The Court’s statement of assurance provided to the European Parliament and the Council — Independent auditor’s report
Date: 2017-07-13
Institutions: European Court of Auditors
Subjects: EU budget, activity report, audit, auditing, budgetary assessment, budgetary control, closing of accounts, financial year








C_2017323EN.01015101.xml










28.9.2017   


EN


Official Journal of the European Union


C 323/151





THE COURT’S STATEMENT OF ASSURANCE PROVIDED TO THE EUROPEAN PARLIAMENT AND THE COUNCIL — INDEPENDENT AUDITOR’S REPORT
(2017/C 323/02)


Opinion















I.


We have audited:






(a)


the consolidated accounts of the European Union, which comprise the consolidated financial statements (1) and the budgetary implementation reports (2) for the financial year ended 31 December 2016, approved by the Commission on 26 June 2017, and










(b)


the legality and regularity of the transactions underlying those accounts, as required by Article 287 of the Treaty on the Functioning of the European Union (TFEU).














Reliability of the accounts








Opinion on the reliability of the accounts









II.


In our opinion, the consolidated accounts of the European Union (EU) for the year ended 31 December 2016 present fairly, in all material respects, the financial position of the Union as at 31 December 2016, the results of its operations, its cash flows, and the changes in net assets for the year then ended, in accordance with the 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









III.


In our opinion, the revenue underlying the accounts for the year ended 31 December 2016 is legal and regular in all material respects









Payments







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









IV.


In our opinion, except for the effects of the matter described in the basis for qualified opinion on the legality and regularity of payments underlying the accounts paragraph, the payments underlying the accounts for the year ended 31 December 2016 are legal and regular in all material respects.










Basis for opinion















V.


We conducted our audit in accordance with the IFAC International Standards on Auditing (ISAs) and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions (ISSAIs). Our responsibilities under those standards are further described in the Auditor’s responsibilities section of our report. We are independent in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.





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









VI.


Expenditure recorded in 2016 covering spending on a reimbursement basis (3) is materially affected by error. Our estimated level of error for payments made on a reimbursement basis is 4,8 %. Our overall estimated level of error (3,1 %) is still above our materiality threshold, but it is not pervasive. Payments made on an entitlement basis are not affected by a material level of error (4). Our overall conclusion is corroborated by the Commission’s analysis of amounts at risk presented in the annual management and performance report for the EU budget.










Key audit matters















VII.


Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated accounts of the current period. These matters were addressed in the context of our audit of the consolidated accounts as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.





We assessed the provision for pension and other employee benefits presented in the accounts









VIII.


The EU balance sheet includes pension and other employee benefits amounting to 67,2 billion euro at the end of 2016. This is one of the most significant liabilities in the balance sheet, accounting for almost a third of the total 2016 liabilities of 234,8 billion euro.












IX.


The majority of this provision for pension and other employee benefits (58,7 billion euro) relates to the Pension Scheme of Officials and Other Servants of the European Union (the ‘PSEO’). This pension liability covers the ‘defined benefit’ guaranteed by Article 83 of the Staff Regulations of Officials of the European Communities (the ‘Staff Regulations’) and Article 4(3) of the Treaty on the European Union (the ‘TEU’). The liability recorded in the accounts reflects the amount which would have been included in a pension fund had one been set up to pay existing retirement pension obligations (5). In addition to retirement pensions, it covers invalidity pensions and pensions paid to widows/orphans of EU officials. Under Article 83 of the Staff Regulations, the benefits paid under the pension scheme are charged to the EU budget, Member States jointly guarantee the payment of the benefits and officials contribute one third of the cost of financing the scheme.












X.


The PSEO is a mandatory occupational pension scheme for EU civil servants, under which contributions from staff and from the institutions and bodies that employ them are used to finance future pensions. It is designed, through adjustments to the rate of contribution to the scheme and to pensionable age, to be in actuarial balance by default. The number and variety of parameters used to calculate a long-term projection of pension costs underlines the actuarial nature of this calculation, which is ultimately performed by Eurostat on an annual basis.












XI.


As part of our audit, we evaluated the actuarial assumptions and resulting valuation for the pension provision. We checked the numerical data, the actuarial parameters, the calculation of the provision as well as the presentation in the consolidated balance sheet and the notes to the consolidated financial statements. Our audit of the fair value of the provision detected some incompleteness and inaccuracies in the underlying primary database which do not have a material impact on the EU consolidated accounts. The Commission, as disclosed in note 2.9 to the consolidated financial statements, will take further steps to strengthen its processes used for calculating the employee benefits liability, which we will keep under review.





We assessed the accrued charges presented in the accounts









XII.


At year-end 2016, the Commission estimated that incurred eligible expenses due to the beneficiaries but not yet reported amounted to 102 billion euro (year-end 2015: 106 billion euro). It recorded these as accrued expenses.












XIII.


We examined the methodologies and control systems for year-end estimates applied in the main directorates-general. We drew samples of invoices and pre-financing payments and carried out work on these elements to address the risk of the accrual having been misstated. We sought additional explanation from the Commission’s accounting services for the general methods applied, and in particular for the new method applied for the 2014-2020 programming period in Cohesion.












