Annual report of the European Court of Auditors 201106 November 2012
by eub2 -- last modified 06 November 2012
The 2011 accounts present fairly the financial position of the European Union and the results of its operations and its cash flows for the year. Revenue and commitments were free from material error. However, payments were affected by material error, with an estimated error rate of 3.9% for the EU budget as a whole. The level of error remained similar to 2010 when it was 3.7%. In 2011 the EU spent € 129.4 billion, with around 80% on agriculture and cohesion policies where the task of implementing the EU budget is shared by the Commission and EU Member States. The ECA found too many cases of EU money not hitting the target or being used sub-optimally. Member States and Commission control systems examined were only partially effective in ensuring the regularity of payments. Control systems are not realising their full potential to prevent or detect and correct errors. There needs to be a greater degree of commitment on the part of national authorities to the management and control of EU money. The error rate estimated by the ECA for spending in rural development, environment, fisheries and health policy group (the most error prone spending area) was 7.7 %. The estimated error rate for policy group regional policy, energy and transport remained high at 6.0 %. For many years, the ECA has called for simpler spending schemes with clearer objectives, easier to measure results and more cost-effective control arrangements. The ECA’s recommendations come at a time when legislative proposals for the better management of EU money are being discussed.
What is the Court of Auditors' annual report?
The European Court of Auditors (ECA) is the independent external auditor of the European Union. Each year, the Court publishes an Annual Report on the implementation of the EU budget. The main components of this report is "statement of assurance" on the Commission's accounts (checking if the books were well kept) and EU expenditure (checking if the transactions were made in accordance with the rules), along with an explanation of the Court's findings.
The Court's findings are drawn mainly from audits that it carries out on sample transactions throughout the year, at EU, national, regional and individual beneficiary level. From these audits, any errors found are classified as either quantifiable (i.e. with a potential financial impact) or not. The impact of these errors is then extrapolated to reach a "most likely error rate", which the Court gives to each individual chapter that includes a cluster of policy programmes (e.g. cohesion, transport and energy), and to the budget as a whole. If a spending area has an error level of less than 2%, it is classified as free from material error (i.e. all payments were made in line with the rules and requirements). If the level of error reaches or exceeds 2% the spending area is classified as affected by material error.
What has been the trend in the Court of Auditors' findings over the past 10 years?
Over the last decade, the overall error rate for EU spending has declined significantly. Where in 2007 the error rate was well above 7%, since 2009 the Court of Auditors has reported an overall error rate for EU spending of less than 4% - which means that at least 96% of all payments made in 2009, 2010 and 2011 were accurate and fully in line with all the applicable rules.
Why are there sometimes reports that the Court of Auditors has "not signed off EU accounts" for years?
Firstly, the Court has signed off the EU's accounts. In fact, for the fifth year in a row the Court of Auditors gave a completely clean bill of health to the Commission's accounting books. This means that every euro spent from the EU budget was duly recorded in the books and properly accounted for.
When it comes to payments, it is true that the Court requires an error rate of less than 2% before it will declare the EU budget to be free from material error. This means that more than 98% of EU spending must be free of error with a quantifiable impact for it to be "signed off".
The Commission is constantly working to move closer to this goal. It has so far reached a success rate of a 4% error rate. In other words, out of every 100 euro spent by the EU, at least 96 euro was free from quantifiable error. While this is not enough to get the Court of Auditors' "green light", it does indicate the very high standard of management and control applied to taxpayers' money at EU level.
Does an error mean that money has been lost, wasted or subject to fraud?
Absolutely not. Error rates cannot be 'translated' into an amount lost. Errors in procedures do not mean failed projects or wasted funds: despite errors, the money may have well been spent in line with what it was meant for. The fact that there were errors in the application of a tender procedure for a bridge construction project does not mean that the new bridge should be dismantled or that it is of poor quality.
Second, controls at various levels (project level, national and EU) ensure that EU taxpayers' money is protected. In fact, the multilevel controls for EU spending are probably much tighter than the controls for any national budget. If errors with financial impact are discovered, undue payments are then clawed back from the project or country at fault, usually as part of the multiannual system of checks and audits (EU programmes are multiannual, and so are the checks).
