Source: EURLEX
Language: en
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# 52014DC0342

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE COURT OF AUDITORS Synthesis of the Commission’s management achievements in 2013 /\* COM/2014/0342 final - 2014/ () \*/**

  

1.         Executive summary

In adopting this synthesis report, which is based on the assurances
and reservations registered by the Directors-General and heads of service in
their annual activity reports, the Commission takes overall political
responsibility for the management of the EU budget.

In the area of the direct management of EU funds, the
Commission considers that strengthened internal control systems and genuine
simplification of eligibility and other rules have been key elements in aiming
at a reduction in error rates. However, more detailed controls are costly
and the Commission considers that additional controls should be performed only where the potential benefits can
be shown to outweigh the costs to the Commission
and the beneficiaries.

To address specific challenges in shared management, the
Commission takes a clear position on a number of issues:

- Member State authorities should make maximum use of all available instruments to prevent errors and effectively discharge their responsibilities
and obligations for all programmes under shared management, in order to protect
the EU budget. They should tackle remaining deficiencies in their management
and control systems. The Commission will continue to
supply meaningful control indicators and statistics, which facilitate
thorough analysis of Member States’ management of the
funds;

- The Commission will intensify its
audit framework and strategy, where appropriate, to identify
remaining weaknesses in the systems of the Member States, in particular those
with the highest risk profiles concerning the implementation of EU programmes;

- The Commission will continue to implement
the rules on the suspension and interruption of payments where serious shortcomings have occurred. If necessary, it will use
the new mechanism for suspending agricultural payments as a new ex-ante
instrument to protect the EU budget from weaknesses in Member States’ control
systems;

- The Commission imposes financial corrections on Member States
that fail to implement sound systems. It will use the net financial corrections
instrument whenever the conditions laid down in the new legal framework are
fulfilled.

The financial scope of the
reservations made by Directors-General increased as compared with 2012.
This is the result of additional efforts, in terms of both resources and
methodology, to assess more accurately the amounts at risk and residual error
rates. It is certainly not due to a deterioration in financial management by
the services. As the programmes and control systems are multi-annual,
the real effect of weaknesses of the supervisory and control systems and of  the
management of the EU budget can be judged only by taking into account the
financial impact of corrective measures in subsequent reporting years.

In this report, the Commission takes stock of the main achievements
in improving the performance measurement and reporting systems. It reiterates
its strong commitment to strengthen further these
systems. In a concern to keep its reporting structures as streamlined as
possible, a number of concrete

- As concerns the different overview reports, such as the evaluation
report and the synthesis report, central services should do the necessary to
avoid overlapping;

- As regards the individual annual activity reports: part 1 should
present a fair and true view of the state of policy achievements. This is best
done in the same format as in the planning documents. The declaration of
assurance should focus on management and financial matters.

2. 1      Accountability chain and management reporting

Article 317 of the Treaty on the
Functioning of the European Union (TFEU) gives the European Commission responsibility
for implementing the EU budget, within the limits of the appropriations
available and having regard to the principles of sound financial management. It
requires Member States to cooperate with the Commission to ensure that the
appropriations are used in accordance with these principles.

The college of Commissioners delegates
operational implementation of political and management objectives to the Directors-General
and heads of service, who (as authorising officers by delegation, 'AODs’)
receive the means to act. This decentralised organisation of management is
characterised by a clear demarcation of the various actors’ responsibilities. The
authorising officers by delegation (AODs) are fully empowered to establish the
most appropriate and effective control system for ensuring the sound and
efficient management of the resources for which they are responsible. The annual
activity reports are the main means by which they account for their stewardship
of the human and financial resources for which they are responsible. In them, they
report on the performance of their duties[1] and document
any issues arising from their management that need to be brought to the
attention of the college.

Each annual activity report includes a
signed declaration of assurance in which the
Director-General or head of service, in his/her role as authorising officer by delegation,
provides assurance concerning the true and fair view given by the report and concerning
the legality and regularity and the sound financial management of all financial
transactions under his/her responsibility, as well as for the non-omission of
significant information. If deemed necessary, the declaration contains
reservations related to defined areas of revenue and expenditure.

In part 1 of the annual activity report,
the authorising officer by delegation provides information, on an annual basis,
on the progress towards the achievement of the policy objectives established in
the management plan, on the basis of available information at the moment of
reporting. This information covers inputs, outputs, mid-term results and
long-term impacts. A distinction should be drawn between the Commission's
responsibility for reporting on the progress made towards policy objectives and
accountability for their attainment. Commission departments are accountable
for the implementation of the budget and the management of the financial
programmes having due regard to the management mode. Moreover, whilst the
Commission is engaged in making these financial programmes deliver the desired
effects on the ground, the co-legislators, Member States' authorities and
several other players at national, regional or local level have also an impact
on the achievements of results and impacts. In addition, many external factors
(social, demographic, economic and environmental), far beyond the control of
the Directors-General, affect policy achievements (or failures) resulting from
Commission departments' initiatives.

To
ensure that declarations of assurance in the AARs remain fully in line with its
financial responsibility for implementing the EU budget, the Commission
confirms that they should focus on management and financial matters.

Each annual activity report confirms explicitly
that the Commissioner(s) responsible has(have) been informed of the main
aspects of the report, including any reservations the AODs intend to lodge, before final signature of the declaration of assurance.

This report was adopted after discussion by
the college on 11 June 2014. In adopting this synthesis report, which is
based on assurances and reservations registered by the Directors-General and heads
of service in their annual activity reports, the Commission takes overall
political responsibility for management of the EU budget. In the report, the
Commission also identifies the key management issues to be addressed as a
matter of priority and action to be taken to address weaknesses that have been
identified.

Besides this synthesis of management
achievements, the Commission will also present a synthesis of the results
achieved by the spending programmes. This is done in the annual evaluation
report on the Union's finances based on the results achieved, which is required
by Article 318 of the Treaty on the Functioning of the European Union ('the
Article 318 evaluation report'). The synthesis report
and the Article 318 evaluation report each serve specific purposes and are the
starting point for the budget discharge procedure. For
a broader readership, a wide range of other information
is available on the Europa website. Stakeholders requiring more detailed budgetary
information can consult the Commission’s Report on Budgetary
and Financial Management.[2] Citizens looking for more general information on the achievements of
the Europe 2020 strategy will find reports on the relevant flagship initiatives and individual spending programmes[3] on the respective websites.

The
Commission instructs its departments to ensure that relevant, up-to-date
information, tailored to the needs of different users, is available and to identify
reports that are outdated or redundant so as to streamline reporting on
achievements.

3.
2      Strengthening the Commission’s performance
management framework

The ex-ante setting of objectives and indicators for spending
programmes and non-spending activities in management plans and the ex-post
measurement, evaluation and reporting of achievements are central elements of
the Commission’s performance management framework. This so-called mirroring has
allowed the performance framework to be made more objective.

Following its
undertaking in the 2012 synthesis report, the Commission has been working to
strengthen its performance framework. This important shift of emphasis will
allow provide evidence of the results and impacts of EU activities in the
medium to long term.

The Commission
has taken a step-by-step approach. First, it has ensured that the legal bases
of the 2014-2020 spending programmes include a more coherent framework for
monitoring, evaluation and reporting on their performance. Secondly, the
frameworks have been incorporated into the Directorates-General (DGs’) 2014
management plans and, starting with the 2014 annual activity reports and the
next edition of the Article 318 evaluation report, will serve as a basis for
reporting on achievements. Thirdly, the Commission has undertaken to improve
the performance framework for the 'non-spending activities[4]', starting with the 2015 management plans.

In addition, the Internal Audit Service (IAS)
is carrying out a number of performance audits as part of its 2013-15 Strategic
Audit Plan. In 2013, the IAS carried out 12 audits with a prevailing focus on
performance issues. During the course of the audits, certain common findings began
to emerge, in particular concerning systems of performance measurement, the
management of human resources and management of IT projects and IT security.
More detailed information on performance audits will be made available to the
discharge authority as part of the report on internal audits required by
Article 99(5) of the Financial Regulation.

The Commission also considers the European
Court of Auditors’ special reports to be very valuable instruments for developing
its performance management system further in various policy areas.

2.1         Performance requirements in the 2014-2020 Multiannual Financial
Framework

Throughout 2013 and early 2014, the
monitoring, evaluation and reporting elements established in the legal bases of
the programmes under the 2014-2020 Multiannual Financial Framework (MFF) were elaborated
further in a number of implementing and delegated acts and, in the case of the
European structural and investment (ESI) funds, embedded in partnership
agreements with the Member States and operational programmes. In addition, financial
incentives have been built into the ESI funds in the form of a performance
reserve (see section 2.6).

All performance frameworks for the 2014-2020
programmes and funds comply with the performance-related principles enshrined
in the Financial Regulation. They include accurate and detailed information
on the added value of the 2014-2020 financial interventions and their
relevance to the Commission’s strategic objectives and the EU’s sectorial
policy objectives, and specific objectives, along with quantitative and
qualitative indicators measuring their achievement. It is important to remember
that the co-legislators[5] were closely involved in the setting of the programme objectives
and performance indicators.

2.2         Management plans

In the last quarter of 2013 and early 2014,
the Commission departments incorporated the main elements of the performance
frameworks for the new spending programmes into the 2014 management plans.
These elements consisted of the objectives and indicators, and also the
monitoring, evaluation and reporting provisions in the legal bases of the
programmes. Particular attention was paid to establishing relevant baselines
and sufficiently ambitious and realistic milestones and targets. Where
appropriate, and given the time‑lag between implementation of the spending
programmes and their expected outcomes, Commission departments set additional
internal indicators in order to be able to demonstrate meaningfully in their annual
activity reports that the programmes are on track to deliver expected results.
In addition, the DGs responsible for programme management described the
intervention logic of each programme and fund (i.e. linkages between
resources used, outputs produced and set objectives). In this context, they
also explained how their own planned actions and deliverables would contribute
to the achievement of programme objectives. The central services supported the
preparation of the 2014 management plans, in particular by organising dedicated
peer-review meetings.

It is important to note that, in several
cases, the objectives in the DGs’ management plans relate to societal problems
that are being addressed in a variety of ways, including financial
intervention, policy coordination, regulatory action and law enforcement
organised at different levels of government. Separating out the DGs’
contributions to the achievement of these objectives from the influence of
external factors and the participation of other actors represents a
considerable challenge. Nevertheless, the Commission departments have a responsibility
to monitor achievement of the Commission’s political objectives and main policy
priorities, with a focus on changes that will make a difference to the lives of
EU citizens.

The Commission
welcomes the improvements made to the management plans for the spending
activities with a view to reflecting appropriately the performance frameworks for
the 2014-2020 spending programmes. It instructs its central services to develop
the necessary guidance to strengthen also performance measurement and reporting
for the “non-spending activities”, such as law-making, monitoring and
enforcement, policy development and coordination, and administrative support
activities. The objective should be to focus on results (policy performance)
while demonstrating the extent to which the Commission’s own intervention (its
performance) has influenced or contributed to their achievement.

2.3         Annual activity reports

The annual
activity reports have become an important source of information, in particular
for the European Court of Auditors and the discharge authority. Over recent
years, the AODs have deepened their reporting on how they have used the
financial and human resources allocated to them to achieve the policy
objectives set by the college, and on how policies have generated added value
for EU society.

The Commission
considers that it has made significant progress in recent years in reporting on
policy achievements, in addition to management achievements, and that its DGs’ annual
activity reports contain a wealth of useful information on policy objectives,
results attained and their impact on society.

The 2014 annual
activity reports and the subsequent Article 318 evaluation report will contain
first elements of reporting on progress towards reaching the objectives of the
new MFF programmes, albeit in relation to a very early stage of programme
implementation.

