure were identified. 

  The  Commission’s  self  assessment  on  performance  is  evolving  and  represents  some 
welcome  improvements  on  previous  years.  Nevertheless,  ECA  performance  audits  in 
2011 identified a lack of good quality needs assessments, weaknesses in the design of 
programmes  which  impair  reporting  on  results  and  impacts,  and  a  need  for  the 
Commission to demonstrate EU added value. 

 
2011 ANNUAL REPORTS - INFORMATION NOTE 

7 

STATEMENT OF ASSURANCE  

RELIABILITY OF 2011 ACCOUNTS 

In the Court’s opinion, the consolidated accounts of the European Union present fairly, in all 
material respects, the financial position of the Union as of 31 December 2011, 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. 

LEGALITY AND REGULARITY OF 2011 REVENUE AND EXPENDITURE 

REVENUE 

In  the Court’s  opinion,  EU revenue  underlying  the 2011  accounts  is  legal and  regular  in  all 
material respects. 

COMMITMENTS 

In the Court’s opinion, commitments underlying the 2011 accounts are legal and regular in all 
material respects. 

PAYMENTS 

Basis for adverse opinion  

The Court concludes that the examined supervisory and control systems are partially effective 
in ensuring the legality and regularity of payments underlying the accounts. The policy groups 
agriculture: market and direct support; rural development, environment, fisheries and health; 
regional policy, energy and transport; employment and social affairs as well as research and 
other internal policies are materially affected by error. The Court’s estimate for the most likely 
error rate for payments underlying the accounts is 3,9 %. 

Adverse opinion  

In  the  Court’s  opinion,  because  of  the  significance  of  matters  described  in  the  above 
paragraph, the payments underlying the 2011 accounts are materially affected by error.  

For the full text, please refer to chapter 1 of the 2011 Annual Report. 

 
 
 
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2011 ANNUAL REPORTS - INFORMATION NOTE 

RESULTS IN MORE DETAIL 

Chapter 1 of the 2011 annual report provides analytical information on the results for the year, 
in terms of: 

findings on the regularity of transactions; 

  comparison of 2011 results with previous years; 

the assurance provided by Commission management representations; and 

  observations on budgetary management. 

REGULARITY OF TRANSACTIONS 

The ECA tests samples of transactions to provide statistically-based estimates of the extent 
to which revenue and the different expenditure areas are affected by error. The results of the 
testing  for  the  EU  budget  as  a  whole  are  given  in  Diagram  1.  The  diagram  shows  the 
frequency with which transactions are affected by error and the impact of those errors whose 
effects can be quantified (estimated most likely error rate). 

The ECA draws its audit conclusions based on these results and other evidence, such as 
the assessment of systems, Commission management representations and the work of other 
auditors. For more information on the ECA’s audit approach see page 43. 

 
 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

9 

Diagram 1 – Results of transaction testing for 2011 EU budget as a whole 

Error 
frequency

Audited amount and 
most likely error rate

Revenue

Expenditure

2 %

44 %

0,8 %

3,9 %

Audit 
Conclusion

Free from 
material error

Affected by 
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 
quantifiable or non-quantifiable error) 

Y  %

Most likely error rate (Estimated error rate based on the 
quantifiable errors found in the sample of transactions 
audited)

Note: The ECA uses standard statistical techniques to estimate the error rate. (See chapter 1 Annex 1.1 of the annual report)

For 2011, the ECA concludes that commitments in all policy groups and revenue were free 
from material error. For the budget as a whole, the estimated error rate of 3,9 % leads to an 
adverse opinion on the regularity of the payments underlying the accounts.  

The  testing  of  the  policy  groups  provides  results  for  each  spending  area  as  presented  in 
Diagram  2.  More  information  on  each  of  the  spending  areas  assessed  –  specific 
assessments – is given later on in the information note, as well as the related chapters of the 
annual report.  

 
 
 
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2011 ANNUAL REPORTS - INFORMATION NOTE 

Diagram 2 – Results of transaction testing for 2011 EU spending areas 

Policy 
group

Error 
frequency

Audited amount and 
most likely error rate

Audit 
Conclusion

2,9 %

39 %

59 %

57 %

49 %

40 %

7 %

33 %

Agriculture: 
Market and 
Direct Support

Regional 
Policy, Energy 
and Transport

Rural 
Development, 
Environment, 
Fisheries and 
Health 

Research and 
other Internal 
Policies

Employment 
and Social 
Affairs

Administrative 
and other 
expenditure

External 
Relations, Aid 
and 
Enlargement

7,7 %

3,0 %

2,2 %

0,1 %

1,1 %

6,0 %

Affected by 
material 
error

Free from 
material 
error

0

€ 10 bn

€ 20 bn

€ 30 bn

€ 40 bn

€ 50 bn

X %

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

Y %

Most likely error rate (Estimated error rate based on the 
quantifiable errors found in the sample of transactions 
audited)

Note: The ECA uses standard statistical techniques to estimate the error rate. (See chapter 1 Annex 1.1 of the annual report)

 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

11 

COMPARISON WITH PREVIOUS YEARS 

For  the  payment  budget  as  a  whole  the estimated  most  likely  error  for  payments  of  3,9 %, 
was largely similar to 2010 (3,7 %) (see Diagram 3). The ECA found around two fifths of the 
transactions tested to be affected by error (2010: around one third of the transactions).  

Diagram 3 – Estimated most likely error rate for the EU budget as a whole: 
 2006 to 2011 

7,3 %

6,9 %

EU 
spending

5,2 %

3,3 %

3,7 %

3,9 % *

10%

9%

8%

7%

6%

5%

4%

3%

2%

1%

0%

2006

2007

2008

2009

2010

2011

Upper error limit

Most likely error rate

Lower error limit

Note: The ECA uses standard statistical techniques to estimate the most likely error rate. 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.
* In contrast to previous years, failure to meet cross-compliance obligations by recipients of payments under 
the CAP has been included in the calculation of the most likely error for 2011. The errors found represent 
around 0,1 percentage points of the most likely error estimated by the Court for payments as a whole.

The ECA’s estimate of the most likely error for payments in the individual policy groups for 
2011 is higher than in 2010 in the case of:  

•  Agriculture: market and direct support and rural development, environment, fisheries 
and health (compared with the former policy group agriculture and natural resources); 
and 

•  Research and other internal policies. 

 
 
 
12 

2011 ANNUAL REPORTS - INFORMATION NOTE 

There  was  a  decrease  in  the  estimated  most  likely  error  for  regional  policy,  energy  and 
transport  and  employment  and  social  affairs  (compared  with  the  former  policy  group 
cohesion, energy and transport). 

