Annual report of the Court of Auditors on the activities funded by the 8th, 9th, 10th and 11th European Development Funds (EDFs) concerning the financial year 2014, together with the Commission's replies
Date: 2015-11-10
Institutions: European Court of Auditors
Subjects: European Development Fund, activity report, auditing, budgetary assessment, general budget (EU), implementation of the budget




C_2015373EN.01028901.xml










10.11.2015   


EN


Official Journal of the European Union


C 373/289





ANNUAL REPORT ON THE ACTIVITIES FUNDED BY THE 8TH, 9TH, 10TH AND 11TH EUROPEAN DEVELOPMENT FUNDS (EDFs)
(2015/C 373/02)

Annual report on the activities funded by the 8th, 9th, 10th and 11th European Development Funds (EDFs)

TABLE OF CONTENTS





Introduction
1-12








Specific characteristics of the European Development Funds
2-12








Risks to regularity
8-12








Chapter I — Implementation of the 8th, 9th, 10th and 11th EDFs
13-19








Financial implementation
13-19








Chapter II — The Court’s statement of assurance on the EDFs
20-46








The Court’s statement of assurance on the 8th, 9th, 10th and 11th EDFs to the European Parliament and the Council — Independent auditor’s report
I-IX








Information in support of the statement of assurance
20-46








Audit scope and approach
20-23








Reliability of accounts
24-25








Regularity of transactions
26-35








Examination of selected systems and annual activity reports
36-46








Conclusion and recommendations
47-50








The conclusion for 2014
47-48








Recommendations
49-50










Annex 1 —

Results of transaction testing for the European Development Funds











Annex 2 —

Follow-up of previous recommendations for the European Development Funds























THE COURT’S OBSERVATIONS



 





INTRODUCTION











1.


This annual report presents our assessment of the European Development Funds (EDFs). Key information on the activities covered and spending in 2014 is provided in 
Graph 1
.






 





Graph 1 —   European Development Funds — Key information 2014























(million euro)




Total operational expenditure (Projects)


2  685




Total operational expenditure (Budget support)


794




Total administrative expenditure (53)



102





Total payments




3  581






– advances




2  105






+ clearings of advances




1  597






Audited population




3  073





 


 





Total individual commitments
 (54)




3  380





 


 





Total global commitments
 (54)




621











 





THE COURT’S OBSERVATIONS



 





Specific characteristics of the European Development Funds











2.


Since 1958, the EDFs have been the main instrument for providing European Union aid for development cooperation to the African, Caribbean and Pacific (ACP) States and overseas countries and territories (OCTs). The partnership agreement signed in Cotonou on 23 June 2000 for a period of 20 years (‘the Cotonou Agreement’) is the current framework for the European Union’s relations with ACP States and OCTs. Its main focus is on reducing and eventually eradicating poverty.






 










3.


The EDFs are of a particular nature:






(a)


they are funded by the Member States according to contribution keys (1) set in an internal agreement between the governments of the Member States, meeting within the Council, which are different from those for the EU general budget;










(b)


they are managed by the European Commission, outside the framework of the EU general budget, and by the European Investment Bank (EIB);










(c)


due to the intergovernmental nature of the EDFs, the European Parliament has a more limited role in their functioning than that it plays for the development cooperation instruments financed by the EU general budget: notably, it does not intervene in the establishment and allocation of EDF resources. However, the European Parliament is the discharge authority, except for the Investment Facility managed by the EIB (2)
 (3).










 










4.


Each EDF is governed by its own Financial Regulation. The Court has suggested on several occasions that a single Financial Regulation, applicable to all present and future EDFs, would ensure continuity, without the risk of interrupting the implementation of the EDFs, and simplify management (4).






 










5.


While the EDF Financial Regulations have been progressively aligned with the General Financial Regulation (5), significant differences remain. One main difference is that the principle of annuality does not apply to the EDFs: EDF agreements are usually concluded for a commitment period of five to seven years, and payments can be made over a much longer period. In 2014, spending was made under four EDFs simultaneously, and payments were still made under the 8th EDF opened in 1995.






 










6.


The EDFs are managed almost entirely by the Commission’s Directorate-General for International Cooperation and Development (EuropeAid), which also manages a wide range of expenditure from the EU budget (6)
 (7).






 










7.


EDF interventions are implemented through projects and budget support (8) under four main arrangements. In 2014, 38 % of payments were made under direct management, of which 22 % of the total related to budget support. The remaining 62 % were made under indirect management, of which 32 % through international organisations, 25 % through third countries and 5 % through national bodies of the EU Member States (9).






 





THE COURT’S OBSERVATIONS




THE COMMISSION’S REPLIES






Risks to regularity











8.


The expenditure covered in this report is delivered using a wide range of methods implemented in 79 countries. Rules and procedures are often complex, including those for tendering and awarding contracts. The absence of a stand-alone, user-friendly Financial Regulation for the 11th EDF significantly increases this complexity (10).













8.



The 11th EDF is governed by its own Financial Regulation (FR) (Regulation (EU) 2015/323) adopted by the Council on 2 March 2015. The real simplification is obtained through the alignment with the general budget FR, which the 11th EDF FR achieved through transparent and clear references to the general budget FR and its Rules of Application (RAP). In this way the 11th EDF FR ensures not only coherence in the applicable financial procedures and greater efficiency, but also allows a reduction in risks and errors.





The rules and templates for tendering and awarding contracts for both the general budget and the EDF compiled in the Procurement and Grants practical guide (PRAG) developed by DG DEVCO, are widely commended by the European federations of contractors.











9.


In two areas — budget support (11) and EU contributions to multi-donor projects carried out by international organisations (12) such as the United Nations (UN) — the nature of the instruments and payment conditions limit the extent to which transactions are prone to errors.






 










10.