In addition to
a number of adjustments to the structure of the annual activity reports (see
section 3.2), several measures have been taken to ensure a sharper focus on
performance:

- the inclusion of examples of efforts to improve efficiency and
economy of management;

- the incorporation of more exhaustive performance information from
various sources, e.g. evaluations, studies, audits and impact assessments;

- the inclusion of representative examples demonstrating the EU added
value of the programmes; and

- a closer alignment of management plans with annual activity reports
(e.g. by using the same templates for reporting on objectives and indicators in
both cases).

The Commission instructs the central services to build on this
experience and enhance the strategic planning and programming (SPP) documents so
that, over time as information becomes available, stronger and more
comprehensive analysis of the extent to which EU spending has contributed to
achieving general policy objectives becomes available. Central services should
investigate whether more dedicated reports should be developed or the existing
reporting tools can be enhanced for this purpose.

The central
services have checked the annual activity reports for compliance with the standing
instructions. The
difficulties experienced by a number of Commission departments in complying
with the instructions demonstrate a need for additional guidance and assistance
from the central services on performance reporting. For instance, fewer than half of the DGs illustrated the annual activity
report with appropriate examples of concrete achievements under spending
programmes. 80 % provided examples of initiatives to improve the
efficiency and economy of their operations, but the quality of the
examples varied.

The
Commission instructs the central services to develop a more tailor-made
approach (e.g. by ‘families’ of services) to performance reporting in the 2014 annual
activity reports, in particular to demonstrate better the Commission’s
responsibility in achieving policy objectives and to report on initiatives to
improve the efficiency and economy of operations.

2.4         Evaluation report (Article
318 TFEU), a Commission-wide evaluation of the
results of EU funding

In June 2013, the Commission reported[6] for the third time
on its evaluation of the EU’s finances based on the
results achieved. This report, required by Article 318 TFEU, seeks to provide an overview of progress in programme
implementation, and the impact and results achieved by EU funding. The report covers EU programmes in all policy areas involving MFF expenditure.
Other performance-related information was included in addition to evaluation
results.

The Commission
is working continuously to improve this reporting. Incorporating the Article
318 report into the strategic planning and programming (SPP) cycle requires it
to be based on the information on evaluations in the annual activity reports,
which in turn has required more focus on evaluations in Part 1 of the annual
activity reports. This incorporation also ensures that performance indicators
and targets are in line with those in the other SPP documents.

Various evaluations
have provided useful information on the policy achievements reported on in those
reports. However, not all evaluations directly serve the purpose of the annual
activity reports as, for example, the time frame they cover may not correspond
to the year in question.

The
Commission instructs its services to strengthen the performance-related aspects
(i.e. results and impacts) of its monitoring and evaluations, so as to
improve performance reporting in the evaluation report.

2.5         Reporting on the Europe 2020 strategy and the added
value of the EU budget

The Commission has taken several measures
with a view to demonstrating the importance of the quality of spending and the
added value of the EU budget. For example, it presented a comprehensive report
on the added value of EU spending in support of its proposals for the new
generation of programmes under the new MFF.[7] In addition, all legal proposals for a new spending programme or
fund included an assessment of their added value and their
contribution to the Europe 2020 strategy.

2.6         Budget allocation by Member State and performance reserve

For the new MFF, the newly created
performance reserve mechanism under the ESI funds will help to provide further
incentive to achieve targets. The performance reserve represents 6 % of the total allocation for the ‘investment for growth and jobs’ goal,
the European Agricultural Fund for Rural Development (EAFRD) and shared
management measures in the area of maritime and fisheries policy. Member States and regions
will have to announce in advance what objectives they intend to achieve with
the available resources and identify precisely how they will measure progress.
This will involve regular monitoring and follow-up of how financial resources
are used. The reserve will be allocated only to
programmes and priorities that are assessed, in a final performance review to
be carried out by the Commission in 2019, as having achieved their milestones. This will facilitate sharper focus on performance and attainment of
the objectives of the EU strategy for smart, sustainable and inclusive growth,
and fund-specific objectives.

4. 3      Improving the quality of the annual activity reports

3.1         Assessment by the European Court
of Auditors

In its 2012 annual report, the Court of
Auditors reviewed the annual activity reports for 2012. In general, its main
observations refer to the need for a more coherent approach to determining
scope and quantifying reservations, in particular as regards the amount at risk
and the residual error rate. Since then, the Commission has made a specific
effort to define (see Annex 2) and estimate (see section 4.1) the amount at
risk in a consistent and comparable way across DGs.

3.2         Revision
of the structure of annual activity reports

The structure of the
2013 annual activity reports was revised significantly to help AODs comply with
reporting requirements under the new Financial Regulation and to respond to a
number of audit recommendations.

Over the past
decade, the reports have proved their usefulness for both internal and external
stakeholders. As a result, the Commission receives regular requests to include
additional data and information. The revised instructions respond to these
requests where possible, while making it clear that the reports are management
reports to the college and, as such, must contain management conclusions on the
achievement of policy and operational objectives, the functioning of internal
control systems and, for financial management, information on whether the AOD has
reasonable assurance that the resources assigned to the activities have been
used for their intended purpose and in accordance with the principles of sound
financial management. The information assessed in the report must be relevant in
terms of supporting these conclusions.

In revising the
instructions, much effort has been devoted to ensuring that the reports include
only what is relevant and to improve clarity and consistency across DGs. The aim is to ensure compliance, conciseness, clarity and
consistency while at the same time reducing the reporting burden.

The instructions
have undergone thorough examination with a view to excluding non-essential
requirements. As a result, there is now a clear distinction between
compulsory requirements and guidance.

The reports are structured in three layers,
with increasing degrees of detail, to meet the diverse needs of the various
information users:

(1)     an executive summary setting
out concisely and in an accessible way for the non‑specialist reader the main
policy achievements and the management conclusions on control and assurance;

(2)     the body of the report, providing
the elements underlying the conclusions in the executive summary; and

(3)     annexes containing more detailed
(technical) information.

The use of a template with suggested introductory
paragraphs has resulted in significantly greater clarity and comparability across
DGs. The executive summaries have proved to be particularly useful to retrieve
key information readily available on all DGs.

The
Commission instructs its services to take steps to maintain an appropriate
level of transparency, while keeping the annual activity reports to a
reasonable length. The central services are further instructed to support them
and to identify best practices.

3.3         Strengthened peer review process

In a continuing quest for further improvement,
the central services work from an early stage to support the DGs in drafting
the annual activity reports. They discuss key issues with them and provide guidance
when needed. Peer reviews have proven to be an effective platform for sharing
opinions on how to formulate cross-cutting issues and tackle weaknesses. Also,
the Internal Audit Service was actively involved in these discussions and
provided early feedback on the draft AARs.

3.4         Cost-effectiveness of controls

The revised Financial Regulation[8] includes new
provisions requiring AODs to take account of risk and cost-effectiveness when
setting up internal control[9] systems (Article 66(2) Financial Regulation) and determining
the frequency and intensity of controls (Article 49 Rules of application of the
Financial Regulation). AODs are now also required to include the overall cost
and benefits of the controls in the annual activity report (Article 66(9) Financial
Regulation).

The primary purpose of assessing the
cost-effectiveness of controls is to support management decision-making concerning
the design of the control systems and the allocation of related resources. Control
strategies and systems should ensure higher control intensity and
frequency in riskier areas and ensure that controls consistently add
value.

The Commission’s Central Financial Service has
helped AODs throughout the Commission to develop a ‘risk-differentiated’
approach to control. To support implementation of this approach in an efficient
manner, it has set up working groups and provided guidance on the revision of
the internal control strategies, templates and examples of how to define and
calculate the requisite cost‑effectiveness indicators for the four main kinds
of expenditure and management modes. All annual activity reports include
control strategies in line with the proposed structure, so that it is possible
to:

-
establish a direct link between risks and
controls;

-
identify criteria for adapting control frequency
and intensity to the risks; and

-
develop indicators for assessing control
effectiveness and efficiency.

However, further
work is required to make better use of this information to modulate control
intensity and frequency according to risk. Significant gaps are apparent as regards
establishing indicators for control effectiveness. This is mainly due to the
lack of systematic registration of control results and difficulties in estimating
the benefits of control.

The
Commission welcomes the efforts to review the internal control strategies to
ensure that controls are efficient and cost-effective. Its services should
continue to adjust control intensity to the risks they confront, with due
regard to their impact on the achievement of policy objectives. Furthermore, it
instructs the Director-General for Budget to continue to develop further guidance, identifying a limited number of cost-effectiveness
indicators which could be used across the Commission, and define more precisely
the methodology to be used to calculate them.

5.
4      Assurance gathered through the annual
activity reports and reservations by the Directors-General

Having
examined the annual activity reports, in particular the AODs’ declarations, and
noting their reservations, the Commission notes that they all give reasonable
assurance as to the use of resources for the intended purpose, observance of
the principles of sound financial management and the fact that control
procedures give the necessary guarantees of the legality and regularity of the
underlying transactions.

4.1         Number of reservations and
amount at risk

The number of reservations in the annual
activity reports fell from 29 in 2012 to 21 in 2013. There were three[10]
new reservations, while eleven were lifted.[11] Four reservations
are ‘reputational’, while the other seventeen concern the legality and
regularity of financial operations.

The number of reservations is not an indicator
of the number or extent of the problems encountered by the services because a
single issue may affect programmes managed by several services and may result
in a disproportionately high number of reservations being issued.[12]
Also, the nature and scope of the underlying causes or constraints are seldom
comparable. As the lifted reservations were associated with spending activities
with lower financial volumes, the lower number did not translate into a
reduction in the scope or amount at risk[13]. On
the contrary, both the scope and the financial exposure from the reservations
increased in 2013.

The AODs identified the main reasons for
their reservations and set out remedial actions to address them. Annex 1 to
this report provides a quantified overview of the reservations and the
following table shows the amount at risk (EUR 3 807 million) for the part of
expenditure under reservations (scope of EUR 129 149 million).

Table. 2013
reservations — scope and amount at risk (EUR million)[14]

Area || Total expenditure || Scope || Amount at risk

Agriculture || 58 227 || 58 051 || 1 888

Cohesion || 58 912 || 57 723 || 1 506

Subtotal shared mgmt. || 117 139 || 115 774 || 3 394

|| || ||

External aid || 6 383 || 3 768 || 126

Research || 11 539 || 6 291 || 180

Other internal policies || 4 217 || 354 || 8

Administration || 5 488 || 0 || 0

Subtotal direct/indirect mgmt || 27 626 || 10 412 || 314

Total EU budget || 144 766 || 126 186 || 3 708

EDF || 2 963 || 2 963 || 99

Total || 147 729 || 129 149 || 3 807

Financial reservations are made when the
amount at risk exceeds the 2 % materiality threshold. However, the remainder of
the expenditure, which is not included in this scope, is not necessarily free
from instances of non-compliance. Nevertheless, the amount at risk on this
expenditure free from reservations will not be higher than 2% and therefore represents
maximal EUR 372 million[15] in 2013.

Therefore, the Commission is confident
that the maximum total amount at risk for the entire 2013 expenditure (EU
and EDF budget), including both amounts at risk on expenditure under
reservation and expenditure not under reservation, is below EUR 4 179 million
(EUR 3 807 million + EUR 372 million) which corresponds to 2.8 %[16]
of all expenditure disbursed.

In 2013, in accordance with the Financial
Regulation and sector-specific rules, the Commission implemented financial
corrections and recoveries amounting to EUR 3 362 million, which
represented 2.3 % of payments from the EU budget. The drop from 2012
(EUR 4 419 million) is due to a significant case (representing 49 %
of the total amount of financial corrections implemented in 2012) related to
the implementation in 2012 of a financial correction of EUR 1.8 billion
concerning Cohesion Fund 2000-06 programmes in Spain. The resulting decrease by
34% of financial corrections implemented in 2013 (from EUR 3 742 million to EUR
2 472 million) was only partially compensated by an increase by 31% of
recoveries implemented in 2013 (from EUR 678 million to EUR 890
million).