In  the  other  policy  groups  (external  relations,  aid  and  enlargement;  and  administrative  and 
other  expenditure)  the  ECA’s  estimate  of  the  most  likely  error  remained  similar  to  2010. 
Diagram 4 gives a comparison between the 2010 and 2011 results per policy group. 

The  frequency  of  errors  detected  by  the  ECA  increased  for  all  policy  groups,  except  the 
former policy group cohesion, energy and transport and administrative and other expenditure, 
which remained stable. 

 
2011 ANNUAL REPORTS - INFORMATION NOTE 

13 

Diagram 4 – Comparison between 2010 and 2011 estimated most likely 
error rates for EU spending areas 

2010

Agriculture and natural 
resources 

2,3 %

Cohesion Policy, Energy 
and Transport

7,7 %

External aid, 
Development and 
Enlargement 

Research and other 
Internal Policies 

1,7 %

1,4 %

Administrative and other 
expenditure 

0,4 %

2011

Agriculture: 
Market and 
Direct Support 

Rural Development, 
Environment, 
Fisheries and Health

Regional Policy -
Energy and 
Transport

Employment and 
Social Affairs 

2,9 %

7,7 %

6,0 %

2,2 %

External Relations, Aid 
and Enlargement 

Research and other 
Internal Policies 

Administrative and other 
expenditure 

4,0 %

5,1 %

1,1 %

3,0 %

0,1 %

Note: combined error rates for the agriculture and cohesion areas for 2011 are provided for comparison purposes.

SIGNIFICANTLY INCREASED PAYMENTS UNDER RESERVATION BY 
COMMISSION MANAGEMENT 

Explaining Commission management representations 

The Commission is responsible for the implementation of the EU budget. The Commission’s 
directors-general  issue  annual  activity  reports  in  which  they  account  for  the  human  and 
financial resources under their responsibility. They include a signed declaration of assurance 
on  the  extent  to  which  resources  have  been  used  for  their  intended  purpose,  and  control 
procedures  ensure  the  regularity  of  transactions.  When  they  identify  significant  problems, 
directors-general  make  reservations  in  their  declarations,  providing  stakeholders  with 
information  of  a quantitative  and/or  qualitative  nature on  the extent and  likely  impact of the 
issues. 

 
14 

2011 ANNUAL REPORTS - INFORMATION NOTE 

For 2011, all directors-general declared that the control procedures under their responsibility 
gave  the  necessary  guarantees  concerning  the  regularity  of  transactions.  However,  the 
number of directorates-general or services issuing one or more reservations increased from 
13  in  2010  to  16  in  2011  (out  of  a  total  of  48).  The  number  of  individual  reservations 
increased  from  17  in  2010  to  27  in  2011.  The  majority  of  these  relate  to  weaknesses 
concerning the regularity of transactions.  

The  estimated  total  financial  impact  of  reservations  was  € 1 959  million  or  1,5 %  of  the 
payments  made  in  2011  (€ 423 million  -  0,3 %  -  in  2010).  The  increase  in  the  number  and 
estimated  financial  impact  of  reservations  reflect  the  recognition,  by  the  Commission’s 
directors-general, of a high risk of error in some areas, notably rural development, cohesion 
and research. This risk is corroborated by the results of the ECA’s audit testing.  

ECA ANALYSIS OF BUDGETARY MANAGEMENT 

Implementation of the EU budget for 2011 resulted in a budgetary surplus of € 1,5 billion at 
the  end  of  the  year  (2010:  € 4,5 billion),  reflecting  the  extent  to  which  the  budget  was  not 
spent. 

For  the  three  main  funds  of  the  multi-annual  financial framework  “Cohesion  for  growth  and 
employment” (European Social Fund, European Regional Development Fund and Cohesion 
Fund), payment requests by Member States increased towards the end of 2011. Budgetary 
payments  could  have  been  up  to  € 5 billion  higher  had  this  increase  been  correctly 
anticipated and sufficient appropriations made available. 

OUTSTANDING BUDGETARY COMMITMENTS INCREASE FURTHER 

The  EU  budget  is  multi-annual.  Outstanding  budgetary  commitments  represent  amounts  to 
pay  on  spending  programmes  for  which  requests  have  not  yet  been  made.  The  total 
outstanding  commitments 
in  2011, 
increased  by  € 13 billion  (6,7 %) 
representing the equivalent of 2,7 years of payments at the 2011 spending rate. 

to  € 207 billion 

Two thirds of outstanding budgetary commitments concern cohesion, representing 3,2 years 
worth  of  payments  –  or  € 136 billion  –  in  that  area  at  the  2011  spending  rate.  The 
substantially  higher  level  of  accumulated  outstanding  commitments  for  the  2007-2013 
programming period compared with the same point in the previous period is largely due to the 
late start and implementation of the related spending programmes.  

Full  information  on  the  main  findings  can  be  found  in  chapter  1  “The  Statement  of 
Assurance and supporting information” of the 2011 Annual Report. 

 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

15 

REVENUE  
(€ 130,0 BILLION) 

WHAT WE AUDITED 

This specific assessment covers the EU’s revenue, through which it finances its budget. The 
gross  national  income  (GNI)  and  VAT-based  own  resources  provide  67,1 %  and  10,8 %  of 
the total revenue respectively. They are calculated on the basis of Member States’ GNI and 
VAT  collected  by  Member  States.  For  these  own  resources  the  Commission  uses 
macroeconomic  aggregates  prepared  by  Member  States  to  serve  as  the  basis  for  the  EU 
revenue due.  Customs duties collected on imports and the sugar production charge collected 
by national administrations of Member States on behalf of the EU – traditional own resources 
– comprise 12,9 % of the revenue. 

Explaining the audit of EU revenue 

Most EU revenue is calculated on the basis of statistical and macroeconomic data provided 
by the Member States. The ECA’s audit of the regularity of the underlying transactions only 
covers the Commission’s actions in processing the data provided by Member States and not 
the  initial  generation  of  that  data.  As  a  consequence,  the  estimated  error  rate  presented 
below  only  describes  the  impact  of  the  Commission’s  errors  on  the  overall  amount  of 
revenue. 

WHAT WE FOUND  

o  Affected by material error?  

o  Estimated most likely error rate:  

No 

0,8 % 

o  Audited transactions affected by error:  

2 %  

o  Audited control systems:  

Effective  

The ECA’s audits revealed weaknesses in national customs supervision. The ECA concludes 
that the supervisory and control systems of the Member States audited are only partially 
effective in ensuring that the customs duties recorded are complete and correct. 