Budget support contributes to a state’s general budget or its budget for a specific policy or objective. We examined whether the Commission complied with the specific conditions for making budget support payments to the partner country concerned and verified that general eligibility conditions (such as satisfactory progress in public finance management) had been complied with.






 










11.


However, the legal provisions offer broad scope for interpretation and the Commission has considerable flexibility in deciding whether the general conditions have been met. Our audit of regularity cannot go beyond the stage at which aid is paid to the partner country. The funds transferred are then merged with the recipient country’s budget resources. Any weaknesses in its financial management will not generate errors in our audit of regularity.






 





THE COURT’S OBSERVATIONS



 










12.


When the Commission’s contributions to multi-donor projects are pooled with those of other donors and are not earmarked for specific identifiable items of expenditure, the Commission assumes that EU eligibility rules are complied with as long as the pooled amount includes sufficient eligible expenditure to cover the EU contribution. This is what the Commission calls the ‘notional approach’. The notional approach applied by the Commission limits the work of the auditors in case of substantial contribution of other donors, which the Commission then considers sufficient to cover any ineligible expenditure we may have found.






 





CHAPTER I — IMPLEMENTATION OF THE 8TH, 9TH, 10TH AND 11TH EDFs






Financial implementation











13.


The 8th EDF (1995-2000) amounts to 12  840 million euro and the 9th EDF (2000-2007) to 13  800 million euro. The 10th EDF (2008-2013) totals 22  682 million euro. Of this amount, 21  966 million euro is allocated to ACP countries and 286 million euro to OCTs. These sums include, respectively, 1  500 million euro and 30 million euro for the Investment Facility managed by the EIB, mainly for support to the private sector in the ACP countries and OCTs. Finally, 430 million euro is earmarked for the Commission’s expenditure on programming and implementing the EDF.






 










14.


The Internal Agreement establishing the 11th EDF (13) was adopted in August 2013. It came into force on 1 March 2015 following ratification by all EU Member States. The 11th EDF totals 30  506 million euro (14), of which 29  089 million euro is allocated to ACP countries and 365 million euro to OCTs.






 










15.


In order to ensure the availability of funds between January 2014 and the entry into force of the 11th EDF, transitional measures, known as the ‘Bridging Facility’, were adopted by the Council in December 2013 (15). The resources available under the Bridging Facility in 2014 amounted to 1  616 million euro. They were funded by:






—


funds decommitted from the 8th and 9th EDFs up to 31 December 2013 (936 million euro);










—


uncommitted balances from the 10th EDF at 31 December 2013 (75 million euro);










—


funds decommitted in 2014 from the 10th and previous EDFs (586 million euro); and










—


interest and other receipts (19 million euro).




They are accounted for under the 11th EDF, but do not constitute additional resources to the 11th EDF.






 










16.




Table 2
 shows the use, during 2014 and cumulatively, of EDF resources.






 







Table 2 —   Use of EDF resources at 31 December 2014



















(million euro)




 


Situation at end of 2013


Budgetary implementation during the financial year 2014 (net) (60)



Situation at end of 2014




 



Total amount



Implement. rate (56)



8th EDF (57)



9th EDF (57)



10th EDF


11th EDF



Total amount



8th EDF


9th EDF


10th EDF


11th EDF




Total amount





Implement. rate (56)













A —



RESOURCES
 (55)







49  026



 




- 64






- 373






-  1  105






1  616






74






10  417






15  739






21  328






1  616






49  100




 











B —



USE






 


 


 


 


 


 


 


 


 


 


 


 


 










1.


Global commitments
 (58)







47  952




97,8 %





- 63






- 381






- 95






1  160






621






10  415






15  703






21  294






1  160






48  573





98,9 %











2.


Individual commitments
 (59)







41  410




84,5 %





- 37






- 1






2  687






731






3  380






10  400






15  407






18  252






731






44  790





91,2 %











3.


Payments







35  384




72,2 %





16






145






2  760






595






3  516






10  379






14  941






12  985






595






38  900





79,2 %












C —



Outstanding commitments (B1-B3)







12  568




25,6 %



 


 


 


 


 




36






762






8  309






565






9  673





19,7 %












D —



Available balance (A-B1)







1  074




2,2 %



 


 


 


 


 




2






36






34






456






527





1,1 %















THE COURT’S OBSERVATIONS



 










17.


The level of net commitments made in 2014 was extraordinarily low (621 million euro) compared to previous years (16). This was due to the delayed entry into force of the 11th EDF, which limited the resources available for commitments under the Bridging Facility. On the other hand, payments made in 2014 reached a historical high (3  516 million euro) (17), in particular because of 595 million euro paid out from the Bridging Facility, notably for large disbursements of budget support and advances for operations under the African Peace Facility in the Central African Republic and Somalia.






 










18.


At the end of 2014, almost all resources available had been committed (98,9 % for financing decisions, 91,2 % for individual contracts). Outstanding commitments (18) decreased by 23 % from 12,5 billion euro at the end of 2013 to 9,7 billion euro at the end of 2014. This was the result both of the efforts made by EuropeAid to decrease outstanding commitments and of the low level of financing decisions made in 2014.






 










19.


For its whole area of responsibility (19), EuropeAid pursued its efforts to decrease old prefinancing and old unspent commitments (20) and to reduce the number of open expired contracts (21). The 2014 targets set for old prefinancing and unspent commitments were largely exceeded (22). However, while the 2014 target set as regards the share of expired contracts on the total number of contracts was almost met for EuropeAid’s whole portfolio (23), progress has been less satisfactory for the EDFs (24).