Fraud is different from errors, in that it is an intentional deception and criminal action. Any suspicions of fraudulent activity involving EU funds are reported to the European Anti-fraud Office (OLAF). It should be noted that the Court only refers to OLAF on suspicions of fraud around 4 cases per year out of the many hundreds of cases it looks at. Fraud amounts to a mere 0.2% of all expenditures.
How does the Commission respond to errors that are uncovered?
There is a robust, multi-layered system of controls and audits in place to avoid irregularities in EU spending. Nonetheless, errors do happen when large sums are distributed to millions of recipients in 27 different countries. The Commission takes a very strong stance on the principle that when an error is found, the money must be recovered. In 2011, for example, the Commission recovered or corrected €1.84 billion of incorrectly paid amounts.
Also, it should be noted that in Structural Funds, the Commission blocks interim payments if Member States systems are not considered to be up to standard, and payments are also suspended or interrupted when serious weaknesses are identified. Moreover, for the next generation of programmes under the Multi-annual Financial Framework, even stricter corrective measures have been proposed, including the possibility of Member States losing EU funds for programmes definitively if they fail to identify and address irregularities on time.
What role does the Court of Auditors' report play in the budget discharge procedure?
The budget discharge is the final approval of the EU budget implementation for a given year. It is granted by the European Parliament on a recommendation from the Member States in Council. The Parliament uses the Court of Auditors' report (statement of assurance) as the primary basis for this decision. Discharge equates to approval of how the Commission implemented the EU budget in that financial year and the closure of the accounts.
How does the Commission use the Court of Auditors' report?
The Commission takes the European Court of Auditor's recommendations very seriously, using them to help identify the areas where improvement could be made. Over the past decade, there has been a significant decline in the overall error rate thanks to continuous efforts by the Commission to follow up the Court's and discharge Authority's recommendations and so improve the financial management of EU funds. Just a snap-shot of measures taken in recent years include:
• Simplification of rules across all policy areas. Simpler rules are easier to apply and easier to check for compliance, thereby reducing the risk of errors.
• Introduction of stricter penalties. Interim payments are blocked if Member States systems are not considered to be up to standard, and payments are suspended or interrupted when serious weaknesses are identified.
• Modernisation of the Commission's accounting system, so that it is now one of the top public sector accounting systems worldwide.
• The new EU Financial Regulation adopted on 25 October 2012 includes many new measures to further improve the management and control of EU funding, and ensure that EU money delivers maximum value to citizens while reducing to red-tape to the greatest possible degree.
What are the changes in this year's Court of Auditors' report, compared to the previous years?
This year the Court of Auditors slightly changed the structure of the policy groups. Instead of all agriculture, environment, fisheries and health spending being classified under one heading (with a single error rate), direct payments in agriculture are now treated separately. Likewise, regional policy, energy and transport are no longer put in under the same heading as employment and social affairs spending.
This new approach can be welcomed. It will allow a more detailed picture of where problems might lie, by narrowing down the policy areas which are subject to the same error rate. However, the change in approach does mean that it is more difficult to directly compare this year's results to previous years, although comparative information is provided.
In addition, there has been a change in methodology. For the first time, the Court has included the failure to meet cross-compliance rules (1) in the calculation of the most likely error rate. The errors found here represent around 0.1 percentage point of the overall error rate for the EU budget in 2011.
Is the Court of Auditors' annual report directed only at the European Commission?
No. The Court of Auditors' annual report assesses how well expenditures made from the EU budget followed the administrative rules for a particular year. Given that the spending of around 80% of this budget is under shared management of the Commission and Member States, national authorities also have a great responsibility in ensuring that EU money is properly managed, controlled and spent. The Court points also at Member States in indicating where the problem lies or improvements need to be made, and the European Commission and Parliament have urged Member States on many occasions to follow these recommendations and take their responsibilities seriously when it comes to managing EU funds.
Cross compliance = the single farm payments system is linked to measures taken to meet environmental, food safety, animal and plant health and animal welfare standards, as well as the requirements to keep all farmland in good agricultural and environmental condition
Source: European Commission