At the end of 2011 the Commission had still not lifted general reservations or placed specific 
GNI  reservations  in  respect  of  the  EU-15  Member  States  for  the period 2002  onwards  and 
EU-10  from  2004  onwards.  These  reservations  were  eventually  lifted  in  January  2012.  Nor 
had  it  lifted  the  two  remaining  specific  gross  national  product  reservations  for  the  1995  to 
2001 period. 

 
 
 
 
 
 
 
 
 
 
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2011 ANNUAL REPORTS - INFORMATION NOTE 

The ECA noted the practice of not enforcing the recovery of fines in the case of debtors in a 
precarious financial condition. The Commission is proposing to modify the implementing rules 
of the Financial Regulation to allow this course of action “in exceptional circumstances”. 

In order to reflect the current situation in the banking sector, the Commission is reviewing its 
risk management policy concerning the reliability of guarantees received to cover outstanding 
fines and penalties. The ECA found examples where the minimum credit rating requirements 
for the providers of such guarantees were not respected. 

WHAT WE RECOMMEND 

Action taken by the Commission in following-up on the recommendations made by the ECA in 
its 2008 and 2009 annual reports has yielded little progress. 

In its 2011 Annual Report the ECA recommends the Commission to: 

o 

o 

encourage Member States to strengthen customs supervision in order to maximise the 
amounts of traditional own resources collected; and 

continue  its  efforts  to  ensure  that  accounting  systems  allow  the  Member  States' 
accounts to be demonstrably complete and correct. 

Full  information  on  the  ECA’s  audit  of  EU  revenue  can  be  found  in  chapter  2  of  the 
2011 Annual Report. 

 
 
 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

17 

AGRICULTURE: MARKET AND DIRECT SUPPORT  
(€ 43,8 BILLION)  

WHAT WE AUDITED 

the 

This  specific  assessment 
European 
covers 
Agricultural 
Guarantee 
Fund  (EAGF),  one  of  the 
two main instruments of the 
Common Agricultural Policy 
of  the  EU.  The  majority  of 
the  direct  payments  of  this 
to 
are 
Fund 
paid 
beneficiaries 
on 
based 
land  area.  To 
eligible 
receive 
payments 
the 
to  comply 
farmers  have 
with  a  number  of  "cross 
compliance”  obligations  in 
respect  of  land  stewardship  practices  and  environmental  protection.  Management  of  the 
spending is shared with Member States.  

WHAT WE FOUND  

o  Affected by material error?   

o  Estimated most likely error rate:   

Yes 

2,9 % 

o  Audited transactions affected by error: 

39 % 

o  Audited control systems:  

Partially effective 

Around  three  quarters  of  quantifiable  errors  are  ‘accuracy’  errors,  with  the  most  frequent 
being over-declaration by beneficiaries of land area when claiming for EU funds.  

The majority of errors amount individually to less than 5 % of the claim, although some are 
more substantial (see example). The ECA also found cross compliance infringements in 22 of 
the 155 payments subject to these obligations. 

 
 
 
 
 
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2011 ANNUAL REPORTS - INFORMATION NOTE 

Example: Claim for non-existent animals 

A  farmer  was  granted  a  special  premium  for  150  sheep.  On  inspection  the  ECA  found  that  the 
beneficiary did not have any sheep.  

The effectiveness of the control systems – notably the integrated administration and control 
system  (IACS)  –  is  adversely  affected  by  inaccurate  data  in  the  various  databases  (see 
example  below)  and  incorrect  administrative  treatment  of  claims  by  the  paying  agencies. 
Inaccurate land data provided by beneficiaries and by Member State land registries represent 
a  significant  source  of  error.  Furthermore,  some  serious  systems  weaknesses  reported  in 
previous annual reports still persist. 

Example: Incorrect data in the Land Parcel Identification System (LPIS) database 

In two Member States (Italy (Lombardia) and Spain (Galicia)), the ECA found cases where areas of 
land classified as “permanent pasture” were recorded in the LPIS as being 100 % eligible despite the 
fact that they are fully or partially covered with dense forest or other ineligible features. The ECA also 
observed  that  the  LPIS  was  not  updated  with  the  results  of  on-the-spot  inspections  performed  by 
paying agencies (Hungary, Italy (Lombardia) and Spain (Galicia)).  

WHAT WE RECOMMEND 

The Commission has taken some remedial action based on the ECA’s recommendations in 
previous  annual  reports  with  regard  to  the  reliability  and  completeness  of  information 
recorded  in  the  LPIS.  For  instance,  mandatory  quality  assessments  by  all  paying  agencies 
and action plans in Member States affected by major deficiencies were introduced. However, 
the ECA noted that weaknesses persist in certain Member States. 

In  its  2011  Annual  Report  the  ECA  recommends  that  the  Commission  and  Member  States 
take action to ensure that: 

o 

o 

o 

o 

the  eligibility  of  permanent  pasture  is  properly  assessed  in  all  Member  States, 
especially in cases where areas are partly covered with bushes, shrubs, dense trees or 
rocks; 

paying agencies take immediate remedial action where their administrative and control 
systems and/or databases are deficient; 

on-the-spot inspections identify the eligible area in a reliable manner; and 

the  design  and  quality  of  the  work  performed  by  the  certification  bodies  provides  a 
reliable assessment of the legality and regularity of operations in the paying agencies. 

Full information on the ECA’s audit of EU expenditure on market and direct support in 
agriculture can be found in chapter 3 of the 2011 Annual Report. 

 
 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

19 

RURAL DEVELOPMENT, ENVIRONMENT,  
FISHERIES AND HEALTH 
(€ 13,9 BILLION)  

WHAT WE AUDITED 

This specific assessment covers the spending areas of: rural development, environment and 
climate action; maritime affairs and fisheries; and health and consumer protection. 

The  European  Agricultural  Fund  for  Rural  Development  (EAFRD)  represents  88 %  of  the 
payments of this policy group. Management of the spending is shared with Member States. 
EAFRD  co-finances 
rural 
development  programmes.  The  expenditure  covers  area-related  measures  (such  as  agri-
environment  payments  and  compensatory  payments  to  farmers  in  areas  with  natural 
handicaps)  and  non-area-related  measures  (such  as  modernisation  of  agricultural  holdings 
and the setting up of basic services for the economy and rural population).  

rural  development  expenditure 

through  Member  States' 

WHAT WE FOUND  

o  Affected by material error?   

o  Estimated most likely error rate:   

Yes 

7,7 % 

o  Audited transactions affected by error: 

57 % 

o  Audited control systems: 

Partially effective 

The majority of the most likely error rate concerned the eligibility of expenditure for non-area-
related measures. In ten out of 43 payments for agri-environment schemes, the farmers had 
not respected the environmental commitments they had given (see example). One or more 
cross  compliance  infringements  were  noted  in  26  out  of  the  73  payments  subject  to  these 
obligations. 