 





CHAPTER II — THE COURT’S STATEMENT OF ASSURANCE ON THE EDFs






The Court’s statement of assurance on the 8th, 9th, 10th and 11th EDFs to the European Parliament and the Council — Independent auditor’s report











I —


Pursuant to the provisions of article 287 of the Treaty on the functioning of the European Union (TFEU) and Article 49 of the Financial Regulation applicable to the 10th EDF as regards the application of the transition period between the 10th European Development Fund and the 11th European Development Fund until the entry into force of the 11th European Development Fund Internal Agreement, which also applies to previous EDFs, we have audited:






(a)


the annual accounts of the 8th, 9th, 10th and 11th European Development Funds which comprise the balance sheet, the economic outturn account, the statement of cash flow, the statement of changes in net assets and the table of items payable to the European Development Funds and the report on financial implementation for the financial year ended 31 December 2014 approved by the Commission on 24 July 2015; and










(b)


the legality and regularity of the transactions underlying those accounts within the legal framework of the EDFs in respect of the part of the EDF resources for whose financial management the Commission is responsible (25).













Management's responsibility











II —


In accordance with Articles 310 to 325 of the TFEU and the applicable Financial Regulations (26), management is responsible for the preparation and presentation of the annual accounts of the EDFs on the basis of internationally accepted accounting standards for the public sector (27) and for the legality and regularity of the transactions underlying them. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error. Management is also responsible for ensuring that the activities, financial transactions and information reflected in the financial statements are in compliance with the authorities which govern them. The Commission bears the ultimate responsibility for the legality and regularity of the transactions underlying the accounts of the EDFs (Article 317 of the TFEU).









Auditor's responsibility











III —


Our responsibility is to provide, on the basis of our audit, the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions. We conducted our audit in accordance with the IFAC International Standards on Auditing and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions. These standards require that we plan and perform the audit to obtain reasonable assurance as to whether the annual accounts of the EDFs are free from material misstatement and the transactions underlying them are legal and regular.














IV —


An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the accounts and the legality and the regularity of the transactions underlying them. The procedures selected depend on the auditor's judgment, including an assessment of the risks of material misstatement of the accounts and of material non-compliance of the underlying transactions with the requirements of the legal framework of the EDFs, whether due to fraud or error. In making those risk assessments, internal control relevant to the preparation and fair presentation of the accounts, and supervisory and control systems implemented to ensure legality and regularity of underlying transactions, are considered in order to design audit procedures that are appropriate in the circumstances but not for the purposes of expressing an opinion on the effectiveness of internal control. An audit also includes evaluating the appropriateness of accounting policies used and reasonableness of accounting estimates made, as well as evaluating the overall presentation of the accounts.














V —


We consider that the audit evidence obtained is sufficient and appropriate to provide a basis for our opinions.









Reliability of the accounts






Opinion on the reliability of accounts











VI —


In our opinion, the annual accounts of the 8th, 9th, 10th and 11th EDFs for the year ended 31 December 2014 present fairly, in all material respects, the financial position as at 31 December 2014, the results of their operations, their cash flows and the changes in net assets for the year then ended, in accordance with the EDF Financial Regulation and with accounting rules based on internationally accepted accounting standards for the public sector.









Legality and regularity of the transactions underlying the accounts






Revenue






Opinion on the legality and regularity of revenue underlying the accounts











VII —


In our opinion, revenue underlying the accounts for the year ended 31 December 2014 is legal and regular in all material respects.









Payments






Basis for adverse opinion on the legality and regularity of payments underlying the accounts











VIII —


Our estimate for the most likely error rate for expenditure transactions from the 8th, 9th, 10th and 11th EDFs is 3,8 %.









Adverse opinion on the legality and regularity of payments underlying the accounts











IX —


In our opinion, because of the significance of the matters described in the basis for adverse opinion on the legality and regularity of payments underlying the accounts paragraph, the payments underlying the accounts for the year ended 31 December 2014 are materially affected by error.








16 July 2015




Vítor Manuel da SILVA CALDEIRA





President





European Court of Auditors


 




12, rue Alcide de Gasperi, 1615 Luxembourg, LUXEMBOURG


 





THE COURT’S OBSERVATIONS



 





Information in support of the statement of assurance






Audit scope and approach











20.




Annex 1.1, part 2
, of chapter 1 of the Court of Auditors’ 2014 annual report on the implementation of the budget describes our overall audit approach and methodology. For the audit of the EDFs, the following specific points should be noted.






 










21.


Our observations regarding the reliability of the EDF accounts concern the financial statements (28) of the 8th, 9th, 10th and 11th EDFs (29) approved by the Commission in compliance with the EDF Financial Regulation (30) and received, together with the accounting officer’s letter of representation, by us on 24 July 2015. The audit involved testing amounts and disclosures, and assessing the accounting principles used, significant estimates made by the management and the overall presentation of the accounts.






 










22.


The audit of the regularity of transactions involved:






 










(a)


an examination of all contributions from Member States and a sample of other types of revenue transaction;






 










(b)


an examination of a sample of 30 commitments (31);






 










(c)


an examination of a sample of 165 transactions (32). The sample is designed to be representative of the entire range of payments within the EDFs. It consisted of 127 payments authorised by 28 EU delegations (33) and 38 payments authorised by the Commission departments (34). Where errors were detected, the relevant systems were analysed to identify the specific system weaknesses involved;






 





THE COURT’S OBSERVATIONS




THE COMMISSION’S REPLIES











(d)


an assessment of systems examined at EuropeAid and EU delegations, covering: (i) ex ante checks by Commission staff, external auditors or supervisors before payments were made, and (ii) monitoring and supervision, notably the follow-up of external audits, verification missions, monitoring visits, and EuropeAid’s 2012, 2013 and 2014 residual error rate (RER) studies;






 










(e)


a review of the annual activity report (AAR) by the Director-General of EuropeAid; and






 










(f)


a follow-up of our previous recommendations.






 










23.