The multi-annual character of the controls
and audits designed in accordance with Article 59 of the Financial Regulation,
including ex-post controls by the Commission and Member States, implies that
cumulative figures have to be used to provide a more meaningful picture of
the significance and effectiveness of the corrective mechanisms applied by the
Commission and the Member States and their impact on the residual amount at
risk. The following indicators demonstrate clearly an increasing trend in
the financial impact of the corrective capacity of the Commission's supervisory
and control systems for the last five years. The total amount of financial
corrections and recoveries in 2013 (EUR 3 362 million) exceeds by EUR 632 million
the average amount for 2009-13 (EUR 2 730 million). For the period 2009-2013,
the average amount of financial corrections and recoveries represented 2.13% of
the average amount of payments from the EU budget, while for 2009-2012 it represents
2.07%.

4.2         Revenue

Concerns as to the reliability of the Belgian
authorities’ traditional own resources declarations were addressed by means of improved
internal controls. As a result, the Director-General for Budget was able to
lift the reservation concerning insufficient assurance of the reliability of
Belgium’s clearance and accounting systems.

4.3         Administrative expenditure

DG Human Resources and Security entered a
reputational reservation following the European Court of Auditors’ findings on
the European Schools’ annual accounts for 2012 and the detection of irregularities
linked to potential fraud in relation to one of the schools.

DG Human Resources and Security has already
taken measures, under the existing governance framework, such as continued insistence
on the implementation without delay of the recommendations from the Court and
the IAS, in particular regarding the new accounting system (SAP). In addition, it
will take the opportunity of the revision of the Financial Regulation of the European
Schools to propose the way of re-designing the accountability system of
European Schools.

The
Commission instructs DG Human Resources and Security to help strengthen control
procedures and to improve the overall control environment in the European
Schools by continuing to insist, via the Board of Governors, that the Schools
take the necessary decisions and action. The Schools must follow up on the
recommendations from the European Court of Auditors and the Internal Audit
Service, in particular as regards the new accounting system.

4.4         Agriculture and rural
development, environment, fisheries and health

The Director-General for Agriculture and
Rural Development issued a new reservation on the market measures funded by
the European Agricultural Guarantee Fund (EAGF) for miscellaneous aid
schemes in nine Member States (Austria, the Czech Republic, France, Italy, the Netherlands, Poland, Spain, Sweden and the United Kingdom). The amount at risk
corresponds to 7.43% of the expenditure disbursed. For the majority of the measures
concerned, the deficiencies were identified by the Commission in the course of on-the-spot
audits. In the other cases (producer organisations in the Netherlands and school milk schemes in France and Sweden), the reservation was triggered by the high
error rate reported by the paying agency or certifying body. In all cases, the
necessary corrective actions have already been identified and notified to the
Member States concerned.

The Director-General maintained his
reservation on direct payments from the EAGF for 20 paying agencies in six
Member States (Spain (15), France, the United Kingdom (England), Greece, Hungary and Portugal). The amount at risk corresponds to 2.34 % of the
expenditure disbursed. As the deficiencies were identified by the Commission
itself, the necessary corrective actions have already been identified and those
Member States have been notified.

The Director-General maintained his
reservation on expenditure from the European Agricultural Fund for Rural
Development (EAFRD) in respect of 31 paying agencies in 19 Member States
(Belgium, Bulgaria, Cyprus, Germany (2), Denmark, Spain (6), Finland, France
(2), the United Kingdom (2), Greece, Hungary, Ireland, Italy (5), Luxembourg,
the Netherlands, Poland, Portugal, Romania and Sweden). The amount at risk corresponds
to 5.12 % of the expenditure disbursed. As the deficiencies were
identified by the Commission itself, the necessary corrective actions have
already been identified and those Member States have been notified.

The Director-General also issued a new
reservation on expenditure in Turkey from the Instrument for Pre-Accession
Assistance in Rural Development (IPARD). The amount at risk
corresponds to 5.46 % of total IPARD expenditure.

The Director-General
for Maritime Affairs and Fisheries maintained her reservation on the European
Fisheries Fund (EFF) management and control systems (eligibility of
declared expenditure for six Member States (the Czech Republic, Denmark, Spain, Finland, the Netherlands and the United Kingdom). Payments in respect of the
six programmes in question have been or will be interrupted. An action plan will be developed for each case, specifying
measures to be taken to rectify the weaknesses that gave rise to the high error
rates, and the applicable timeframes. Payments will resume only when these
issues have been satisfactorily addressed. The amount at risk of these six
programmes with high error rates represent together only 1.91% of the total EFF
payments.

4.5         Regional policy, energy and Transport

The Director-General for Regional and Urban
Policy maintained two reservations. The main one relates to the 2007-13
European Regional Development Fund (ERDF)/Cohesion Fund/Instrument for
Pre-Accession Assistance (IPA) management and control systems, in 2013, for
68 operational programmes in 15 Member States (Austria, Belgium, Bulgaria, the Czech
Republic, Germany, Estonia, Spain, Hungary, Italy, Malta, the Netherlands,
Poland, Slovenia, Slovakia, and the United Kingdom), five European territorial
cooperation programmes and two IPA programmes. The amount at risk corresponds
to 2.66% of the ERDF/CF and IPA payments made in 2013. The other reservation
relates to the 2000-06 ERDF/Cohesion Fund management and control
systems, in 2013, for five operational programmes in Italy and Ireland and for the Cohesion Fund (transport sector) in Poland and Romania, but with no final payments
affected in 2013.

In each case,
specific action has been taken or planned, including:

- warning letters to prevent submission of payment claims concerning irregular
expenditure;

- suspension of payment deadlines;

- launching correction procedures when the Commission considers that
the national authorities did not sufficiently carry out checks prior to
winding-up projects;

- complementary guidance and support for national authorities;

- audit peer reviews to check the ability of national auditors to
fulfil their obligations;

- updating of the audit plan and a continuous focus on risk-based
audits; and

- the monitoring of implementation of agreed remedial action plans
following the interruption/suspension of payments.

As regards the
2000-06 programming period, specific action has been taken or planned in each
case, including:

- launching the financial correction procedure as part of the closure
process; and

- asking the authorities to carry out further checks before winding up
the projects.

4.6         Employment and social affairs

The Director-General for Employment,
Social Affairs and Inclusion maintained two reservations for serious
deficiencies in key aspects of the management and control systems for
identified operational programmes. The main reservation is a financial
reservation for the 2007‑13 European Social Fund (ESF) in 2013 for 36 operational
programmes in 11 Member States (Belgium, the Czech Republic, France, Germany, Ireland, Italy, Poland, Romania, Slovakia, Spain and the United Kingdom). The
amount at risk for the 2007-2013 reservation corresponds to 2.4 % of the
payments made for the ESF in 2013.

The other reservation concerns a
reputational reservation for 2000-06 ESF in 2013 for six operational programmes
in four Member States (France, Italy, Sweden and the United Kingdom). As
regards the 2000-06 programming period, there is no financial risk, as final
payments will be executed only when all issues are resolved and agreement has
been reached with the Member States concerned on the level of financial
correction to be applied. The Commission has taken or plans specific action for
each programme in question, with a view to obtaining assurance that the
required corrective measures have been implemented.

In addition to pursuing a strict policy of
interruptions and suspensions to protect EU funds, the Commission actively
promoted the benefits of using simplified cost options for the ESF in the
context of negotiations for partnership agreements and operational programmes for
the 2014‑20 programming period.

As Spain still accounts for a third of the
operational programmes under reservation, a specific targeted action plan will
be developed in close cooperation with the Spanish authorities to address the
specific issues identified.

DG Employment, Social Affairs and
Inclusion will also closely follow Romania’s implementation of the action it had requested to improve the management and control
system.

4.7         External
relations, development aid and enlargement

The Director-General
for Development and Cooperation — EuropeAid maintained his overall reservation, i.e. covering all
activities and management cycles,
since the overall residual error rate in terms of legality and regularity of
underlying transactions was 3.35 %
in 2013. An action plan has been drawn up following the
2012 reservation. This action plan is already being implemented and also
addresses the recurrent reservation.

4.8         Research and other internal policies

A third of the reservations in the 2013 annual
activity reports relate to the Seventh Research Framework Programme (FP7). This is due to the fact that the programme
is implemented through six distinct DGs and two executive agencies. As the
detected error rate from the common representative audit sample was 4.14 %
at the end of 2013, all relevant AODs maintained their reservation. Only the European
Research Council Executive Agency (ERCEA) and the Research Executive Agency (REA)
did not do so, for two specific sub‑populations (the Ideas and People projects)
that have different beneficiary profiles and simpler grant modalities, leading
to lower‑than‑average error rates for the programme.

The director of REA made a reservation related
to the specific sub-population of small and medium-sized enterprises (SME
projects) because he judges that the residual error rate may be up to 14 %
due to the relatively higher risk profile.

Simplification
measures introduced in 2011 have had a positive impact on the error rate. However,
the Commission considers that possibilities for simplifying the rules have been
exhausted for FP7.

The Commission instructs the services managing the Seventh
Research Framework Programme to maintain measures to reduce errors, e.g.
through ongoing efforts to give guidance and feedback to participants and certifying
auditors to prevent errors occurring. The control and audit work should be
continued, balancing legality and regularity with other objectives such as the
attractiveness and success of EU research policy, international
competitiveness, scientific excellence, encouraging participation by small and
medium-sized enterprises and containing the costs of controls.

The Education, Audiovisual and Culture
Executive Agency (EACEA) maintained its reservation on the Lifelong Learning
Programme (LLP) in view of the residual error rate (3.04 %) still
above 2 %. The agency is analysing the most frequent
errors and, if necessary, takes further action, taking into account the cost
and benefits of any corrective measures. The mandatory use of audit
certificates by beneficiaries, together with improved communication on
financial obligations, should allow the 2 % materiality threshold to be
reached for projects committed in the last year of the current programming
period, namely 2013. However, based on an estimate of the director of EACEA,
the error-rate for the entire 2007-13 Lifelong Learning Programme will trigger a the reservation for at least a couple of years.

The Director-General for Climate Action
maintained his reputational reservation relating to remaining significant
security weaknesses identified in the EU Emissions Trading System (EU ETS)
Registry. Following the organised cyber-attacks on
some national registries between November 2010 and January 2011 and the theft
of a considerable number of allowances, significant and systemic weaknesses
were detected in the relevant security provisions. An operator lodged a
complaint against the Commission before the European Court of Justice about the
theft of allowances. This led to the recording of a contingent liability of EUR 16.2 million
in DG Climate Action’s accounts. The proceedings in court are ongoing. There
were no security incidents in 2012 or 2013, but the Commission continues to improve
the security level. The ‘security statement’ issued jointly by DG Climate Action
and DG Informatics at the end of January 2013 includes an action plan proposing
five additional security measures to address jointly six identified business
risks. The timely and successful rolling out of the action plan by 2015 would
provide reasonable assurance that the residual risk of any successful
cyber-attack had been reduced to an acceptably low level.

The Director-General for Health and
Consumers maintained her reservation on the accuracy of Member States’ cost
claims (residual error rate of 2.3 % in 2013) under the animal disease eradication and monitoring programmes in the food and feed area. The DG had already taken a
number of mitigating measures to reduce the error rate in that area. A more
precise and restrictive definition of eligible expenditure was introduced in
the Commission Decision on the veterinary programmes starting on 1 January 2011.
The use of unit costs in the 2012 and 2013 programmes will help reduce the
errors in the cost claims. The cumulative effect of all measures is expected to
reduce the error rate further, probably below the 2 % threshold.