XIV.


The work we performed enables us to conclude that the estimate of the overall amount of accrued charges stated in the consolidated balance sheet is fair for the main directorates-general. However, in some smaller directorates-general we found systemic weaknesses in relation to the year-end entries. The Commission developed an action plan in this respect.





We sought additional information from the Commission to support the valuation of financial instruments under shared management









XV.


Authorities in the Member States transfer a part of the funding advanced by the Commission to financial instruments in the form of loans, equity instruments or guarantees.












XVI.


For the 2007-2013 multiannual financial framework (MFF), EU law did not require these authorities to produce periodic reports on sums held in these instruments for the preparation of the accounts. The Commission therefore estimated the use made of advances, on the basis of the latest available report (in this case, from year-end 2015), assuming that funds would be used in full and evenly over the period of operation (initially up to 31 December 2015, but later extended to 31 March 2017). We note that even though we find the use of financial instruments in 2016 to be outside the eligibility period (see chapter 6, paragraphs 6.20 and 6.21), the Commission does not seek to recover these amounts. Therefore the presentation in the balance sheet and note 2.5 to the consolidated financial statements reflects this Commission position.












XVII.


For the 2014-2020 MFF, authorities need to provide information in every cost claim on advances paid to financial instruments and disbursements made from them to final beneficiaries. On the basis of this information an estimated amount is calculated and recognised in the accounts for the period between the date of the last cost claim received and year-end.












XVIII.


We examined the procedure put in place for recognising the related pre-financing, and we consider that the amount stated in the balance sheet is fair.










Other matters















XIX.


Management is responsible for the other information. The other information comprises the Financial Statement Discussion and Analysis, but does not include the consolidated accounts and our auditor’s report thereon. Our opinion on the consolidated accounts does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated accounts, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated accounts or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.










Responsibilities of management















XX.


In accordance with Articles 310 to 325 of the TFEU and the Financial Regulation, management is responsible for the preparation and presentation of the consolidated accounts of the European Union on the basis of internationally accepted accounting standards for the public sector 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 European Union (Article 317 of the TFEU).












XXI.


In preparing the consolidated accounts, management is responsible for assessing the EU’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so.












XXII.


The Commission is responsible for overseeing the EU’s financial reporting process.










Auditor's responsibilities for the audit of the consolidated accounts and underlying transactions















XXIII.


Our objectives are to obtain reasonable assurance about whether the consolidated accounts of the European Union are free from material misstatement and the transactions underlying them are legal and regular and 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 transactions underlying them. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit will always detect a material misstatement or non-compliance when it exists. These can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated accounts.












XXIV.


For revenue, our examination of value added tax and gross national income-based own resources takes as its starting point the relevant macroeconomic aggregates on which these are calculated, and assesses the Commission's systems for processing these until the contributions of the Member States have been received and recorded in the consolidated accounts. For traditional own resources, we examine the accounts of the customs authorities and analyse the flow of duties until the amounts are received by the Commission and recorded in the accounts.












XXV.


For expenditure, we examine payment transactions when expenditure has been incurred, recorded and accepted. This examination covers all categories of payments (including those made for the purchase of assets) other than advances at the point they are made. Advance payments are examined when the recipient of funds provides justification for their proper use and the Institution or body accepts the justification by clearing the advance payment, whether in the same year or later.












XXVI.


As part of an audit in accordance with ISAs and ISSAIs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:






—


Identify and assess the risks of material misstatement of the consolidated accounts and of material non-compliance of the underlying transactions with the requirements of the legal framework of the European Union, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement or non-compliance resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.










—


Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control.










—


Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.










—


Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated accounts or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the entity to cease to continue as a going concern.










—


Evaluate the overall presentation, structure and content of the consolidated accounts, including the disclosures, and whether the consolidated accounts represent the underlying transactions and events in a manner that achieves fair presentation.










—


Obtain sufficient appropriate audit evidence regarding the financial information of the entities within the European Union scope of consolidation to express an opinion on the consolidated accounts and transactions underlying them. We are responsible for the direction, supervision and performance of the audit. We remain solely responsible for our audit opinion.
















XXVII.


We communicate with the management regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.












XXVIII.


From the matters communicated with the Commission and other audited entities, we determine those matters that were of most significance in the audit of the consolidated accounts of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.









13 July 2017

Klaus-Heiner LEHNE

President

European Court of Auditors
12, rue Alcide De Gasperi, Luxembourg, LUXEMBOURG




(1)  The consolidated financial statements comprise the balance sheet, the statement of financial performance, the cash flow statement, the statement of changes in net assets, and a summary of significant accounting policies and other explanatory notes (including segment reporting).

(2)  The budgetary implementation reports comprise also the explanatory notes.

(3)  66,0 billion euro. We provide further information in paragraph 1.10 of our 2016 annual report.

(4)  63,3 billion euro. We provide further information in paragraph 1.11 of our 2016 annual report.

(5)  See International Public Sector Accounting Standard (IPSAS) 25 — Employee benefits. For the PSEO, the defined benefit obligation reflects the present value of expected future payments that the EU will be required to make to settle the pension obligations resulting from employee service in the current and prior periods.