As indicated in paragraph 6, EuropeAid implements most of the external assistance instruments financed from the general budget and the EDFs. Our observations concerning both the systems and the reliability of the AAR and the Director-General’s declaration for 2014 refer to EuropeAid’s entire area of responsibility.






 





Reliability of accounts











24.


Since 2007, year of the modernisation of the EDF accounting, the cut-off estimation method applied by the Commission does not include accrued costs related to budget support contracts for which no payment request were submitted by the ACP countries during the year. The Commission considers that, in view of the nature of budget support, the event for the recognition as an expense is the disbursement. The Commission has indeed a broad margin of judgement when assessing the compliance with the eligibility conditions. However, budget support is not a discretionary grant, but an entitlement, under the Commission’s accounting rules: as for other non-exchange expenses, the Commission is obliged to make the payments when eligibility conditions are met.













24.



The Commission has been applying this approach to budget support operations since 2007, on the basis of the 2006 accounting rules.





The Commission has considered that recognition as an expense should take place when ‘disbursement’ takes place, as at this stage all eligibility conditions have been duly assessed by the Commission services. The Commission also includes in the cut-off payment requests made by ACP States during the year and not yet paid because the Commission considers that when an ACP State sends a request for payment related to budget support, there is a high probability that the contractual criteria for eligibility are met.











25.


For prefinancing payments over 7 50  000 euro, the Commission is required to recover interests on an annual basis (3 million euro recovered in 2014 and 5,7 million recovered in 2013). As mentioned in previous years (35), we found that the authorising officers by delegation still do not comply systematically with this rule and the amount of interests revenue disclosed in note 3.5 to the financial statements is partially based on estimates. Furthermore, the interest earned on prefinancing between 2 50  000 euro and 7 50  000 euro were still not recognised as financial revenue in the financial statements because the development of the Common External Relations Information System (CRIS) was completed only in late 2014.













25.



Improvement has been recorded over the past 3 years as regards better yearly recovery of interest on prefinancing, rather than at the end of the contract.





Instructions are regularly sent to the authorising officers to remind them of the obligation to recover interest on pre-financing when due. A monitoring system has also been put in place.






THE COURT’S OBSERVATIONS



 





Regularity of transactions






Revenue











26.


Our audit of revenue transactions found them to be free from material error.






 





Payments











27.




Annex 1
 contains a summary of the results of payment transaction testing. Of the 165 payment transactions that we audited, 54 (33 %) were affected by error. On the basis of the 36 errors which we have quantified, we estimate the level of error to be 3,8 % (36).






 










28.


When excluding from the audited sample budget support and multi-donor transactions referred to in paragraphs 9 to 12, the estimated level of error is 4,8 % (37).






 










29.




Graph 2
 presents the extent to which the different types of errors contributed to our estimated level of error for 2014. Errors relating to non-compliance with procurement procedures by beneficiaries and the absence of supporting documents account for 63 % of the estimated level of error.






 





Graph 2 —   Contribution by type of error to the estimated level of error





Source: European Court of Auditors.





THE COURT’S OBSERVATIONS



 






Projects












30.


Of the 133 payment transactions relating to projects that we audited, 52 (39 %) were affected by error, of which 34 (65 %) were quantifiable errors. Of the 34 payment transactions affected by quantifiable errors, 14 were final transactions authorised after all ex ante checks had been performed.






 










31.


As was the case in previous years (38), errors were more frequently found in transactions relating to programme estimates, grants and contribution agreements with international organisations than in other forms of support. Of the 66 transactions of this type audited, 29 (44 %) were affected by quantifiable errors accounting for 75 % of the estimated level of error.






 










32.


The main types of quantifiable error detected in payment transactions related to projects concerned:






 










(a)


non-compliance by the beneficiary with procurement rules (eight transactions);






 





THE COURT’S OBSERVATIONS




THE COMMISSION’S REPLIES











(b)


absence of supporting documents showing that eligible activity occurred (11 transactions) (39);






 










(c)


ineligible expenditure, such as expenditure relating to expenditure incurred outside the implementation period (three transactions), ineligible VAT (two transactions), activities not covered by the contract (one transaction) or indirect costs claimed as direct costs (one transaction);






 










(d)


expenditure not incurred by beneficiaries (10 transactions);






 










(e)


incorrect calculation of expenditure (two transactions).






 





Box 1 — Examples of quantifiable errors in project transactions





Box 1 —
   
Examples of quantifiable errors in project transactions








Failure by the beneficiary to comply with procurement procedures


We examined the final clearance of expenditure under a grant agreement to an organisation in charge of agricultural cooperation between ACP countries and found an error in the procurement of IT services amounting to 2 25  900 euro. The grant beneficiary based in the Netherlands did not follow an international restricted procurement procedure, which requires a tender notice to be published. Invitations were sent only to three Dutch companies of his choice. The failure to comply with procurement rules stipulated in the grant agreement resulted in restricted competition.




Failure by the beneficiary to comply with procurement procedures



The Commission is implementing relevant corrective measures, i.e. issuing a recovery order for the full amount of the final contract value 2 51  124 euro. A pre-information letter was sent to the beneficiary on 1 June 2015.







Absence of supporting documents to justify expenditure


We examined the final clearance of expenditure incurred under the ‘Facilitating Agricultural Commodity Trade’ programme implemented across the Pacific region. We tested 20 expenditure items. For seven of them, relating to construction works, staff costs, daily allowances and hotel accommodation amounting to 22  117 euro, the essential supporting documents for the expenditure (e.g. invoices, proof of payment, evidence demonstrating the link between staff costs and project activities, evidence of travel and meeting participation to justify daily allowances and hotel accommodation) were not provided (39).