6.
5      Assurance gathered through the work of
the Internal Audit Service

The Audit Progress Committee (APC) informs
the college on audit issues, including those with a corporate dimension. The 2013
Internal Audit Report[17] reported on progress in implementing the IAS’s audit
recommendations. By the end of 2013, 79 % of the recommendations accepted
in 2009-13 had been implemented. As regards recommendations issued in 2009-13
and rated ‘very important’ or ‘critical’, implementation of only ten (2.3 %)
‘very important’ recommendations were overdue by more than six months (based on
the deadline in the initial action plan). Implementation of three ‘very
important’ recommendations issued before 2009 was also overdue. No critical
recommendation is outstanding. The APC was regularly informed of cases in which
implementation of ‘critical’ or ‘very important’ recommendations were overdue by
more than six months. The IAS’s
follow-up work confirmed that, overall, recommendations are being implemented
in a satisfactory way and the control systems in the audited services are
improving. The IAS ‘closed’ 96 % of the recommendations followed up during this
period.

The Commission’s Internal Auditor submitted
an overall opinion, mainly based on its own work and that of the Internal Audit
Capabilities (IAC) and focusing on financial management. It considered that the
Commission has put in place governance, risk management and internal control
procedures which, taken as a whole, are adequate to give reasonable assurance on
the achievement of its financial objectives. The overall opinion is qualified
with respect to the reservations as expressed by the Authorising Officers by
Delegation in their AARs. Furthermore, the Internal Auditor added an
'emphasis of matter’ paragraph highlighting three issues that require
particular attention:

(1)   Concerning reporting on the cost-effectiveness of controls in
the annual activity reports (see section 3.4 above), he suggests that guidance
should be further refined so that services demonstrate more clearly that
controls are effective and proportionate and that scarce resources are being used
in a targeted and rational manner;

(2)   He recognises progress in the way residual error rates are
formulated and presented in the annual activity reports, in particular concerning
the structural funds, research, agriculture and rural development. He considers
it essential that the DGs continue to demonstrate that residual rates are
reliable and solidly based. Where information from the Member States on error
rates and financial corrections is used, the DGs should take all reasonable
steps through their control and audit work to verify its accuracy. Ultimately,
they must ensure that their own corrective measures are applied rigorously in
practice; and

(3)   IAS audits in 2013 of the work of the Executive Agency for
Competitiveness and Innovation (EACI)[18] and the REA highlighted significant findings as regards control
strategies and systems and outlined corresponding action to be taken.

The
2014-20 Multiannual Financial Framework will involve more tasks being delegated
to the executive agencies. The agencies’ growing operational budgets and
responsibilities will require them appropriately to reinforce their internal
control systems in order to meet future challenges and fully address the risk
of error in the underlying transactions.

Concerning the corrective capacity of the
multi-annual supervisory and control systems, the Commission's Internal Auditor
states that it is reasonable to assume that comparable annual average level
of financial corrections and recoveries, as in the last four years, will relate
to payments made in 2013. Consequently, financial corrections and recoveries
are estimated to be of a sufficient magnitude to protect the budget as a whole
and over time.

A summary report of the work of the
Internal Auditor will be forwarded to the discharge authority in accordance
with Article 99(5) of the revised Financial Regulation.

7.
6      The challenge of shared management

Under shared management, the Member States
have the responsibility to establish and maintain reliable management and
control systems. Under Article 317 TFEU and the new Financial Regulation, shared
management also means shared responsibility between the Commission and the Member States. According to the European Court of Auditors’ 2012 annual report, around
two thirds of the errors could have been identified and corrected by the
national authorities.

6.1         Member State authorities should make maximum use
of available instruments to prevent errors and fulfil their responsibilities
and obligations for all programmes under shared management, in order to protect
the EU budget and tackle remaining deficiencies in their management and control
systems.

Additional national measures will be needed
to target the weakest links in the assurance chain, i.e. deficient
management and control systems checks at the level of the managing/paying
authorities and agencies which carry out ineffective first‑level checks, resulting
in unreliable control results. The Commission will strengthen its supervisory
role vis-à-vis Member State authorities in order to ensure as effectively as
possible that future errors do not occur and past expenditure be corrected. Therefore,
the Commission will continue its targeted capacity-building actions. In
addition, it encourages the widest use of simplified payment schemes, which are
much less prone to errors than the traditional spending mechanisms.

The
Commission calls on the Member States to demonstrate their commitment to
improving accountability and transparency by reinforcing control measures,
where necessary, in particular as regards first-level management checks, before
certifying expenditure to the Commission, and by adopting clear eligibility
rules to reduce the risk of error.

Correcting
amounts unduly paid is an important aspect of
sound financial management. In 2013, continued
efforts were made to implement financial corrections where necessary, improve
the quality of Member States’ data on financial corrections and recoveries, and
promote the use of best practices so as to improve recovery mechanisms at Member State and EU levels.

As regards shared management, the annual
activity reports provide detailed information on the corrections that Member
States implement and report to the Commission, and assessments of national
control systems. In the area of cohesion policy, as well as in the area of
agricultural policy, Member States implement corrections resulting from their
own audit work and from EU audits. For the 2007-13 programming period, these
are reported cumulatively by 31 March, with a year’s delay, so in 2013 Member
States reported on their 2012 corrections. In addition to corrections resulting
from EU audits, these included corrections and recoveries following their own
audits, for a total of EUR 1 411 million. The AODs reported the
latest figures known at the time of signing their annual activity reports.[19]

6.2         The Commission will intensify its audit framework and
strategy to help tackle remaining weaknesses in systems in the Member States,
in particular those with the highest risk profile for the implementation of EU
programmes.

The European Court of Auditors found that
the Member States’ audit reports, on which the Commission's risk analysis is
based, are sometimes unreliable. Although the majority of the audit reports on
the Member States are reliable, the Commission does not unquestionably rely on
the results, but always assesses them and draws conclusions for its assurance.

In the field of agriculture, the
Commission will maintain its risk-based approach, but move towards a multi-annual
audit strategy for the 2014-20 period to strike a better balance between risk coverage
and geographical coverage. No Member State will be left out, but some affected
by higher risks will be audited more intensively. Commission audits will
continue to focus on paying agencies’ controls before paying the final
beneficiaries. In all cases of serious deficiency, the Member States will be required
to draw up and implement precise remedial action plans and the Commission will
monitor their implementation. A new unit will be devoted to this activity for
direct payments, including improvements to the Land Parcel Identification
System (LPIS). Failure to remedy sufficiently the deficiencies in line with an action
plan will trigger the suspension of payments. Independently (as part of the
separate conformity clearance procedure), net financial corrections are imposed
to protect the EU budget.

Under the reform of the common agricultural
policy (and as laid down in the revised Financial Regulation), as from claim
year 2014, the certification bodies have to re-perform primary controls on a
representative sample of transactions at beneficiary level, and give an opinion
on the legality and regularity of the transactions. DG Agriculture and Rural
Development will audit the reliability of this opinion and use it to
consolidate its assurance and fine‑tune the risk analysis for its own audits at
the level of the primary controls. In the field of cohesion policy, the Commission’s
multi-annual audit strategy for 2007-13, which is updated annually based on a
risk assessment, consists of two main components:

-
verification (through on‑the-spot
‘re-performance’ of the national audit work, including at the level of
beneficiaries) of the extent to which it can rely on the work of national audit
authorities, their reported audit results and error rates; and

-
direct auditing of programmes or authorities it
has assessed as not sufficiently addressing the high risks identified,
including on-the-spot audits at the level of beneficiaries to confirm the
results of the targeted system audits.

The new single audit strategy for 2014-20 reflects
the upgrading of certain aspects of the annual financial management and control
cycle, which will end in the provision, by 15 February each year, of the
programme certified accounts, management declaration and annual summary, audit
opinion on the functioning of systems, legality and regularity of expenditure
and accounts, and the relevant control report.

Based on their extensive audits since 2009
assessing the reliability of the most important audit authorities (covering 96 %
of allocations), DG Regional and Urban Policy and DG Employment, Social Affairs
and Inclusion will continue to monitor the authorities’ performance to ensure
that they work to required standards. They will require a remedial action plan
for the few audit authorities not working well and will provide them with guidance
and common methodological tools.

Managing authorities’/paying agencies’ first‑level
checks of beneficiaries’ expenditure declarations are the cornerstone of the
assurance chain. The Commission will verify through its own risk-based system
audits (which include on-the-spot audit visits to beneficiaries) that national
authorities are carrying out adequate checks. It follows up its audit findings
until it has assurance that systemic weaknesses have been addressed and
remedied, and will impose financial corrections in order to protect the EU budget.

6.3         The Commission will continue to suspend payments in the
event of serious shortcomings which are not yet addressed in due time by the
Member States concerned. It will use a reinforced suspension mechanism for
agriculture as an ex-ante instrument to protect the EU budget from weaknesses
in Member States’ control systems.

In their annual activity reports, the
services carrying out transactions in shared management mode have reported all
interruption/suspension decisions, including the relevant operational
programmes, the Member States affected, the types of weakness, the main facts
triggering each decision and the budgetary impact of the decision. This
information constitutes an important dimension of reasonable assurance and
accountability.

Following the
introduction of the new interruption instrument for the 2007-13 programming
period, the DGs operating in shared management took formal decisions in 2013 to
interrupt payment deadlines in 265 cases for a total of EUR 4 930
million. In 2013 and the first quarter of 2014, the college also adopted 17
[20] decisions to suspend payments under
2007-13 programmes. Payments will not be resumed until AODs obtain clear audit
evidence that the reasons for interruptions and/or suspensions have been
remedied, the necessary financial corrections have been implemented and there
are no further risks for future expenditure to be certified to the Commission.

This experience in shared management
confirms the effectiveness of suspensions as an incentive for Member States to take
appropriate remedial action.

6.4         The Commission imposes financial corrections on Member
States that fail to implement sound systems. It will use the net financial
corrections instrument.

Overall, the Commission was very active in
2013 in recovering undue amounts and making financial corrections. Section 4.1
demonstrates clearly that it adequately protects the EU budget from expenditure
incurred in breach of the law. More details on these figures and the corrective
mechanisms in the applicable legislation can be found in Note 6 to the 2013
accounts and the Commission’s Communication to the discharge authority and
the Court of Auditors every September. At the request of the European
Parliament, the Communication will provide a breakdown of financial corrections
by Member State, data on net financial corrections which lead to assigned
revenue for the EU budget and the results of Member States’ corrective work.

The Commission will continue to work with
Member States whose audit systems display persistent and systematic weaknesses.
In addition, it uses all available instruments to prevent errors and protect
the EU budget.

In the area of agricultural policy,
including rural development, financial corrections are applied wherever irregular
expenditure is detected. The aim now is also to reduce further the time to
implement a decision on a net financial correction. Currently, the procedure,
with its contradictory and conciliation stages, takes too long. A quicker
procedure[21] should create more of an incentive for Member States to address weaknesses in their management and control
systems in a timely manner, although it should be stressed that the EU budget
is well protected even where corrections are implemented late.

For ESI funds, the new provision on net
financial corrections comes in addition to the existing correction procedures,
where a Member State can re-use the EU funds made available for other projects
or programmes if it agrees to the correction. However, for serious deficiencies
detected after submission of the annual accounts, the Commission will apply
corrections which reduce the Member State’s allocations, so that the corrected
amounts cannot be re-used. The Common Provisions Regulation (CPR) covering the ESI
funds lays down clear rules[22] and conditions for applying the corrections[23]. The Commission must apply them if a serious deficiency is detected.
Given the need for a contradictory procedure with the Member State in question, the Commission would expect corrections to be applied within 10 to 12 months
of the findings being notified.

The
Commission instructs its services to ensure an effective system for applying
net financial corrections as soon as possible under the regulations for the new
programming period as from 2016 and to take steps to speed up the existing
conformity procedure in agriculture.

6.5         The Commission will continue to supply meaningful
statistics to facilitate thorough analysis of Member States’ performance.