Example: Eligibility error - non-respect of agri-environment commitments 

A  beneficiary  of  an  agri-environment  scheme  had  committed  to  carry  out  appropriate  orchard 
management techniques and good agricultural practices, including pruning and thinning of fruit trees. 
The  ECA  found  that  several  requirements  were  not  respected,  including  that  the  trees  were  not 
pruned  and  that  the  parts  of  the  parcels  where  the  trees  grew  were  covered  with  waste  material. 
According  to  the  applicable  national  rules,  these  significant  breaches  of  requirements  should  have 
resulted in a 100 % reduction of the payment. However, the payment was made in full.  

In  the  area  of  rural  development,  the  audit  of  the  control  systems  revealed  that 
administrative  and  on-the-spot  checks  are  not  sufficiently  rigorous  to  mitigate  the  risk  of 
declaring ineligible expenditure.  

 
 
 
 
 
 
 
20 

2011 ANNUAL REPORTS - INFORMATION NOTE 

Example: Control systems weakness - Insufficient quality of Member State checks  

One  of  the  ECA's  re-performance  checks  in  Italy  (Lombardia)  was  for  a project  to  construct  a  two-
storey building on a farm including a laboratory for the processing of fruit and other farm products, a 
storage area and a terrace for drying fruits. The paying agency approved the full amount of the final 
payment  claim  of  € 0,2  million  following  both  administrative  and  on-the-spot  checks.  However,  the 
ECA found that the building had predominantly the characteristics of a private residence and not of an 
agricultural building and thus the related costs were not eligible. 

In  the  area  of  maritime  affairs  and  fisheries,  the  ECA  found  that  unforeseen  expenditure 
resulted from insufficient monitoring of fish catches. 

Example: Insufficient monitoring of fish catches  

Under  an  agreement  with  the  Islamic  Republic  of  Mauritania,  EU  vessels  are  allowed  to  fish  in  its 
waters in exchange for an EU financial contribution. Due to a lack of monitoring of these catches in 
2010 more fish were caught than foreseen and the EU had to pay an extra € 1,9 million to Mauritania. 

WHAT WE RECOMMEND 

In its 2011 Annual Report the ECA recommends that the Commission take action to ensure 
that: 

o 

the rules and conditions for rural development expenditure are further simplified; 

o  Member  States  carry  out  administrative  and  on-the-spot  checks  in  a  more  rigorous 

manner so as to mitigate the risk of declaring ineligible expenditure to the EU; 

o 

o 

checks are spread throughout the year so that all relevant seasonal requirements are 
properly checked; and 

fish catches under fisheries partnership agreements with countries outside the EU are 
monitored. 

Full  information  on  the  ECA’s  audit  of  EU  expenditure  in  rural  development, 
environment, fisheries and health can be found in chapter 4 of the 2011 Annual Report. 

 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

21 

REGIONAL POLICY, ENERGY AND TRANSPORT 
(€ 34,8 BILLION)  

WHAT WE AUDITED  

This specific assessment covers the audit of regional policy (94 % of the spending), which is 
mostly  financed  through  the  European  Regional  Development  Fund  (ERDF)  and  the 
Cohesion  Fund  (CF).  Regional  policy  aims  at  strengthening  economic  and  social  cohesion 
within  the  European  Union  by  reducing  development  disparities  between  different  regions. 
Management of regional policy expenditure is shared with Member States, and involves the 
co-financing  of  projects  within 
approved spending programmes. 

Energy  and  transport  represent  the 
remaining  6  %  of  this  spending 
area.  Energy  and  transport  policies 
aim  to  provide  European  citizens 
secure, 
and 
sustainable  and  competitive  energy 
and transport systems and services. 
is  managed 
This  expenditure 
directly by the Commission. 

businesses  with 

WHAT WE FOUND 

o  Affected by material error?   

o  Estimated most likely error rate:   

Yes 

6,0 % 

o  Audited transactions affected by error: 

59 % 

o  Audited control systems: 

Partially effective 

The  ECA  found  serious  failures  to  respect  public  procurement  rules.  Such  errors  affected 
one  quarter  of  transactions  audited.  The  combined  estimated  contract  value  for  these  298 
audited public procurements amounted to € 6,7 billion. 

 
 
 
 
 
 
 
 
22 

2011 ANNUAL REPORTS - INFORMATION NOTE 

Example: Serious failure to respect public procurement rules  

For an energy project involving the construction of a gas pipeline, the works contracts for the second 
and  third  stage  of  the  project  were  awarded  directly,  without  tendering,  to  the  same  consortium  of 
companies that had been awarded a contract for the first section of the pipeline five years earlier. This 
does not comply with the applicable EU and national public procurement laws.  

The second most frequent type of error was ineligible payments with projects failing to fulfil 
the necessary conditions. 

Example: Revenue generated by a project was not taken into account 

A project involved the co-financing of the purchase of new metal processing machines. The revenue 
generated from the sale of the old machinery was not deducted from the expenditure declared for co-
financing. As a consequence the beneficiary received more money from the EU than he was entitled 
to. 

For 62 % of the transactions affected by error, the ECA considers that sufficient information 
was available for the Member State authorities to have detected and corrected at least some 
of  the  errors  prior  to  certifying  the  expenditure  to  the  Commission.  For  regional  policy,  the 
ECA  found  weaknesses  in  management  verifications,  in  particular  in  the  ‘first  level  checks’ 
carried out by managing authorities and intermediate bodies. 

Audit authorities, which are established by the Member States for cohesion policy purposes, 
play  a  key  role  in  ensuring  that  the  expenditure  reimbursed  under  the  ERDF,  CF  and 
European  Social  Fund  (ESF)  is  regular.  The  ECA  assessed  the  functioning  of  a  sample  of 
seven  audit  authorities,  and  found  four  to  be  ‘effective’  and  two  ‘partially  effective’.  The 
remaining audit authority was assessed as ‘not effective’, with the ECA considering the error 
rate it disclosed to be unreliable. 