 






Ineligible expenditure


We examined a clearance of the EDF contribution to the TerrAfrica Leveraging Trust Fund. The administration agreement for the Trust Fund was signed in November 2012. The clearance made by the Commission was based on total disbursements of the Trust Fund during its lifetime from 2006 to 2013. Out of 6 7 14  489 euro accepted by the Commission, expenditure of 4 6 64  666 euro was incurred before the administration agreement entered into force. In addition, it had already been cleared by the Commission under the previous Trust Fund agreement, and was therefore paid twice.




Ineligible expenditure



The Commission has fully implemented relevant corrective measures. The sampled clearing was cancelled and re-encoded taking into account the overstated amount.







Expenditure not incurred by the beneficiary


We examined a clearance of prefinancing made under the ‘Implementation of humanitarian demining operations in Senegal (Casamance)’ programme. The international organisation implementing the programme claimed as actual expenditure the amount of a service contract for demining that had not yet been fully paid out. The demobilisation phase had not been completed (the equipment and material had not been removed from the project site and handed over to the national authorities, and the final report had not been submitted by the contractor) and the corresponding expenditure, 2 07  437,87 USD, had not been incurred by the beneficiary.




Expenditure not incurred by the beneficiary



The Commission is implementing relevant corrective measures, i.e. the recovery procedure has been initiated. In addition, a verification mission is planned for the closure of the project.











33.


In 21 (40) cases of quantifiable error, the Commission, via its systems, had sufficient information (41) to prevent, detect, and correct the errors before accepting the expenditure. If all this information had been used to correct errors, the estimated level of error would have been 2,3 percentage points lower.






 










34.


Non-quantifiable errors mainly included shortcomings in the procurement procedures followed (eight transactions) and insufficient procurement documents (seven transactions).






 






Budget support












35.


Of the 32 transactions relating to budget support that we audited, two were affected by quantifiable errors of minor impact (less than 0,1 percentage point) relating to the beneficiary governments’ failure to comply with the provisions of the financing agreements in respect of exchange rates to convert budget support disbursements to local currency.













35.



Given the fact that, for both errors, the financing agreements do not set a clear reference to the exchange rate to be applied, the Commission considers that it is difficult to quantify these errors.









Examination of selected systems and annual activity reports











36.


As in previous years, the frequency of errors that we found, including some affecting final claims which had been subject to external audits and expenditure verifications, point to weaknesses in these ex ante checks.






 










37.


In May 2013, EuropeAid adopted an action plan to address weaknesses identified in the implementation of EuropeAid’s system (42). Implementation of all 23 planned actions started in 2013 and 2014. By the end of 2014, 15 actions had been fully implemented and eight were ongoing (43). It is too early to assess the impact of the action plan as some actions are still under development.






 










38.


The following measures have been taken to improve external audits and expenditure verifications:






 










(a)


risk analysis was made compulsory for the preparation of annual audit plans by EU delegations and EuropeAid’s services;






 










(b)


grant contract templates have been revised so that auditors can be selected or contracted directly by EuropeAid;






 










(c)


awareness-raising about the most common types of error, training and reinforcing of financial and control skills of EuropeAid staff and beneficiaries.






 










39.


While planned for December 2013, EuropeAid has not yet developed the quality/eligibility grids assessing the reliability of expenditure verification reports and providing guidance in the event of non-compliance.













39.



Since the issue is more complex in practical terms than expected, the development of the quality grids for expenditure verification reports is taking a longer time than foreseen. The grids should be available by the last quarter of 2015.














40.


As indicated in our previous annual reports (44), there are still shortcomings in EuropeAid’s management information system on the results and the follow-up of external audits, expenditure verifications and monitoring visits. These make it difficult for the Director-General to hold heads of unit or heads of EU delegations accountable for the timely follow-up and correction of the system weaknesses and errors identified. EuropeAid is developing a new audit application to improve the follow-up of audit reports.













40.



As far as audits, expenditure verifications and similar engagements contracted by the Commission are concerned, the rollout of a new management information system on the results and the follow-up of external audits, expenditure verifications and similar engagements, is expected to lead to significant improvements over time.










2014 residual error rate study












41.


EuropeAid carried out its third RER study to estimate the level of error which has evaded all management checks to prevent, detect and correct errors. The RER study is based on an appropriate methodology and provides useful information, which allows EuropeAid to identify where the implementation of control systems should be improved.






 










42.


The study consisted of an examination of a representative sample of transactions relating to contracts closed between September 2013 and August 2014. Its results are presented in the AAR (45). Following a recommendation made in our 2013 annual report (46), the AAR discloses the scope of the RER study and the estimated lower and upper limits. The study estimates the RER at 2,81 %, i.e. above the 2 % materiality level set by the Commission. The main types of error identified by the study are:






 










(a)


absence of satisfactory documentation demonstrating eligibility provided by beneficiary organisations (42,70 % of the RER);






 










(b)


absence of legal basis for payment, over-claim and other non-compliance issues (32,83 % of the RER);






 










(c)


errors which were estimated because insufficient evidence was available to check the regularity of transactions (16,76 % of the RER);






 










(d)


unrecovered and uncorrected amounts (7,71 % of the RER).






 










43.


Our review of the 2014 RER study found that it was carried out overall in accordance with the methodology and provides sufficient evidence that the RER is material. For some transactions examined, we found that there was scope for improvement in a number of respects, relating to:






(a)


the compliance with the conditions set for placing reliance upon previous control work;










(b)


the adequacy of the documentation of the audit evidence to support the conclusions;










(c)


the justification for the decision not to extrapolate the error found in the sample tested to the whole transaction amount; and










(d)


a too wide margin of judgment was left when error rates on individual transactions had to be estimated.

















43.



The Commission welcomes the Court’s conclusion that the RER is based on an appropriate methodology, that it provides useful information and that it was carried out overall in accordance with the methodology. It will examine, together with the contractor, the issues raised by the Court.









Review of annual activity report











44.