Annual activity reports are a very valuable
source of information for the discharge authority, as they show in a
transparent way how the Commission fulfils its responsibility to ensure the
legality and regularity of shared management policies at the level of
individual Member States and programmes (for cohesion policy) or paying
agencies (for agriculture). The reports contain estimates of error rates and
residual amount at risk, broken down by paying agency/programme and by Member State. They also help the discharge authority to assess the situation in more detail,
because they give an indication of actual risk once Member States and the
Commission (for net financial corrections) have implemented corrective action.

In 2013, the Commission communicated the amounts recovered through
financial corrections and recoveries in the course of 2012. The information
covered preventive and corrective action and, wherever possible, its impact in
ensuring a lasting improvement of management and control systems, as reflected
in the error rates.

It should also be noted that the residual
error rates reported by the Commission services are used to estimate financial
exposure, and these differ from the error rates reported by the European Court
of Auditors. The main reason for this is that they take account of the effect
of the various corrective mechanisms once actually implemented.

8.
7      Cross-cutting issues and solutions

7.1         Internal control
standards

The Commission has taken note of the 'Overview
of the State of Internal Control' prepared by the Director-General for Budget
and is satisfied with the positive trend as regards operational procedures.

The Commission instructs
DG Budget to pursue its efforts to simplify internal control standards, focusing
them more on effectiveness and efficiency, and to revise them accordingly.

7.2         Impact of entrusted entities on
the chain of assurance

The revised Financial Regulation has
simplified the definition of management modes and methods by incorporating them
into a common logical framework including:

-
direct management where EU funds are transferred
by an AOD to grant beneficiaries and contractors; and

-
indirect management or shared management where
EU funds are entrusted to other entities or to a Member State before being
transferred to final recipients.

Also, the Regulation provides for the
potential creation of new types of delegated actors to which AODs entrust
budget implementation tasks under a wide range of arrangements, including
amongst other:

-
cross-delegations to other AODs;

-
operating budgets for executive agencies;

-
funds for joint undertakings;

-
funds for EuropeAid Contribution Agreements with
third countries;

-
financial instruments managed by the European
Investment Bank (EIB) and the European Investment Fund (EIF);

-
budget executed via national agencies; and

-
mandates with other international organisations.

In 2013, 22 Commission services relied on
entrusted bodies to help implement the budget through operations for a total of
EUR 6 572 million. All but one, the Trans-European Transport Network
Executive Agency, concluded that they had adequate information to conclude on
assurance.

In the 2012 synthesis report, the
Commission confirmed that the declaration of assurance covered all resources
assigned to its DGs, irrespective of the management mode used and whether the
entrusted body was subject to a separate discharge decision. The AODs should ensure
appropriate supervision, take into account any negative control results or
control system weaknesses and lodge reservations where necessary.

DG Budget has provided instructions,
templates and guidance for a dedicated section and annex in the annual activity
reports in which services can report on their supervision and assurance‑building
as regards the entities to which they, as parent DGs, have entrusted budget
implementation tasks.

DG Economic and Financial Affairs, in
particular, has indicated the challenges of implementing the guidance in view
of the plethora of specific arrangements with entrusted bodies under agreements
that date back several years.

The peer reviews on the draft annual
activity reports have also discovered a gap in the prescribed control strategy.
It is not fully applicable in cases where funding does not cover operational
expenditure but is exclusively used to finance the administration costs of the
entrusted body.

The Commission instructs DG Budget to develop further specific
guidance on the most relevant internal control strategies for externalised
management and on best practices for the supervisory controls by parent DGs and
their documentation.

7.3         Commission Anti-Fraud Strategy (CAFS)

The Communication on the Commission
Anti-Fraud Strategy[24] emphasised the need for DGs and services to strengthen their
internal control systems to address the risk of fraud. One of the key measures was
to design and adopt their anti-fraud strategies by the end of 2013.

12 services[25] have already fully implemented their strategies and the others have
indicated the expected date of full implementation and identified outstanding
measures, in so far as these can be made public without endangering their
effectiveness. No unmitigated residual risk has been reported.

The quantified indicators reported are
essentially the number of fraud suspicions transferred to or being investigated
by the European Anti-Fraud Office (OLAF). DG Employment, Social Affairs and Inclusion
and DG Health and Consumers also provide, as financial indicators, the amounts involved
in riskier financial operations subject to close monitoring.

On the basis of the annual activity reports,
it is possible to conclude that, in view of the services’ implementation of the
Anti-Fraud Strategy and although not all their individual strategies have been
fully implemented yet, there are no unmitigated risks which would suggest that
this control objective is not adequately met.

Measures in
this area (e.g. specific risk analysis of beneficiaries, close monitoring
of selected projects or contracts, other measures to mitigate fraud risks) are already
outlined in some of the annual activity reports, together with the specific
results of anti-fraud action taken during the reporting year and any elements
of assurance that can be drawn from them. This will be done across the board in
the 2014 reports.

The Commission welcomes the fact that most DGs are already well
advanced in the development and implementation of their anti-fraud strategies. It
instructs its services to continue including information on fraud prevention as
part of their assessment of their internal control systems.

[1]               Article
66 of the Financial Regulation.

[2]              This
report does include a description of the objectives achieved for the year, in
accordance with the principle of sound financial management (Article 227 Rules
of Application (RAP) to the Financial Regulation). In accordance with Article
141 of the financial regulation, all institutions and bodies of the
consolidated accounts prepare an annual report on the budgetary and financial
management of their administrative expenditure. The report of the Commission
deals with the operational expenditure of the European Union.

[3]               Such
as the Annual Growth Survey, national reform programmes and the dedicated
portal on Europe 2020 available on http://ec.europa.eu/europe2020.

[4]               'Non-spending activities' are being referred to as
those activities which have no major operational budget other than
administrative expenditure.

[5]               The Commission summarised the results of the
legislative process of the 2014-2020 Multiannual Financial Framework in a
dedicated Communication: "Final Simplificaiton Scoreboard for the MFF
2014-2020", COM(2014) 114 final.

[6]               COM(2013) 461 final.

[7]               Report
on the added value of EU spending, (SEC(2011) 867).

[8]               The
revised Financial Regulation entered into application in January 2013.

Financial Regulation: 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 Council Regulation (EC, Euratom) No
1605/2002 (OJ L298, 26.10.2012, p.1)

Rules of application: Commission Delegated Regulation (EU) No 1268/2012 of 29 October
2012 on the rules of application of Regulation (EU, Euratom) No 966/2012 of the
European Parliament and of the Council on the financial rules applicable to the
general budget of the Union (OJ L362, 31.12.2012, p. 1)

[9]               The
Financial Regulation defines ‘control’ as any measure taken to provide
reasonable assurance as to the achievement of the internal control objectives.
This entails all-encompassing internal control systems, covering all measures for
the management of budget appropriations, from identifying needs and objectives,
which precedes any legal commitment, to final decisions closing multi-annual
programmes.

[10]     The most
significant new reservation concerns the European Agricultural Guarantee Fund
(EAGF) market measures and the second the Instrument for Pre-Accession
Assistance in Rural Development (IPARD) (both DG Agriculture and Rural
Development). The third is reputational and relates to accountability issues in
European Schools (DG Human Resources and Security).

[11]     To lift a
reservation, AODs were asked to demonstrate that the weaknesses had been
effectively addressed. The reservations lifted concerned:

-
four remaining FP6 reservations (research DGs);

-
certified organic products (DG Agriculture and
Rural Development);

-
the Financial Instrument for Fisheries Guidance
(FIFG) (DG Maritime Affairs and Fisheries);

-
the European Energy Programme for Recovery
(EEPR) (DG Energy);

-
the second-generation Schengen Information
System (SIS II) project (DG Home Affairs);

-
the reliability of the financial reporting of
the European Space Agency (DG Enterprise and Industry);

-
election observation missions (Service for
Foreign Policy Instruments); and

-
the revenue-related reservation on traditional
own resources (TOR) (DG Budget).

[12]     This applies
particularly in the area of research policy, where the issues regarding the
management of the framework programmes concern six DGs and two executive
agencies.

[13]     The concept of amount at risk is defined in annex 2.

[14]     Unless
otherwise indicated, the sources for all figures quoted in the present report
are the provisional consolidated accounts of the EU for the 2013 financial year
and the AARs. In case of discrepancy, the figure used is that of the
provisional accounts. These instances are specifically disclosed.

[15]             EUR 372 million corresponds to 2 % on the difference
between EUR 147 729 million and EUR 129 149 million

[16]             Errors should not be confused with fraud. Errors are
mistakes such as not filling out a form correctly, or not respecting the proper
tendering procedure. Only a minority of errors are committed deliberately.
Fraud is a deliberately committed irregularity constituting a criminal offence.
Cases of suspected fraud are systematically forwarded to the European
Anti-Fraud Office (OLAF).

[17]             Article
99(3) of the Financial Regulation.

[18]             Subsequently
renamed the Executive Agency for Small and Medium-sized Enterprises (EASME).

[19]             For agriculture, the information on financial corrections
and recoveries relates to the year of the report.

[20]             Fifteen
suspensions were decided in 2013 and two in the first quarter of 2014. Six decisions
concerned the ERDF and 11 the ESF.

[21]             For
further details, see point 2.b.

[22]             Serious
deficiencies will be defined in terms of (non-)compliance with the main
elements of the management and control systems, assessed in detail according to
18 key requirements for all programme authorities. The main elements to be
assessed on the basis of detailed and comprehensive audit results include:

-
adequate separation of functions of programme
authorities and supervision over all intermediate bodies involved in the
management and control system;

-
adequate selection of operations and effective
verifications by managing authorities to avoid errors in the first place;

-
effective anti-fraud measures;

-
appropriate procedures for drawing up payment
applications and for certifying the completeness, accuracy and veracity of the
programme accounts to the Commission; and

-
effective audits on systems, operations and
accounts.

Weak or no compliance with one of the specified key requirements
proposed in the delegated act, or two or more of the key requirements will
automatically lead the Commission to conclude that there are serious
deficiencies, leading to net financial corrections.

[23]             The
delegated act will also establish the criteria to be used by the Commission to determine
the level of flat‑rate correction (5 %, 10 %, 25 % or 100 %).
These are linked to the relative scale of the serious deficiency, its frequency
and extent, and the loss for the Union budget. The act will also provide that
flat rates can be raised to the next level in cases of repeated serious
deficiencies due to the programme authorities’ failure to take the necessary
measures to correct the system following application of a financial correction
in a previous accounting year.

[24]             COM(2011)
376, 24.6.2011.

[25]             The DGs
for Agriculture and Rural Development (AGRI), Communications Networks, Content
and Technology (CNECT), for Employment, Social Affairs and Inclusion (EMPL),
for Home Affairs (HOME), for Justice (JUST), for Regional Policy (REGIO) and
The Service for Foreign Policy Instruments (FPI), The Internal Audit Service
(IAS),  The European Anti-Fraud Office (OLAF), The Legal Service (SJ), The Bureau
of European Policy Advisers (BEPA)  and The Education, Audiovisual and Culture
Executive Agency (EACEA).