The ECA found that the programme closure procedures for the 2000-2006 programming 
period were better prepared by the Commission and Member States than for previous multi-
annual programmes but the ECA also identified weaknesses. For instance, in order to avoid 
the imposition of financial corrections at closure, the Member States submitted declarations 
which  contained  unjustified  reductions  in  error  rates,  as  well  as  opinions  which were  not in 
line with the results of the checks. 

More  generally,  the  ECA’s  audits  have  shown  that  there  is  no  assurance  that  financial 
corrections  mechanisms  adequately  compensate  for  the  detected  errors  and  resolve  all 
material issues at the closure of the operational programmes. There is equally no evidence 
that  financial  correction  mechanisms  translate  into  lasting  improvements  to  systems, 
preventing the recurrence of errors. 

 
2011 ANNUAL REPORTS - INFORMATION NOTE 

23 

WHAT WE RECOMMEND 

The ECA recommends that the Commission: 

o  makes sanction systems more effective by increasing the impact of financial corrections 
and  by  reducing  the  possibility  of  replacing  the  ineligible  expenditure  with  other 
expenditure; 

o 

strictly monitors compliance with the eligibility requirements for EU funding, in particular 
the correct application of EU and national public procurement rules; 

o  addresses  weaknesses  in  ‘first  level  checks’  at  the  level  of  managing  authorities  and 
intermediate  bodies,  where  appropriate  through  training  measures  and  specific 
guidance material; 

o  provides  better  guidance  to  audit  authorities  in  the  Member  States  and  encourages 
them to carry out specific systems audits concerning first level checks done by Member 
State authorities that manage the funds; and 

o 

in order to make the procedure for closing multiannual programmes more efficient: 

• 

reminds  the  Member  States  to  ensure  that  the  final  declarations  submitted 
for the 2007-2013 programmes are reliable; 

•  examines  the  specific  weaknesses  identified  by  the  ECA  in  the  winding-up 

declarations for closures of 2000-2006 programmes; and 

•  considers whether these problems have also occurred for other operational 

programmes, and apply financial corrections where necessary. 

Full information on  the ECA’s audit of EU expenditure in regional policy, energy and 
transport can be found in chapter 5 of the 2011 Annual Report. 

 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

25 

EMPLOYMENT AND SOCIAL AFFAIRS  
(€ 10,3 BILLION)  

WHAT WE AUDITED 

This specific assessment covers the employment and social affairs policy area, part of the EU 
cohesion  policy.  The  main  objectives  of  the  spending  are  to  combat  unemployment,  to 
develop  human  resources  and  to  promote  integration  in  the  labour  market.  The  European 
Social Fund (ESF) is the main tool for the implementation of employment and social policy, 
accounting  for  97  %  of  the  policy  area  spending  in  2011.  The  ESF  funds  investments  in 
human  capital  through  training  and  other  employment  measures.  Management  of  the 
spending is shared with Member States. 

WHAT WE FOUND 

o  Affected by material error?   

o  Estimated most likely error rate:   

Yes 

2,2 % 

o  Audited transactions affected by error: 

40 % 

o  Audited control systems: 

Partially effective 

The  majority  of  errors  detected  –  73 %  of  the  estimated  error  rate  –  concerned  the 
reimbursement  of  ineligible  costs,  including  ineligible  training  course  participants  (see 
example),  ineligible  beneficiaries,  ineligible  and  overcharged  staff  costs  and  incorrectly 
awarded contracts.   

Example: Ineligible training participants 

Funding was provided for training courses to increase the qualifications and knowledge of employees 
working  in  the  electronics  sector.  The  ECA  found  that  many  of  the  participants  did  not  work  in  the 
electronics sector and were therefore not eligible for the training.  

The results of the ECA’s audit indicate weaknesses in the management and control systems 
established  in  the  Member  States,  in  particular  in  the  first  level  checks  of  the  expenditure. 
These  are  the  responsibility  of  the  managing  authorities  and  intermediate  bodies  in  the 
Member States. 

The ECA found that sufficient information was available to the Member State authorities for 
them  to  have  detected  and  corrected  at  least  some  of  the  errors  in  76 %  of  the  ESF 
transactions affected by error, before certifying the expenditure to the Commission. 

 
 
 
 
 
 
26 

2011 ANNUAL REPORTS - INFORMATION NOTE 

WHAT WE RECOMMEND 

The  ECA’s  review  of  progress  in  addressing  recommendations  for  cohesion  policy,  energy 
and  transport  made  in  previous  annual  reports  (2008  and  2009)  identified  that  the 
Commission  has  published  a  working  document  in  May  2011  on  the  main  audit  findings 
regarding the application of public procurement rules, in view of launching a discussion with 
Member  States  on  reducing  non-compliance.  Furthermore,  while  the  Commission  has 
continued its programme of audits in the Member States, national management and control 
systems were found to be only partially effective. Finally, the Commission has continued to 
interrupt  or  suspend  payments  and  to  impose  financial  corrections,  but  the  expenditure 
certified to the Commission by the Member States remains affected by material error. 

In its 2011 Annual Report the ECA recommends that the Commission: 

o 

o 

strictly requires compliance with the eligibility requirements for ESF funding; 

reminds  Member  States of  their  responsibility  to provide  for procedures  which ensure 
the correctness and regularity of expenditure declared and takes appropriate action to 
address the weaknesses in first level checks; 

o  encourages national authorities to apply rigorously the corrective mechanisms prior to 
certification of the expenditure to the Commission. Whenever significant deficiencies in 
the functioning of the management and control systems are identified, the Commission 
should  interrupt  or  suspend  payments  until  corrective  action  has  been  taken  by  the 
Member State; and 

o  encourages  the  use  by  Member  States  of  the  simplified  cost  options  permitted  in  the 

regulations in order to reduce the scope for error. 

Full information on the ECA’s audit of EU expenditure in employment and social affairs 
can be found in chapter 6 of the 2011 Annual Report. 

 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

27 

EXTERNAL RELATIONS, AID AND ENLARGEMENT 
(€ 6,2 BILLION)  

WHAT WE AUDITED 

and 

candidate 

development 

This  specific  assessment  covers 
payments  in  the  fields  of  external 
and 
relations, 
humanitarian  aid  and  measures  for 
EU 
accession 
countries. The spending is directed to 
development  assistance 
to,  and 
economic  cooperation  with,  countries 
in  Asia,  Latin  America  and  African, 
Caribbean  and  Pacific  (ACP)  States, 
the  European  neighbourhood  policy, 
and 
(food 
thematic  programmes 
security, environment etc). 