In his declaration of assurance, the Director-General makes a reservation concerning the legality and regularity of transactions, since the amount considered at risk (205,7 million euro) represents more than 2 % of payments made by EuropeAid in 2014. However, the Director-General also states that the control procedures in place give the necessary guarantees concerning the legality and regularity of the underlying transactions. As for last year (47), we consider that this is not a logical conclusion because systems are not effective when they fail to prevent, detect and correct material error.













44.



Given the risk environment DG DEVCO operates in, and the fact that the residual error is not a consequence of the design of the control system, but rather of weaknesses in its implementation, it is still reasonable to conclude that the control procedures in place give the necessary guarantees concerning legality and regularity of the underlying transactions. As a matter of fact, there is no evidence in the RER that there should be system weakness in the control procedures. However, DG DEVCO acknowledges that there are shortcomings in its implementation, which it is currently addressing.














45.


The reservation relates to the legality and regularity of all of the expenditure managed by EuropeAid. A reservation is appropriate when control weaknesses relate only to defined areas of revenue or expenditure (48), but not when they affect the operation of the system as a whole and the financial impact exceeds the materiality threshold for the whole budget under the Director-General’s responsibility. However, the Commission’s standing instructions for 2014 AARs do not clearly address such a situation.













45.



The Commission is considering how to increase the extent to which it takes the result of DG DEVCO controls into account, in order to provide a more risk differentiated assurance.














46.


The AAR states that EuropeAid’s controls are efficient for each internal control template under direct and indirect management and that total costs of controls, estimated at 370,6 million euro, are reasonable compared to their benefits (49). The extensive information provided in the AAR reflects a significant effort made by EuropeAid to comply with the requirement stipulated in the General Financial Regulation (50). However, the assertions about the efficiency and the cost-effectiveness of controls are not satisfactorily demonstrated because:













46.



Some of the management and reporting duties in Article 66 of the Financial Regulation are still a rather recent challenge for the Commission in general. Central services are playing an important role in ensuring that control systems and related reporting practices progress in a coherent manner throughout the Commission. The Commission will take the observations of the Court into account alongside an assessment of their impact on the use of resources, with a view to achieving sustainable improvements.














(a)


a full cost approach was not followed, as not all direct costs were included (51) and overheads were omitted. In addition, the basis for the allocation keys of indirect staff costs is not clear;






 










(b)


as regards quantifiable benefits, EuropeAid’s management information systems do not yet provide accurate information on errors detected and corrected following external audits and expenditure verifications (see paragraph 40), and the Commission’s own checks;













(b)




As far as audits, expenditure verifications and similar engagements contracted by the Commission are concerned, the roll-out of a new management information system on the results and the follow-up of external audits, expenditure verifications and similar engagements is expected to lead to significant improvements over time.















(c)


EuropeAid did not set objectively verifiable indicators, including target values, against which to assess the efficiency and cost-effectiveness of controls.













(c)




Reporting is already based on verifiable indicators, including in some cases target values. With the guidance of the central services, the Commission system is still being improved and refined.










CONCLUSION AND RECOMMENDATIONS






The conclusion for 2014











47.


We conclude that the EDFs’ accounts for the financial year ending 31 December 2014 present fairly, in all material respects, the financial position of the EDFs and the results of their operations, their cash flows and the changes in net assets for the year then ended, in accordance with the provisions of the Financial Regulation and the accounting rules adopted by the accounting officer.






 










48.


We conclude that, for the financial year ending 31 December 2014:






(a)


the revenue of the EDFs was free from material error;










(b)


EDF payment transactions were affected by material error (see paragraphs 27 to 32). Testing of transactions indicates that the estimated level of error present in the population is 3,8 % (see 
Annex 1
).










 





Recommendations











49.




Annex 2
 shows the result of our review of progress in addressing recommendations made in previous annual reports (52). In the 2011 and 2012 annual reports, we made 12 recommendations. Of these recommendations, one is no longer applicable. EuropeAid fully implemented four recommendations, while five were implemented in most respects and two were implemented in some respects. As regards one of the recommendations implemented in some respects only, EuropeAid was taking action by:






(a)


developing a tool to help EU delegations to screen their portfolio of projects more effectively and prioritise visits to those in particular need of monitoring based on risk assessments;










(b)


preparing new guidelines for the verification missions to delegations entailing risk-based planning and follow-up of the verification visits .










 










50.


Following this review and the findings and conclusions for 2014, we recommend that EuropeAid:






 










—



Recommendation 1: set up and implement internal control procedures to ensure that prefinancing is cleared on the basis of actual incurred expenditure not including legal commitments;







The Commission accepts this recommendation.


The Commission will further clarify clearing rules for Contribution Agreements in the DEVCO Companion and insist on the obligation for clearing to be based on actual incurred expenditure not including legal commitments.











—



Recommendation 2: reinforce the systematic verification that partner countries use the correct exchange rate to convert budget support disbursements into their national currency;







The Commission accepts this recommendation.











—



Recommendation 3: ensure together with the contractor in charge of the RER study that the issues that we have found are addressed;







The Commission accepts this recommendation.











—



Recommendation 4: improve its indicators in respect of target values against which to assess the efficiency and cost-effectiveness of controls, its cost approach, and its procedures and management information systems to measure the benefits of controls.







The Commission accepts this recommendation within the framework defined by the central services.







(1)  For each EDF, the contribution key of each Member State is defined as a percentage of the total amount of resources.

(2)  See Articles 43, 48-50 and 58 of Council Regulation (EU) No 567/2014 of 26 May 2014 amending Regulation (EC) No 215/2008 on the Financial Regulation applicable to the 10th European Development Fund as regards the application of the transition period between the 10th European Development Fund and the 11th European Development Fund until the entry into force of the 11th European Development Fund Internal Agreement (OJ L 157, 27.5.2014, p. 52). See also the Court’s Opinion No 9/2007 on the proposal for a Council Regulation on a Financial Regulation applicable to the 10th European Development Fund (OJ C 23, 28.1.2008), paragraphs 5 and 6.