Annex 1: Scope and amount at risk of the reservations

DG or EA || Reservation || Type || Scope || Amount at risk

ABB items concerned || under reservation || for the ABB items concerned || under reservation

DG AGRI || EAGF market measures for miscellaneous aid schemes in 9 Member States (ABB 05 02) || Financial || 3 193.2 || 670.8 || 237.4 || 198.3

DG AGRI || EAGF direct support for paying agencies in 6 Member States (ABB 05 03) || Financial || 41 658.3 || 18 997.5 || 973.9 || 652.2

DG AGRI || EAFRD expenditure for rural development measures for paying agencies in 19 Member States (ABB 05 04) || Financial || 13 151.8 || 9 591.5 || 673.9 || 598.8

DG AGRI || IPARD pre-accession measures in 1 candidate country (ABB 05 05) || Financial || 47.6 || 26.0 || 2.6 || 2.6

DG CLIMA || EU Registry Emissions Trading System (EU ETS) - significant security weaknesses remaining (ABB 07 12) || Reputational || - || - || - || -

DG MARE || European Fisheries Fund (EFF) management and control systems for 6 Member States (ABB 11 06) || Financial || 566.4 || 91.3 || 10.8 || 7.6

DG HOME || Solidarity (ABB 18 02) and Migration Flows (ABB 18 03) [1] || (none) || - || - || 11.7 || 0.0

DG SANCO || Food and Feed area - animal disease eradication and monitoring programmes (ABB 17 04) || Financial || 229.1 || 229.1 ||  4.5 || 4.5

DG REGIO || 2007-2013 ERDF/Cohesion Fund/IPA for operational programmes in 15 Member States, 5 European Territorial Cooperation programmes and 2 IPA programmes (ABB 13 03 -> 05; part 2007-2013) || Financial || 43 392.8 || 5 636.0 || 1 152.7 || 440.2

DG REGIO || 2000-2006 ERDF/Cohesion Fund management and control systems (ABB 13 03 -> 04; part 2000-2006) || Reputational || - || - || 0.0 [2] || 0.0

DG EMPL || 2007-2013 ESF for operational programmes in 11 Member States (ABB 04 02; part 2007-2013) || Financial || 13 763.8 || 2 159.4 || 330.3 || 123.2

DG EMPL || 2000-2006 ESF for operational programmes in 4 Member States (ABB 04 02; part 2000-2006) || Reputational || - || - || 0.0 [3] || 0.0

DG DEVCO || All DEVCO activities and management cycles (overall; covering its EU general budget) || Financial || 3 767.8 || 3 767.8 || 126.2 || 126.2

DG DEVCO || All DEVCO activities and management cycles (overall; covering the EDF budget) || Financial || 2 963.0[4] || 2 963.0 || 99.3 || 99.3

DG RTD || Research FP7 (ABB 08 02 -> 08 21; except 08 18; plus IMI JU) || Financial || 3 664.4 || 3 664.4 ||  107.5 [5] || 107.5

DG CNECT || Research FP7 (ABB 09 04 -> 09 05) || Financial || 1 533.0 || 1 533.0 || 31.8 || 31.8

DG ENTR || Research FP7 (ABB 02 04) || Financial || 403.2 || 403.2 || 1.2 || 1.2

DG ENER || Research FP7 (ABB 32 06) || Financial || 143.7 || 143.7 || 5.3 || 5.3

DG MOVE || Research FP7 (ABB 06 06) || Financial ||  65.3 ||  65.3 ||  0.8 || 0.8

REA || Research FP7 – Space & Security (ABB 02 04) || Financial || 250.8 || 250.8 || 6.3 || 6.3

REA || Research FP7 – SMEs (ABB 08 13) || Financial || 230.4 || 230.4 || 27.1 || 27.1

EACEA || Lifelong Learning Programme (LLP) (ABB 15 02 22) || Financial || 124.4 || 124.4 || 3.7 || 3.7

DG HR || Possible fraud case in one European School (ABB 26 01 51) || Reputational || - || - || - || -

|| TOTAL (EU + EDF budgets) OF THOSE ACTIVITIES UNDER RESERVATION || || 129 149.0 || 50 547.6 || 3 807.0 || 2 436.6

Annex 2:
Definition of the amount at risk

The Court of Auditors has expressed in its
2012 Annual Report the need for a more coherent approach for quantifying key
elements of the reservations and, in particular, the amount at risk.
Furthermore, the discharge authority has criticised the fact that the concept
of amount at risk was not defined in the synthesis report. It is therefore
necessary to define in a more prominent and less technical manner the various concepts
used:

-
Scope refers to
the volume of expenditure for the reporting year. Unless specifically
indicated, expenditure is measured in terms of payments made during the
financial year by ABB budget item (at 4-digit level).

-
Error rate is the
best estimation by the authorising officer by delegation, taking into account
all relevant information available and using professional judgement, of the
value of the transactions which were not entirely in full conformity with the
applicable regulatory and contractual provisions at the time the payment was
made; expressed as a percentage of the total expenditure. The terms ex-ante
and ex-post are used by reference to the time the payment is made.

"All
relevant information available" notably includes control indicators and
results from all controls implemented by the authorising officer as well as
from audit reports. If the expenditure is directly managed by the Commission
the estimation of the error rate largely rests on the results of ex-post audits
or checks of a sample of payments. In case the authorising officer relies on
Member States agencies or on other bodies for the management of EU funds
(shared and indirect management), the authorising officer assesses the internal
control systems implemented by these agencies and bodies to estimate the error
rate for each of them.

-
Residual error rate is the best estimation by the authorising officer by delegation,
taking into account all relevant information available and using professional judgement,
of the value of the expenditure which was not in full conformity with the
applicable regulatory and contractual provision after all corrective
measures have been implemented; expressed as a percentage of the total
expenditure.

We refer to a multi-annual residual
error rate when the estimation is made over several years, either
cumulative for multi-annual programmes; or as a rolling average for annual
programmes for which the control cycle, including ex-post controls aimed to
detect and correct errors, exceeds a single year.

-
Amount at risk is
defined as the value of the fraction of the transactions which is estimated not
to be in full conformity with the applicable regulatory and contractual
requirements after application of all controls (corrective measures) intended
to mitigate compliance risks.

-
Total amount at risk is the total amount at risk of expenditure under reservation
increased with the maximum amount at risk (2%) of the expenditure for which no
reservation has been made because the error is estimated not to exceed the 2%
materiality threshold.

-
Financial exposure refers to the same concept as amount at risk but expressed as a
percentage, i.e. the amount at risk over the scope.

Annex 3:
Executive Agencies, Regulatory Agencies, and Joint Undertakings

In line with practices in most Member
States, using agencies to carry out predetermined key tasks[6]
has become an established part of the way the European Union works.

While the Executive Agencies are an
integral part of the Commission’s overall discharge procedure[7],
the following are subject to a separate discharge procedure:

−
Decentralised Agencies;

−
Joint Undertakings which financial rules are
based on Article 208 of the Financial Regulation (FR)[8];

−
Joint Undertakings operating under Article 209
FR which constituent acts[9] (by derogation to Article
209 FR) foresee separate discharge procedure.

1. Executive Agencies

Executive Agencies
(EAs) operate within a clear institutional framework, governed by a single
legal basis[10]. Their tasks must relate
to the management of Union programmes or actions, they are set up for a limited
period and they are located at the place where the Commission and its services
are located. The Commission's responsibility for executive agencies is clear:
the Commission creates them (after prior information to the budgetary
authority, including a cost-benefit-analysis, and subject to the positive
opinion of the Committee for the executive agencies[11]),
maintains a degree of control over their activity, and appoints the Director of
the executive agency and Members of the Steering Committee. Their Annual Activity
Reports (AARs) are annexed to the AAR(s) of their parent Directorate(s) General[12].

The Multiannual
Financial Framework 2014-2020[13] foresees an important
increase in the budget allocated to certain EU programmes. To manage these
programmes efficiently and transparently the Commission envisaged a more
extensive use, by more parent DGs, of the six existing executive agencies. With
this in mind the mandates of the six existing executive agencies were expanded
in December 2013 to cover the management of an increased share of the new
spending programmes. The budgetary impact of this delegation was included in an
Amending letter to the 2014 budget.

No new agencies
were created in 2013, the six EU agencies in 2013 are:

−
the Executive Agency for Competitiveness and
Innovation (EACI);

−
the Executive Agency for Health and Consumers  (EAHC),
located in Luxembourg;

−
the Trans-European Transport Network Executive
Agency (TEN-T EA);

−
the Education, Audiovisual and Culture Executive
Agency (EACEA);

−
the European Research Council Executive Agency (ERCEA);

−
the Research Executive Agency (REA).

The names of three executive agencies
changed on 1st January 2014: EACI became the “Executive
Agency for Small and Medium-sized Enterprises” (EASME), EAHC became “The Consumers, Health and Food Executive Agency” (CHAFEA) and
TEN-TEA became "The Innovation and Networks Executive Agency" (INEA).

All executive agencies are located in Brussels, except for CHAFEA (Luxembourg).

The annual
discharge in respect of implementation of operational (i.e. programmes)
appropriations is covered by the general discharge given to the Commission[14].
The Director of each executive agency receives discharge from Parliament, in
respect of the executive agency's operating budget.

All executive
agencies are subject to a standard Financial Regulation adopted by the
Commission, governing the establishment and implementation of their operating
budget. These have important operational budgets to implement, the effectiveness of the Commission's supervision of the
executive agencies is thus of great importance[15].
Their respective roles and responsibilities and notably the content of
supervisory tasks of the Commission and  the associated reporting obligations
of the agencies are formalised in the six individual instruments of delegation
and are further detailed  in  the Memoranda of Understanding signed between the
director of each agency and the delegating partner DG(s). These obligations are
enforced inter alia though the Commission's presence in Steering
Committees and coordination meetings, the Commissions monitoring of internal
control systems, budget implementation and the follow-up of audits.

The executive agencies' high occupation
rate of the authorised posts was maintained in 2013 at 97 %.  The breakdown
of staff employed on 31/12/2013 by the executive agencies was as follows:

|| Temporary agents\* || Contract agents || Total || Total Authorised under the EU budget

EACI ||   35 ||   122 ||   157 ||   159

EAHC ||   11 ||     38 ||     49 ||     50

EACEA ||   99 ||   314 ||   413 ||   431

ERCEA ||   99 ||      280 [16] ||   379 ||   389

REA ||   138 ||   407 ||   545 ||   558

TEN-TEA ||   32 ||     66 ||     98 ||   100

Total || 414 || 1227 || 1641 || 1687

\*Officials
seconded by the Commission and agents recruited by the agency

The executive agencies must adopt the
Commission’s internal control system and report on its effective implementation
in the AAR. In 2013, executive agencies did not report important difficulties
in implementing the required controls. Only one agency (EACI) reported that one
control standard (ICS 3, staff allocation and
mobility) had not been effectively implemented yet. Given the upcoming
transition phase for the extension of their activities, the executive agencies
put emphasis on the standards related to organisation, processes and procedures
(ICS 7 and ICS 8).

2. Decentralised Agencies

The decentralised EU Agencies (also known
as "traditional", or "regulatory" agencies) are bodies falling
within the scope of Article 208 of the Financial Regulation or similar
provisions foreseen by their constituent acts[17],
i.e. they are independent legal entities under European public law, distinct
from the EU institutions (Council, Parliament, Commission, etc.) which receive
(or are likely to receive) contribution charged to the EU budget.

There are currently 32 decentralised agencies
operational in different EU countries: 23 are fully financed from the EU
budget, 3 are partially financed by fees and charges, 3 agencies are
self-financed, and 3 agencies are partly co-financed by national authorities on
the basis of a funding key.

In what follows, the following agencies are
not covered, because they do not meet all conditions set out in Article 208 of
Financial Regulation:

-
2 fully self-financed agencies,

-
3 former second pillar agencies: EDA (European
Defence Agency), EUSC (European Union Satellite Centre), ISS (European
Institute for Security Studies),

-
European Supply Agency (ESA) which is founded
under the Euratom Treaty.

On the other hand, the EIT (European
Institute of Innovation and Technology) which is set up as a sui generis
structure due mainly to its governance model. In terms of budgetary and
financial arrangements, EIT follows largely the regime of decentralised
agencies. It is financed from public (including from the EU budget) and private
funds, and is subject to Article 208 of the Financial Regulation.

Decentralised agencies play an important
role in implementing EU-policies, especially tasks of a technical, scientific,
operational and/or regulatory nature. They also support cooperation between the
EU and national governments in important policy areas, by pooling technical and
specialist expertise from both the EU institutions and national authorities.

In July 2013
the Commission proposed the creation of two bodies which budgetary and
financial provisions are similar to those foreseen for decentralised agencies:
the Single Resolution Board and the European Public Prosecutor Office (EPPO).