The  newly  established  service  for  Foreign  Policy  Instruments  (FPI)  deals  mainly  with  the 
common foreign and security policy, the instrument for stability, election observation mission 
and the industrialised countries instrument. 

Development  projects  are  dispersed  throughout  more  than  150  countries,  and  the 
implementing  organisations  vary  greatly  both  in  size  and  experience.  To  be  eligible  for  EU 
support, projects are required to comply with complex rules including tendering and contract 
award procedures. Management of the spending is implemented directly by the Commission 
DGs, either from their headquarters in Brussels or by EU delegations in recipient countries, or 
jointly with international organisations. 

WHAT WE FOUND 

o  Affected by material error? 

No.  However,  interim and  final  payments 
were affected by material error 

o  Estimated most likely error rate:   

1,1 % 

o  Audited transactions affected by error: 

33 % 

o  Audited control systems: 

Partially effective 

 
 
 
 
 
28 

2011 ANNUAL REPORTS - INFORMATION NOTE 

All errors were found in interim and final payments. The errors involve ineligible expenditure 
incurred at final beneficiary level, such as: expenditure incurred outside the eligibility period; 
inclusion of ineligible expenditure (e.g. VAT, staff costs and unjustified overheads) charged in 
the project cost claims and expenditure without adequate supporting documents.  

Example: Ineligible expenditure in a final payment 

A final payment for a project providing assistance for banana suppliers in Cameroon was affected by 
serious  eligibility  errors.  There  were  irregularities  in  the  tendering  procedures  carried  out  by  the 
beneficiary.  In  addition,  when  purchasing  equipment  the  beneficiary  did  not  comply  with  the  rule 
requiring  that  both  the  supplier  and  the  goods  have  to  originate  from  an  ACP  country  or  an  EU 
Member State. 

The  fact  that  ineligible  expenditure  declared  by  the  final  beneficiaries  of  grants  or  service 
providers  has  been  paid  by  the  Commission,  shows  that  the  preventive  and  detective 
controls  applied  by  the  Commission  prior  to  payment  are  not  fully  effective.  The  ECA 
identified an insufficient number and limited scope of on-the-spot visits and direct testing of 
expenditure declared, as well as insufficient quality of expenditure verifications subcontracted 
by the beneficiaries. 

WHAT WE RECOMMEND 

In  its  assessment  of  the progress  made  on previous  recommendations the ECA found  that 
the Commission has addressed them all, and four out of ten have been fully implemented.  

In its 2011 Annual Report the ECA recommends that the Commission: 

o 

improves the supervision of grant contracts, making better use of on-the-spot visits to 
prevent and detect ineligible expenditure declared and/or increase the coverage of the 
audits contracted by the Commission; 

o  ensures  that  the  internal  audit  function  of  the  Service  for  Foreign  Policy  Instruments 

becomes operational; and 

o  makes explicit the criteria used for the risk assessments when selecting contracts to be 

audited. 

Full  information  on  the  ECA’s  audit  of  EU  expenditure  in  external  relations,  aid  and 
enlargement can be found in chapter 7 of the 2011 Annual Report. 

 
 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

29 

RESEARCH AND OTHER INTERNAL POLICIES 
(€ 10,6 BILLION)  

WHAT WE AUDITED 

The  main  component  of  the  policy  group  covered  by  this  specific  assessment  is  the 
framework  programmes  for  research  and  technological  development  (FPs),  accounting  for 
56 % of the total operational expenditure. Other internal policies include the Lifelong Learning 
Programme,  accounting  for  11 %  of  the  total  operational  expenditure,  the  "Solidarity  and 
management of migration flows" General Programme for 4 % and the Competitiveness and 
Innovation  framework  Programme  for  2 %.  The  expenditure  is  managed  directly  by  the 
Commission. 

WHAT WE FOUND  

o  Affected by material error?   

o  Estimated most likely error rate:   

Yes 

3,0 % 

o  Audited transactions affected by error: 

49 % 

o  Audited control systems: 

Partially effective 

The main source of error is the over-declaration of costs by beneficiaries for projects funded 
by the research FPs. This is consistent with the errors detected by the Commission’s ex-post 

 
 
 
 
 
 
 
30 

2011 ANNUAL REPORTS - INFORMATION NOTE 

financial audits. Errors were found in personnel costs (see example), other direct costs and 
indirect costs.  

Example: Over-claim of personnel cost 

The  ECA’s  audit  of  a  research  project  revealed  that  the  beneficiary  claimed  time  for  several 
employees  in  excess  of  the  time  they  actually  spent  on  the  project.  The  over-claimed  amount  was 
ineligible. 

Under FP rules, beneficiaries’ cost claims should in certain cases be accompanied by audit 
certificates  from  independent  audit  firms.  The  control  systems  assessment  of  the  ECA 
revealed errors in 81 % of the audited projects that had a positive audit certificate. 

WHAT WE RECOMMEND 

The  ECA’s  review  of  progress  in  addressing  recommendations  made  in  previous  annual 
reports (2008 to 2009) identified that the Commission continued with its efforts to implement 
audit  results  by  adjusting  the  costs  claims  or  by  issuing  recovery  orders  when  participants 
had been found to have over-claimed expenditure. However, it was noted that recovery is a 
lengthy process. 

In its 2011 Annual Report the ECA recommends that the Commission: 

o  enhances  its  initiatives  to  make  beneficiaries  and  independent  auditors  aware  of  the 

errors detected during the ECA’s and the Commission’s ex-post audits; and 

o  ensures  that  the  external  audit  firms  conducting  audits  on  its  behalf  align  their 
procedures with the Commission’s guidelines and standard practice, and, in particular, 
enhance the quality of their audit documentation. 

Full  information  on  the  ECA’s  audit  of  EU  expenditure  in  research  and  other  internal 
policies can be found in chapter 8 of the 2011 Annual Report. 

 
 
 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

31 

ADMINISTRATIVE  AND OTHER EXPENDITURE 
(€ 9,8 BILLION) 

WHAT WE AUDITED 

The  specific  assessment  of  administrative  and  other  expenditure  covers  the  expenditure  of 
EU  institutions  and  other  bodies.  Spending  on  human  resources  (salaries,  allowances  and 
pensions), account for 60 % of the policy group; expenditure on buildings, equipment, energy, 
communications and information technology accounts for the remainder. 

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. 