(3)  In 2012, a tripartite agreement between the EIB, the Commission and the Court (Article 134 of Council Regulation (EC) No 215/2008 (OJ L 78, 19.3.2008, p. 1)) set out rules for the audit of these operations by the Court. The Investment Facility is not covered by the Court’s statement of assurance.

(4)  See the Court’s Opinion No 3/2013 on the proposal for a Council Regulation on the Financial Regulation applicable to the 11th European Development Fund (OJ C 370, 17.12.2013), paragraph 6.

(5)  Regulation (EU, Euratom) No 966/2012 of the European Parliament and of the Council of 25 October 2012 on the financial rules applicable to the general budget of the Union and repealing Regulation (EC, Euratom) No 1605/2002 (OJ L 298, 26.10.2012, p. 1).

(6)  The Directorate-General for Humanitarian Aid and Civil Protection (ECHO) managed 3,4 % of 2014 expenditure from the EDFs.

(7)  See chapter 8 ‘Global Europe’ of the 2014 annual report on the implementation of the EU budget.

(8)  Budget support involves the transfer of funds by the Commission to the national treasury of the partner country. It provides additional budgetary resources to support a national development strategy.

(9)  Under direct management, aid is implemented directly by the Commission (head office or the delegations). Under indirect management, implementation is delegated to a third country (former decentralised management), an international organisation (former joint management) or a national body, such as the development agencies of the EU Member States (former indirect centralised management).

(10)  See the Court’s Opinion No 3/2013 on the proposal for a Council Regulation on the Financial Regulation applicable to the 11th European Development Fund, paragraphs 3 and 4.

(11)  Gross budget support payments made from the EDFs in 2014 amounted to 794 million euro.

(12)  Gross payments from the EDFs in 2014 to multi-donor projects carried out by international organisations amounted to 776 million euro.

(13)  OJ L 210, 6.8.2013, p. 1.

(14)  Including 1  139 million euro managed by the EIB.

(15)  Council Decision 2013/759/EU of 12 December 2013 regarding transitional EDF management measures from 1 January 2014 until the entry into force of the 11th European Development Fund (OJ L 335, 14.12.2013, p. 48).

(16)  2013: 3  923 million euro; 2012: 3  163 million euro.

(17)  2013: 2  963 million euro; 2012: 3  209 million euro.

(18)  Reste à liquider (RAL).

(19)  EDFs and general budget together.

(20)  Old RAL.

(21)  A contract is considered to have expired if it is still open more than 18 months after the end of its operational period. Delays in contract closure increase the risk of regularity errors as the supporting documentation might be difficult to retrieve if it has not been archived properly and key project staff have left. Late contract closure may also delay recovery of unspent prefinancing and ineligible expenditure.

(22)  Reduction of old open prefinancing: 46 % achieved (25 % target); reduction of old RAL: 51,24 % achieved (25 % target).

(23)  15,52 % share achieved (15 % target).

(24)  Of 5,3 billion euro in expired contracts, 3,7 billion (69 %) concerns the EDFs. The share of expired contracts on the number of all open EDF contracts is 25 %, compared to 15,5 % for the whole EuropeAid portfolio. For 477 (1,3 billion euro) of 1  528 expired EDF contracts (31 % in number; 35 % in value) the operational period expired before 2010.

(25)  Pursuant to Articles 16, 43, 48, 49, 50 and 58 of the Financial Regulation applicable to the tenth EDF this Statement of Assurance does not extend to the part of the EDFs resources that are managed by the EIB and for which it is responsible.

(26)  Financial Regulations applicable to 8th, 9th and 10th EDFs. The 10th EDF Financial Regulation applies also to the Bridging Facility which is accounted for under the 11th EDF.

(27)  The accounting rules and methods adopted by the EDF accounting officer are drawn up on the basis of International Public Sector Accounting Standards (IPSAS) or by default, International Financial Reporting Standards (IFRS) as respectively issued by the International Federation of Accountants and the International Accounting Standards Board.

(28)  See Article 44 of Regulation (EU) No 567/2014: the financial statements comprise the balance sheet, the statement of financial performance, the statement of cash flow and the statement of changes in net assets.

(29)  See Article 44 of Regulation (EU) No 567/2014: the reports on financial implementation include tables of allocations, commitments, assigned funds and payments.

(30)  See Article 43 of Regulation (EU) No 567/2014.

(31)  Global financial commitments and the corresponding legal commitments (financing agreements) following the adoption of a financing decision by the Commission.

(32)  As defined in 
Annex 1.1
, paragraph 7, of the 2014 annual report on the implementation of the budget.

(33)  African Union, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Central African Republic, Democratic Republic of the Congo, Dominican Republic, Eritrea, Ethiopia, Fiji, Guinea-Bissau, Haiti, Ivory Coast, Lesotho and Swaziland, Liberia, Madagascar, Mali, Mauritania, Mauritius, Mozambique, Niger, Nigeria, Rwanda, Senegal, Sierra Leone and Uganda.

(34)  EuropeAid: 34 payments; ECHO: four payments on humanitarian aid.

(35)  Paragraph 19 of the 2012 annual report and paragraph 20 of the 2013 annual report.

(36)  We calculated our estimate of error from a representative sample. The figure quoted is the best estimate. We have 95 % confidence that the rate of error in the population lies between 2,1 % and 5,6 % (the lower and upper error limits, respectively).

(37)  The figure quoted is the best estimate based on a representative sample of 127 transactions. We have 95 % confidence that the rate of error in the population lies between 2,7 % and 6,9 % (the lower and upper error limits, respectively).

(38)  Paragraph 25 of the 2013 annual report.