The agencies have been established on a
case-by-case basis over the years – to respond to emerging and specific needs –
and thus they operate under somewhat diverse conditions. Following the
reflection initiated by the Commission Communication European Agencies: the
way forward, thorough inter-institutional discussions between the European
Parliament, the Council and the Commission took place. That reflection resulted
in July 2012 in endorsement of a Common Approach on decentralised agencies,
notably with a view to addressing a series of governance issues in order to
improve coherency, effectiveness and accountability of the agencies. The Common
Approach has been translated into a dedicated Roadmap on which the Commission
regularly informs the European Parliament and the Council. It has also been
reflected in the revised Framework Financial Regulation[18]
(detailed modifications are presented under point 2.2) to which Agencies’
financial rules have already been aligned.

In December 2013, the Commission issued a
progress report on the implementation of the common approach. The report shows what
progress has already been achieved, in close cooperation and with the active
contribution of agencies themselves. The implementation of the Roadmap will
continue during 2014 and beyond, in accordance with the deliverables and
deadlines set in this document. The Commission will report again on the state
of play by the end of 2014[19].

In order to complete this comprehensive
approach towards decentralised agencies, the Commission adopted also in July
2013 a Communication[20] which sets out a
programming of the staffing and subsidy levels of each decentralised agency
under the new for 2014-2020, with a view to ensuring compatibility of agency
resources with the constraints set in this regard by the new multiannual
financial framework 2014-2020.

The Commission is
willing to continue its assessment of the possibilities to merge some of the
existing agencies, as well as to obtain further synergies from the sharing of
services between the agencies themselves and from within the Commission, and to
carefully look into the matter of unnecessary spending due to distant and
multiple sites of location. However, it has to be noted that the proposal for
an European agency for law enforcement and training, by merging the European
Police College (CEPOL) with Europol, has not received the necessary support.

Further to the joint statement agreed as
part of the Conciliation on the 2014 budget, a new inter-institutional working
group has been created to explore possible synergies and efficiency gains in
order to  find the way to pursue the 5% staff reduction over 5 years applicable
to all EU institutions, agencies and bodies, as agreed in the new
Interinstitutional Agreement. It is placed under the aegis of Parliament
(COBU-CONT), Council and Commission, within the responsibilities of the
Commissioner in charge of Budget and Financial Programming and the Commissioner
for Inter-Institutional Relations and Administration.

2.1 Discharge

On 4 April 2014, 28
decentralised agencies, the EIT and the Euratom Supply
Agency were granted discharge by the European Parliament[21].
The Parliament’s Budgetary Control Committee postponed the “budget discharge”
to the Riga-based electronic communications regulatory body BEREC. The most
recently established EU-LISA was not subject to discharge yet.

Two decentralised agencies, the Office for
Harmonisation in the Internal Market and the Community Plant Variety Office
(which are self- financed) and three bodies that are funded on an
intergovernmental basis directly by the participating Member States (the
European Institute for Security Studies, the European Union Satellite Centre
and the European Defence Agency) do not receive discharge from the European
Parliament.

Nevertheless the Common Approach foresees
that decentralised agencies that are self–financed should submit to the
European Parliament, the Council and the Commission an annual report on the
execution of their budget and take duly into account their requests and
recommendations.

2.2 Revision of the Framework Financial Regulation
(FFR)

In order to take into account the Joint
statement and the adoption of the new general Financial Regulation, the
Commission adopted a new Framework Financial Regulation for the decentralised
agencies on 30 September 2013[22]. The aim was also to
address recurrent problems encountered by agencies and by the Commission. This
new Framework Financial Regulation introduces new elements concerning in
particular the following issues:

−
Streamlining reporting obligations: the revised FFR provides for a consolidated annual activity report
which includes information on the implementation of the agency work programme,
budget, staff policy plan, agencies' management and internal control systems[23];
it foresees earlier reporting and alignment of reporting practices and
deadlines with those of the Commission (needs to be sent by 1 July each year to
the Commission, the ECA, the EP and Council).

−
Streamlining programming obligations: the revised FFR foresees one programming document consisting of
annual and multi-annual components; it aligns the timetable for the annual and
multi-annual programming with the budgetary procedure.

−
Clarification as regards additional tasks: the revised FFR foresees explicit provisions setting out the
conditions and rules as regards financing additional tasks through delegation
agreements and ad hoc grants with the aim to increase transparency on funding
of agencies and ensure compliance with FR principles on grants.

−
Clarification of the internal audit
architecture (the role of the IAS versus Internal
Audit Capability (IAC)): the revised FFR foresees enhancement of work
coordination, exchange of information and overall synergies between IACs and
IAS; shared IACs between agencies in the same policy area where appropriate and
the creation of IACs where this is cost-effective and proves to have a clear
added value.

−
Financing of multi-annual projects: the revised FFR provides for the possibility to break down commitments
extending over several years into annual instalments where the basic act or
sector specific act so provides or where they relate to administrative
expenditure.

−
Horizontal functions/services: the revised FFR provides for the possibility, where
cost-efficiency might be gained, of sharing or transferring the services (in
particular as regards accounting functionalities).

3. Joint Undertakings[24]

For the
management of the Joint Technology Initiatives (JTI) in the Research &
Innovation area, seven Joint Undertakings (JU) were created for executing the
FP7 budget on behalf of Parent DGs RTD, CNECT and MOVE: i.e. ARTEMIS in the
area of embedded computing systems, ENIAC in nano-electronics in the ICT
domain, IMI in innovative medicines, Clean Sky in aeronautics, FCH in the area
of fuel cells and hydrogen, SESAR in air traffic management (single European
Sky), and F4E/ITER (Fusion for Energy) in energy research. These are separate
and independent legal entities.

Four JUs (Clean
Sky, IMI, FCH and SESAR) follow the bipartite model, involving the Commission
and the relevant industry's representatives. The three others (ENIAC, ARTEMIS
and F4E) follow the tripartite model, involving in addition the public sector
representatives from the JTI member states (which may be different from the 28
EU MS).

In 2014, it is foreseen that two new JUs
(Bio Based Industries JU (BBI) and SHIFT²RAIL JU) will start their activities, and
that ARTEMIS and ENIAC will merge into one ECSEL JU (electronic components and
systems joint undertaking). Clean Sky, IMI and FCH will be re-established and
SESAR’s mandate will be extended.

The 2013 Financial Regulation takes into
account the experience with the setting up of the JTIs under FP7 and in
particular their specific structure and the contribution of the industry. As a
result, depending on the corresponding provisions in their constituent acts,
PPP bodies may be assimilated as to their financial rules to agencies (Article  208
bodies - SESAR) or adopt their financial rules in accordance with a Model
Financial Regulation specifically applicable to PPP bodies (Article 209 bodies
– future IMI2, Clean Sky2, FCH2, ECSEL, BBI and SHIFT²RAIL).

The Commission's supervisory arrangements over the JUs are
ensured by the partner DGs monitoring the JU's set-up of its internal control
system (when preparing for its budgetary autonomy), the delegation agreement concluded
between each JU and the Commission and the Commission's representation on its
governing Board (when having become autonomous). Partner DGs have to report in
their own AAR on these supervision modalities and on the assessment of whether any
serious control issue within the JU would affect their own (reputational and/or
financial) assurance building process. For 2013, DG RTD in its AAR included the operational budget entrusted to the IMI JU into its reservation on the FP7
research grants programme.

The Court of Auditors concluded in December 2013 on
the results from its 2012 annual audits of the European Research Joint
Undertakings that all Joint Undertakings had produced reliable accounts but
three of them (ENIAC, ARTEMIS and IMI), received a qualified ECA statement of
assurance in respect of the legality and regularity of their underlying transactions
of 2012. For some other JUs, there is room to improve procedures, in particular
the implementation of the ex-post audit strategy and, in the case of F4E, cost
control mechanisms.

On 4 April 2014, all joint undertakings were granted discharge by the European Parliament related to the
implementation of the budget for the financial year 2012.

Annex 4:
Compliance with payment time limits

(Article
  111.5 RAP)

Since
2013, the statutory time limits for payments have been laid down
in the Rules of Application of the Financial Regulation[25]
(hereinafter RAP). There are also some exceptionally applied time limits which
are detailed in sector-specific regulations. The entry into force of the new
Financial Regulation and its rules of application brought with it changes to
payment limits. The Commission’s standard contracts have been redrafted to take
on board the new regulatory requirements.

Article
92 of the Financial Regulation foresees that payments to creditors must be made
within deadlines of 30, 60 or 90 days, depending on how demanding it is to test
the deliverables against the contractual obligations. For contracts and grant
agreements for which payment depends on the approval of a report or a
certificate, the time limit for the purposes of the payment periods is no
longer automatically suspended until the report or certificate in question has
been approved.

The period
of two months remains valid for payments under Article 87 of the Regulation of
the European Parliament and the Council[26] laying down the
general provisions on the European Regional Development Fund, the European
Social Fund and the Cohesion Fund.

Compliance
with payment time limits has been reported by the Services in their Annual
Activity Reports since 2007[27]. In accordance with the
applicable rules, the payment times reported in this annex have been calculated
as follows:

For payments related to contracts and grant
agreements signed before 2013 the time limits specified in the Financial
Regulation of 2007 are applied.

·
where the payment is contingent upon the
approval of a report, the time from approval of the report until payment;

·
where no approval report is required, the time
from reception of the payment request until payment.

For
payments related to contracts and grant agreements signed as from 2013, the
Financial Regulation of 2013 is applied:

·
where no report is required and where the
payment is contingent upon the approval of a report, the time from reception of
the payment request until payment.

The Commission's global average payment
time is monitored by the Accounting Officer. It
has evolved as follows in recent years:

|| 2011 || 2012 || 2013

Global average payment time || 25.7 days || 24.9  days || 24.5  days

The data shows that the global
average payment time of the Commission services is just below 25 days and it has
steadily decreased in the last three years. This is a satisfactory trend but there
is clearly scope for reducing payment times further. Thus services are
encouraged to continue their efforts in this regard and to implement follow up measures
whenever payment time problems are identified.

The table
below illustrates the evolution of the “late payments” i.e. payments
made after expiry of the statutory time limit in recent years. The data
used has been extracted from the ABAC accounting system:

|| 2011 || 2012 || 2013

% of late payments in number || 12.3 % ||  11.9 % ||  17.0 %

% of late payments in value || 7.3 % ||  13. 6% ||  18.5%

Average number of overdue days[28] || 43.2 || 41.9 || 37.5

Regrettably, the
number of late payments and the amounts associated with them have increased
significantly in 2013. Since payment times did not became longer, this result is
believed to be linked to the more stringent requirements associated with the
new FR. Another reason is associated with the lack of payment appropriations
which has adversely affected several DGs’ ability to pay on time. There is
clearly a need for services to intensify their efforts to ensure that statutory
payment time limits are met.

The new legal time limits introduced by the
revised FR correspond to the previous target deadlines from Communication
SEC(2009) 477 of 08/04/2009. Thus the reporting on compliance with “target”
time limits is now substituted by the reports on the respect of statutory time
limits.

Concerning the
interest paid for late payments [29] (see figures
in the table below) the total amount paid by the Commission in 2013 is
stable when compared to 2012. The abnormally high amount of interest paid
in 2011 was exceptional and due to late payments on to two litigation cases handled
by one DG.

|| 2011 || 2012 || 2013

Interest paid for late payments || 1 734 229.98 € || 738 959.75 € || 659 342.16 €

The causes of late payments include
the complexities of evaluating the supporting documents that are a prerequisite
for payment. This is particularly the case when the supporting documents are reports
of a technical nature that sometimes have to be assessed by external experts.
Other causes are associated with difficulties in coordinating the financial and
operational checks of payment requests, and issues with the management of
payment suspensions.