WHAT WE FOUND  

o  Affected by material error?   

o  Estimated most likely error rate:   

No 

0,1 % 

o  Audited transactions affected by error: 

7 % 

o  Audited control systems: 

Effective 

The  ECA  draws  attention  to  the  errors  and  weaknesses  detected  in  the  examination  of 
calculations and payments of social allowances, of employment contracts for non-permanent 
staff.  The  ECA  also  noted  several  weaknesses  in  procurement  procedures  namely  in  the 
application of selection and award criteria having an impact on the results of the procedure.  

WHAT WE RECOMMEND 

The ECA reviewed the progress made by the institutions in addressing the recommendations 
from the 2009 Annual Report. The ECA recommended to a number of institutions that they 
request  their  staff  to  deliver  at  appropriate  intervals  documents  confirming  their  personal 
situation and that they implement a system for the timely monitoring of these documents. The 
audit  found  that  the  problems  persist  in  some  institutions.  The  risk  therefore  remains  of 
making incorrect or undue payments when the circumstances of staff members change.  

 
 
 
 
 
 
32 

2011 ANNUAL REPORTS - INFORMATION NOTE 

In its 2011 Annual Report, the ECA recommends that: 

o 

o 

the  institutions  and  bodies  concerned  take  steps  to  ensure  that  the  provisions  of  the 
relevant regulations are applied when concluding, extending or modifying employment 
contracts with non-permanent staff; and 

the  institutions  and  bodies  concerned  should  ensure  that  authorising  officers  improve 
through 
the  design,  coordination  and  performance  of  procurement  procedures 
appropriate checks and better guidance. 

Full information on the ECA’s audit of EU administrative and other expenditure can be 
found in chapter 9 of the 2011 Annual Report. 

 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

33 

EUROPEAN DEVELOPMENT FUNDS (EDFS) 
(€ 2,9 BILLION)  

WHAT WE AUDITED 

The  EDFs  provide  European  Union  assistance  for  development  cooperation  to  the  African, 
Caribbean and Pacific (ACP) States and Overseas Countries and Territories (OCTs) based 
on the Cotonou Agreement of 2000. The spending is centred on the objective of reducing and 
eventually eradicating poverty, consistent with the objectives of sustainable development and 
the gradual integration of the ACP countries and OCTs in the world economy. It is based on 
three complementary pillars of development cooperation, economic and trade cooperation as 
well as the political dimension. 

The EDFs are funded by the Member States, governed by their own financial regulations and 
managed outside the framework of the EU Budget. The European Commission is responsible 
for the financial implementation of operations funded with resources from the EDFs.  

WHAT WE FOUND 

o  Reliability of the EDF accounts:  

2011  accounts  fairly  present  the 
financial  position  of  the  EDFs  and 
the  results  of  their  operations  and 
cash flows 

o  EDF revenue affected by material error? 

No 

o  EDF commitments affected by material error?  No 

o  EDF payments affected by material error?   

Yes 

o  Estimated most likely error rate:   

o  Audited transactions affected by error: 

5,1 % 

33 % 

o  Audited control systems: 

Partially effective 

External  aid  financed  by  the  EDFs  is  implemented  in  a  high  risk  environment,  notably  due  to 
geographically dispersed activities and weak institutional and administrative capacities of partner 
countries. 

 
 
 
 
 
 
 
 
 
34 

2011 ANNUAL REPORTS - INFORMATION NOTE 

Typical errors in the EDFs were eligibility errors, such as: expenditure outside the target time 
period or related to activities and services not included in the contract; non compliance with 
the  rules  of  origin  or  nationality;  or  non  compliance  with  procurement  procedures  by  the 
beneficiary (see examples).  

Example: Non-compliance with the rule of origin  

Expenditure  under  a  grant  for  rural  electrification  in  Mozambique  related  to  supplies  that  did  not 
comply with the rule of origin (they were not from either the European Union or ACP countries).The 
auditors contracted by the beneficiary to verify the expenditure had not identified it as ineligible.  

Example: Non-compliance with procurement rules and lack of supporting documents 

In a water supply project in Ethiopia, contracts were awarded on the basis of a criterion which was not 
included  in  the  tender  notice.  In  addition,  part  of  the  expenditure  could  not  be  corroborated  by 
supporting documents. 

The ECA found weaknesses in the ex-ante checks as well as in the monitoring and external 
audit functions at delegation level. It also points out that the quality of the Common External 
Relations  Information  System  (CRIS)  data  remains  a  source  of  concern  and  that 
EuropeAid’s  internal  audit  capability  was  able  to  perform  only  half  of  its  initial  annual  work 
plan.  

WHAT WE RECOMMEND 

The  ECA  assessed  the  follow  up  given  to  its  previous  recommendations.  The  Commission 
has  made  significant  progress  in  implementing  many  of  them.  This  is  notably  the  case  in 
relation to the dissemination of the financial management toolkit to improve the beneficiaries’ 
knowledge  of  eligibility  rules,  the  planning  and  monitoring  of  audits  and  the  assessment  of 
eligibility for budget support. 

However,  further  efforts  are  necessary  to  fully  implement  the  ECA’s  recommendations 
concerning the quality of Common External Relations Information System data, the follow-up 
of audit findings and recommendations and the assessment of the cost-effectiveness of the 
transactional ex-post control system. 

Following  this  review  and  the  findings  and  conclusions in  its 2011  Annual  Report,  the  ECA 
recommends that EuropeAid: 

o 

o 

o 

improves  the  management  of  contract  awarding  procedures,  by  setting  out  clear 
selection criteria and better documenting of the evaluation process; 

introduces  documented  risk-based  planning  and  systematic  follow-up  for  verification 
visits and on-the-spot monitoring visits; 

renders compulsory the guidelines on risk analysis for the preparation of annual audit 
plans by delegations and its headquarters; 

 
2011 ANNUAL REPORTS - INFORMATION NOTE 

35 

o 

reviews  the  design  of  KPIs  (Key  Performance  Indicators)  to  ensure  that  they  are 
unambiguous and easy to interpret; and 

o  assesses the Internal Audit Capability’s capacity to perform its task effectively. 

Full information on the ECA’s audit of the European Development Funds can be found 
in  the  ‘Annual  Report  on  the  activities  funded  by  the  8th,  9th  and  10th  European 
Development Funds (EDFs)’. 

 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

37 

GETTING RESULTS FROM THE EU BUDGET 

This chapter of the annual report focuses on performance. It contains the ECA’s observations 
on the Commission’s self-assessments of performance as stated in the annual activity reports 
of the Commission’s directors-general, and highlights some of the main themes arising from 
the ECA’s 2011 Special Reports on performance. 