(39)  We report quantifiable errors in cases where no documentation is available at all, where there is no evidence to support an activity reported to have taken place, or where there is no link between the expenditure charged and the documentation provided. There are two main reasons for the absence: (i) either the document has never existed, which should have been detected by ex ante checks; or (ii) the document exists, but could not be retrieved, which points to a weakness in document management.

(40)  Including one known error detected outside the sample.

(41)  On the basis of supporting documentation and required mandatory checks.

(42)  See EuropeAid’s 2013 annual activity report, pp. 188-190 and 195-196.

(43)  See EuropeAid’s 2014 annual activity report, pp. 114-115.

(44)  Paragraph 42 of the 2010 annual report, paragraph 43 of the 2011 annual report, paragraph 35 of the 2012 annual report and paragraph 35 of the 2013 annual report.

(45)  See EuropeAid’s 2014 annual activity report, pp. 84-86.

(46)  Paragraph 51 and recommendation 5 of the 2013 annual report.

(47)  Paragraph 43 and 44 of the 2013 annual report.

(48)  See Article 66(9) of Regulation (EU, Euratom) No 966/2012 and Article 38 of Regulation (EC) No 215/2008.

(49)  See EuropeAid’s 2014 annual activity report, pp. 86–89 and 93–95.

(50)  Article 66(9) of Regulation (EU, Euratom) No 966/2012.

(51)  E.g. Evaluation of staff costs and external costs for the supervision of works contracts.

(52)  The objective of this follow-up was to verify the introduction and existence of corrective measures in response to our recommendations. It did not aim to assess their effective implementation. For some measures which were still under development the verification was too early to be made.

(53)  Contribution from the EDFs to cover expenditure incurred both at the Commission and in EU Delegations on the administrative support needed to manage operations financed under the EDFs.

(54)  Global commitments relate to financing decisions. Individual commitments relate to individual contracts.

Source: 2014 consolidated accounts of the 8th, 9th, 10th and 11th EDFs.

(55)  Include initial allocations to the 8th, 9th, 10th and 11th EDFs, co-financing, interest, sundry resources and transfers from previous EDFs.

(56)  As a percentage of resources.

(57)  Negative amounts correspond to decommitments.

(58)  Global commitments relate to financing decisions.

(59)  Individual commitments relate to individual contracts.

(60)  Net commitments after decommitments. Net payments after recoveries.

Source: Court of Auditors, based on the EDF reports on financial implementation and financial statements at 31 December 2014.


ANNEX 1
RESULTS OF TRANSACTION TESTING FOR EUROPEAN DEVELOPMENT FUNDS








 


2014


2013




 





SIZE AND STRUCTURE OF THE SAMPLE





 




Total transactions:



165



165




 





ESTIMATED IMPACT OF QUANTIFIABLE ERRORS





 


 


 




Estimated level of error



3,8 %



3,4 %




 


 


 




 


Upper Error Limit (UEL)


5,6 %


 




 


Lower Error Limit (LEL)


2,1 %


 







ANNEX 2
FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR THE EUROPEAN DEVELOPMENT FUNDS













Year


Court recommendation


Court's analysis of the progress made


Commission reply




Fully implemented


Being implemented


Not implemented


Not applicable (1)



Insufficient evidence




In most respects


In some respects




2012



Recommendation 1: EuropeAid should review its RER methodology (see the 2012 annual report, paragraph 51, recommendation 1).


x


 


 


 


 


 


 





Recommendation 2: EuropeAid should provide an accurate description in the AAR of the results of RER studies (see the 2012 annual report, paragraph 51, recommendation 2).


x


 


 


 


 


 


 





Recommendation 3: EuropeAid should ensure the timely clearance of expenditure (see the 2012 annual report, paragraph 51, recommendation 3).


 


x


 


 


 


 


 





Recommendation 4: EuropeAid should promote better document management by implementing partners and beneficiaries (see the 2012 annual report, paragraph 51, recommendation 4).


x


 


 


 


 


 


 





Recommendation 5: EuropeAid should take effective measures in order to enhance the quality of expenditure verifications carried out by external auditors (see the 2012 annual report, paragraph 51, recommendation 5).


 


x


 


 


 


 


 





Recommendation 6: EuropeAid should ensure the correct application of specific conditions for budget support payments (see the 2012 annual report, paragraph 51, recommendation 6).


x


 


 


 


 


 


 





Recommendation 7: EuropeAid should make sure that recovery orders in respect of interest on prefinancing over 7 50  000 euro are issued annually (see the 2012 annual report, paragraph 51, recommendation 7).


 


 


x


 


 


 


 




2011



Recommendation 1: EuropeAid should improve the management of contract awarding procedures, by setting out clear selection criteria and better documenting the evaluation process (see the 2011 annual report, paragraph 59(a)).


x


 


 


 


 


 


 





Recommendation 2: EuropeAid should introduce documented risk-based planning and systematic follow-up for verification visits [see paragraph 40] and on-the-spot monitoring visits (see the 2011 annual report, paragraph 59(b)).


 


 


x


 


 


 


 





Recommendation 3: EuropeAid should render compulsory the guidelines on risk analysis for the preparation of annual audit plans by delegations and EuropeAid’s headquarters (see the 2011 annual report, paragraph 59(c)).


 


x


 


 


 


 


 





Recommendation 4: EuropeAid should review the design of KPIs to ensure that they are unambiguous and easy to interpret (see the 2011 annual report, paragraph 59(d)).


 


x


 


 


 


 


 





Recommendation 5: EuropeAid should assess the IAC’s capacity to perform its task effectively (see the 2011 annual report, paragraph 59(e)).


 


 


 


 


x


 


 






(1)  EuropeAid's internal audit function has been centralised within the Internal Audit Service (IAS). IAC ceased to exist at the end of February 2015.