The 2009 Communication establishing
Commission-internal payment targets provided a clear incentive to services to
reduce their payment times. Significant improvements were noted in particular considering
that from 2009 to 2011 the global average payment time fell from 34 to
26 days. However improvements in recent time have been less marked with current
payment times fixed at around 25 days. There is scope for reducing
payment times further especially since both volume and value of late payments
rose substantially in 2013. When setting up action plans in this area,
services' should focus on further reducing late payments from their current
levels of 17% of payments in terms of their number, 18.5 % of their value. The
aim is to meet the statutory payment time for every payment.

Annex 5:
Report on negotiated procedures 2013

1. Legal basis

Article 53 of the Rules
of application of the Financial Regulation requires authorising officers by
delegation to record contracts concluded under negotiated procedures.
Furthermore, the Commission is required to annex a report on negotiated
procedures to the summary of the AARs referred to in Article 66.9 of the
Financial Regulation.

2. Methodology

A distinction has been
made between the 45 Directorates-general, services, offices and executive
agencies which normally do not provide external aid, and those three
Directorates-General (DEVCO, ELARG and FPI) which conclude procurement
contracts in the area of external relations[30] or award
contracts on their own account, but outside of the territory of the European
Union.

These three Directorates-General
have special characteristics as regards data collection (decentralised
services, …), the total number of contracts concluded, thresholds to be applied
for the recording of negotiated procedures (€ 20 000), as well as the
possibility to have recourse to negotiated procedures in the framework of the
rapid reaction mechanism (extreme urgency). For these reasons, a separate
approach has been used for procurement contracts of these three Directorates-General.

3. Overall results of negotiated
procedures recorded

3.1.        The 45 Directorates-general,
services or offices, excluding the three "external relations" Directorates-general

On the basis of the
data received, the following statistics were registered: 103 negotiated
procedures with a total value of € 204 million were processed out of
a total of 733 procedures (negotiated, restricted or open) for contracts
over EUR 60 000 with a total value of EUR 2517 million.

For the Commission, the
average proportion of negotiated procedures in relation to all procedures
amounts to 14.1% in number (15.2% in 2012), which represents some 8.1%
of all procedures in value (13.2% in 2012).

An authorising service
is considered to have concluded a "distinctly higher" proportion of
negotiated procedures "than the average recorded for the Institution"
if it exceeds the average proportion by 50%, or if the increase from one year
to the next is over 10%. Thus, the reference threshold for this year is fixed at
21.1% (22.9% in 2012).

Some 10 Directorates-General
or services out of the 45 exceeded the reference threshold, and another 2
increased their number of negotiated procedures by more than 10% compared to
the previous year. Among those 12 services, it should be noted that 6 Directorates-General
concluded only one to four negotiated procedures, but because of the low number
of procedures conducted by each of them (up to 7), the average was exceeded. In
addition, 17 out of 45 Directorates-General have not used any negotiated
procedure, including 9 services that awarded no contract at all.

The assessment of
negotiated procedures compared with the previous year shows a decrease in the
order of 1.2 percentage points in terms of relative number and a
decrease of 5.1 percentage points in terms of relative value.

3.2.        The three "external
relations" Directorates-General

On the basis of the
data received, the following statistics were registered: 149 negotiated
procedures for a total value of contracts € 138 million were
processed out of a total of 585 procedures for contracts over € 20 000
with a total value of about € 1151 million.

For the three
"external relations" Directorates-General, the average proportion of
negotiated procedures in relation to all procedures amounts to 25.5% in
number, which represents some 12% of all procedures in value terms. Only one Directorate-general
exceeds the reference threshold of 38.2% (average + 50%).

If compared with
previous years, these Directorates-General have registered a decrease of 1.4 percentage
point in number of negotiated procedures in relation to all procedures compared
to the previous year.

4. Analysis of the justifications and
corrective measures

The following
categories of justifications have been presented by those Directorates-general
who exceeded the thresholds:

1)
Statistical deviations due to the low number of contracts awarded under all procedures. Indeed
10 out of the 12 DGs have carried out less than 15 procurement procedures as a
whole.

2)
Objective situations of the economic
activity sector, where the number of operators
may be very limited or even in a monopoly situation (for reasons of
intellectual property, specific expertise, etc.) for instance in the scientific
area or for financial databases. Situations of technical captivity may also
arise especially in the IT domain (proprietary software or maintenance of complex
servers hosting critical information systems, etc).

3)
Situations of emergency that cannot be foreseen by the contracting authority, as is the case
for the Stability Instrument.

4)
Similar services/works as provided for in the initial tender specifications. Some services
in charge of large inter-institutional procedures are faced with estimations of
needs at the beginning of (usually framework) contracts that do not always
match the consumption trend of the contract during its execution. The leading
service must then use a negotiated procedure on behalf of all institutions
party to the contract to increase the ceiling of the framework contract in
question.

5)
Unsuccessful open or restricted procedure, leading to a negotiated procedure.

Besides
it should be highlighted that the number of negotiated procedures in 2013
compared to 2012 has decreased in absolute terms (from 111 to 103), while the
overall number of procurement procedures has increased slightly (from 728 to
733).

Several corrective
measures have already been implemented by the Directorates-General concerned:

1)
Regular update of standard model
documents and guidance documents on procurement.

2)
Training and improved inter-service
communication. The Central Financial Service provides
regular practical training sessions on procurement.

3)
Improvement of the system of evaluation of
needs of Directorates-general/services and an improved
programming of procurement procedures. The Commission's horizontal
services will continue their active communication and consultation policy with
the other DGs, institutions, agencies and other bodies along the following
axes:

−
permanent exchange of information via regular
meetings with user services and agencies in appropriate fora;

−
ad-hoc surveys prior to the initiation of
(inter-institutional) procurement procedures for the evaluation of needs;

−
better estimate of needs of inter-institutional
framework contracts and better monitoring with semester consumption reports
from user services or agencies.

Annex 6:
Summary of Waivers of recoveries of established
amounts receivable in 2013

(Article
91.5 RAP)

In accordance with Article 91(5) of the
Rules of Application, the Commission is required to report each year to the
budgetary authority, in an annex to the summary of the Annual Activity Reports,
on the waivers of recovery involving 100.000 € or more.

The following table shows the total amount
and the number of waivers above 100.000 € per Directorate-General/Service for
the EC budget and the European Development Fund for the financial year 2013.

EC budget:

Directorate-General/Service || Amount of waivers in € || Number of waivers

CNECT ||                    894,999.98 || 5

DEVCO ||                    606,831.82 || 4

EACEA ||                    886,738.54 || 4

ECFIN ||                    193,573.47 || 1

ECHO ||                    987,318.73 || 2

EMPL ||                    533,430.56 || 2

ENER ||                    372,898.92 || 1

ENTR ||                    143,067.18 || 1

ENV ||                 1,335,026.43 || 3

FPI ||                    138,989.59 || 1

MARE ||                    160,927.97 || 1

MOVE ||                    622,978.63 || 2

RTD ||                 2,347,068.76 || 5

Total: ||                 9,223,850.58 || 32

European Development Fund:

Directorate-General/Service || Amount of waivers in € || Number of waivers

EDF || 839,249.25 || 3

Guarantee Fund:

Directorate-General/Service || Amount of waivers in € || Number of waivers

GF (RTD - FP7) || 343,666.43 || 2

[1]               DG HOME funds implemented under shared management
(65.93% of total funds; see AAR p. 39) amount to EUR 660 million, for which in
2013 no reservation was issued. They are included in the table to allow for an
overall estimation of the amount at risk for shared management.

[2]               No final payments affected in 2013

[3]               No final payments affected in 2013

[4]               This is the amount of EDF recorded in the accounts
("budget outturn" as per DEVCO AAR Annex 3B, p. 250), while the AAR
of DG DEVCO includes EDF annual expenditure at EUR 3 054,7 million. The figure
for the amount at risk has been adjusted accordingly.

[5]               Mid-value of the range reported by DG RTD (EUR 105.5
– 109.5 million)

[6]               These cannot be related to policy-making activities.

[7]            For the operational budget they manage.

[8]             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 Council Regulation
(EC, Euratom) No 1605/2002 (OJ L 298,26.10.2012, p. 1).

[9]               Soon to be adopted.

[10]             Council Regulation (EC) No 58/2003 of 19 December 2002
laying down the statute for executive agencies to be entrusted with certain
tasks in the management of Community programmes (OJ L 11, 16.1.2003).

[11]             Former regulatory procedure which is now the examination
procedure with the requirement of a positive opinion in the Committee according
to Article 13(1)(c) of Regulation 182/2011.

[12]             i.e. those Directorates General which have delegated
the implementation of programmes (or parts of it) to the executive agency: Per
31/12/2013 the parent DGs for EACI are DGs ENTR, ENV, ENER, MOVE; for EAHC it
is DG SANCO; for EACEA these are DGs EAC, COMM, DEVCO; for ERCEA, it is DG RTD;
for REA these are DGs RTD, ENTR, EAC; for TEN-T EA, it is DG MOVE. In 2014, the
parent DGs change also for EACEA, EACI (which became EASME by then), EAHC
(CHAFEA by then), REA, TEN-T EA (INEA by then).

[13]             Council Regulation (EU, Euratom) No 1311/2013 of 2
December 2013 laying down the Multiannual Financial Framework for the years
2014-2020 (OJ L 347, 20.12.2013, p. 884).

[14]             Unlike the separate discharge process of (1)
decentralised agencies, (2) Joint Undertakings operating under Article 208 FR
and (3) Joint Undertakings which constituent acts foresee separate discharge
(by derogation from Article 209).

[15]             The 2012 synthesis report already confirmed that the
declaration of assurance of the respective DGs, covers all resources assigned
to its Directorates-General, irrespective of the management mode used and
irrespective of whether the entrusted body is subject to a separate discharge
decision (for its executive agencies, regulatory agencies and JU).

[16]             This figure is made up of 270 contract agents and 10
seconded national experts.

[17]             For instance, the Office for Harmonisation in the
Internal Market and the Community Plant Variety Office.

[18]             Commission Delegated Regulation (EU) No 1271/2013 of
30.9.2013 on the framework financial regulation for the bodies referred to in
Article 208 of Regulation (EU, Euratom) No 966/2012 of the European Parliament
and of the Council (OJ L 348, 7.12.2013, p. 42).

[19]             All related documents and reports can be found on http://europa.eu/about-eu/agencies/overhaul/index\_en.htm.

[20]             COM(2013) 519 of 10 July 2013 Communication from the
Commission to the European  Parliament and the Council on programming of human
and financial resources for decentralised agencies 2014-2020.

[21]             While the ECA has issued a
qualified opinion for EIT and a disclaimer of opinion for FRONTEX.

[22]             Commission Delegated Regulation (EU) No 1271/2013 of
30.9.2013 on the framework financial regulation for the bodies referred to in
Article 208 of Regulation (EU, Euratom) No 966/2012 of the European Parliament
and of the Council (OJ L 348, 7.12.2013, p. 42)

[23]             The report combines what was required by previous FFR
by the Annual Activity Report, internal and external audit, and financial
reporting

[24]           JUs are established on the basis
of art. 187 TFEU (ex-Article 171 of the EC Treaty) which allows the Commission
to set up Joint Undertakings for "the efficient execution of Community
research, technological development and demonstration programmes".

[25]             Commission Delegated Regulation (EU) N° 1268/2012 of
29 October 2012 (OJ L 362, 312.12.2012, p.1).

[26]             Regulation (EC) No 1083/2006 of the European Parliament
and of the Council laying down general provisions on the European Regional
Development Fund, the European Social Fund and the Cohesion fund and repealing
Regulation (EC) No 1260/1999 (OJ L 210, 31.7.2006, p. 25).

[27]             Based on available data in ABAC as of end of the
financial year 2007.

[28]             i.e. above the statutory time limit.

[29]             i.e. no longer conditional upon the presentation of a
request for payment (with the exception of amounts below 200 euros).

[30] Different legal basis: Chapter 3 of Title IV of Part Two
of the Financial Regulation

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