EVALUATION REPORT ADDS LITTLE VALUE  

In February 2012, the Commission published its first report on the evaluation of the Union’s 
finances  based  on  the  results  achieved  (the  ‘evaluation  report’)  introduced  by  the  Lisbon 
Treaty.  

In response to an invitation from the European Parliament, the ECA has issued an Opinion on 
the evaluation report. In this Opinion the ECA states that the evaluation report is vague, short 
on substance and consequently adds little value. The European Parliament, the Council and 
the  Commission  should  discuss  and  agree  on  how  the  evaluation  report  might  be  made 
useful to the discharge authority. 

FURTHER IMPROVEMENTS NEEDED IN COMMISSION  
SELF ASSESSMENT 

The  directors-general  of  the  Commission  set  performance  objectives  for  their  policy 
responsibilities  in  annual  management  plans  and  then  report  on  achievements  in  annual 
activity  reports.  The  ECA  assessed  the  reporting  of  three  directorates-general:  Agriculture 
and Rural Development, Regional Policy and Development and Co-operation. Together they 
are responsible for around three-quarters of the payments made from the EU budget in 2011. 

The  ECA  analysed  whether  the  objectives  and  performance  indicators  presented  were 
relevant, comparable and reliable. 

The process by which the annual activity reports are prepared by Commission directorates-
general  is  evolving  and  represents  some  welcome  improvements  on  previous  years. 
Relevance remains an issue, in particular concerning the internal coherence of the objectives 
and  indicators,  the  setting  of  quantified  targets  and  deadlines  and  the  measurement  of 
progress  in  relation  to  current  programmes.  None  of  the  assessed  directorates-general 
reported on economy and efficiency. 

Objectives,  indicators  and  targets  set  in  the  management  plans  of  directorates-general  for 
Regional  Policy  and  Agriculture  and  Rural  Development  were  generally  those  used  for 
reporting  in  the  annual  activity  reports.  However,  where  changes  were  made,  explanations 
were not always provided. Legal limitations and practical constraints impaired the reliability of 
the  information  collected  from  Member  States  regarding  programmes  under  shared 
management. 

38 

2011 ANNUAL REPORTS - INFORMATION NOTE 

WEAK DEMONSTRATION OF NEEDS FOR SPENDING  
AND OF ITS EUROPEAN ADDED VALUE 

The  16  special  reports  on  a  wide  range  of  subjects  adopted  by  the  ECA  in  2011  examine 
whether  the  EU’s  intervention  was  managed  in  accordance  with  the  principles  of  sound 
financial  management  (economy,  efficiency  and  effectiveness).  The  ECA  examined  the 
lessons  that  can  be  learned  from  its  2011  special  reports  for  the  preparation  of  new 
programmes and projects for the 2014-2020 programming period, focusing on three themes: 
needs analysis, design and the concept of EU added value.  

The ECA found that: 

(a)  good quality needs assessments are often not present although they are key to ensuring 
that EU expenditure is targeted on the areas (geographical or by topic) most in need; 

(b) 

there  are  weaknesses  in  the  design  of  programmes  which  affect  negatively  the 
Commission’s ability to establish and report on the results and impacts of EU spending; 

(c) 

it is a challenge for the Commission to demonstrate the EU added value of EU spending. 

The ECA recommends that the Commission should: 

o 

in  the  design of new  spending programmes,  seek  to focus  its  activities on the  results 
and impacts it wants to achieve. If results and impacts cannot be readily measured, the 
Commission  should  put  in  place  indicators  and  milestones,  based  on  Specific, 
Measurable,  Achievable,  Realistic  and  Timely  (SMART)  objectives, 
that  would 
demonstrate that its activities support its desired goals; 

o  work with Member States with a view to improving the quality and timeliness of the data 

submitted; and 

o  define policy objectives so as to demonstrate and report how it secures EU added value 

during the next programming period 2014-2020. 

Full information on the ECA’s assessment of performance can be found in chapter 10 
“Getting results from the budget” of the 2011 Annual Report. 

 
 
 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

39 

EXPLANATORY AND BACKGROUND 
INFORMATION 

 
 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

41 

THE 2011 EU BUDGET 

The EU’s payments for 2011 totalled € 129,4 billion, equivalent to around one percent of the 
Union’s  gross  national  income  (GNI).  In  contrast  Member  States’  public  sector  budgets  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  –  agriculture  and  cohesion  –  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. 

Traditional own 
resources 
13 %

VAT own 
resource 
11 %

2011 REVENUE 

Other 
9 %

Total revenue 2011: 
€ 130 billion 

GNI own 
resource  
67 %

 
 
42 

2011 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  (policy  groups  agriculture:  market  and  direct  support  and  rural  development, 
environment,  fisheries  and  health)  –  principally  in  the  form  of  payments  to  farmers  – 
accounting  for  almost  half  of  the  EU  budget.  Another  significant  proportion  is  spending  on 
regional policy, energy and transport as well as employment and social affairs that co-finance 
a  wide  range  of  projects  from  the  renovation  of  buildings  to  the  construction  of  railways 
networks across Europe. This constitutes about one third of the EU budget. 

2011 EXPENDITURE 

Research and 
other internal 
policies 
8 %

Administrative 
and other 
expenditure 
7 %

External 
relations, aid and 
enlargement  
5 %

Employment and 
social affairs 
8 %

Regional policy, 
energy and 
transport
27 %

Total expenditure 2011: 
€ 129,4 billion 

Agriculture: 
market and direct 
support
34 %

Rural 
development, 
environment, 
fisheries and 
health
11 %

 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

43 

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  directorates-general  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. 

44 

o 

o 

o 

o 

o 

2011 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. 

More information on the audit process for the statement of assurance can be found in 
Annex 1.1 of the 2011 Annual Report. 

 
 
 
2011 ANNUAL REPORTS - INFORMATION NOTE 

45 

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  our  creation  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  –  notably  within  the  annual  discharge 
procedure - those responsible for managing the EU budget. This is mainly the Commission, 
but also concerns 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  EU  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. 42 published for 2011; 

special  reports  on  selected  audit  topics,  published  throughout  the  year.  They  are 
mainly performance audits. Around 20 will be published in 2012; 

opinions  used  by  the  European  Parliament  and  the  Council  when  drafting  and 
approving  rules  and  regulations  with  a  financial  management  impact.  7  published  in 
2012; 

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

 
46 

2011 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 and 
follow us on Twitter @EUAuditorsECA.  

We can also be contacted by email at eca-info@eca.europa.eu.