European Court of Auditors' Annual Report - guide

13 November 2007
by eub2 -- last modified 13 November 2007

The European Court of Auditors' 2006 Annual Report identifies some improvements, particularly in agricultural spending, although errors of legality and regularity still persist in the majority of EU expenditure due to weaknesses in internal control systems both at the European Commission and in EU Member States.

The European Court of Auditors is the external auditor of the European Union. It is an independent institution of the European Union and is based in Luxembourg.

The Court produces its Annual Reports in November each year covering the previous financial year: one annual report covers the general budget of the Union, the other covers the European Development Funds (development aid financed outside the general budget).

The general budget is the main budget of the European Union, comprising income or 'own resources' and expenditure, and is divided into five principal areas: agriculture; structural spending; internal policies, including research; external actions (development aid) and pre-accession strategy. A sixth area covers the Union's own administrative spending.

The main content of the Annual Reports is the Court's Statements of Assurance (Déclaration d'Assurance, DAS) and accompanying information. These comprise annual conclusions on i) the reliability of the accounts; and ii) the legality and regularity of underlying transactions, based on the EC Treaty.

The opinion on the reliability of the accounts sets out the extent to which the accounts (the financial statements) completely and accurately report the financial results for the year and the assets and liabilities at the year end.

The opinion on the legality and regularity of underlying transactions sets out the extent to which the income and payment transactions underlying the accounts - payments to farmers, local authorities, development projects - are accurately calculated and comply with the relevant rules and regulations.

The Court's opinions are based on the evidence provided by its audit work and can be either: i) unqualified - the accounts are reliable, or the underlying transactions are legal and regular in all material aspects; or ii) adverse - the accounts are not reliable, or the underlying transactions are not legal and regular in all material aspects, or iii) qualified - the accounts are reliable, or the underlying transactions are legal and regular in all material respects, except for the effects of the matter(s) to which the qualification relates.

Errors of legality and regularity occur when beneficiaries either overclaim or otherwise do not meet the obligations that they must fulfil in order to receive EU aid or grant. Evidence of a material or unacceptably high level of error will cause the Court to give an adverse opinion.

The Court bases its opinions on analysis and testing of systems, as well as the testing of statistically representative samples of underlying transactions. This involves obtaining direct evidence on the accuracy and physical reality of the transaction at the level of the final beneficiary.

Internal control is the range of procedures and processes (such as checks) by which the European Union administers and manages its budget and ensures that funds are collected and spent properly and in accordance with the rules. Control procedures - which are designed to prevent or detect and correct errors - are the responsibility of the Commission, and, in the case of shared management, of member or beneficiary states. Internal audit is part of internal control and helps ensure the systems function correctly.

IACS - the Integrated Administration and Control System - is the system EU Member States are required to apply for certain aspects of agricultural spending currently representing around 70% of the total. The requirements of the scheme are laid down by regulation. They involve maintaining databases, identification of land and animals and coordinated checks. Expenditure not covered by IACS is subject to other systems.

Under the Single Payment Scheme - SPS - aid is decoupled from production, meaning that farmers are no longer paid on the basis of the crops they grow or the number of animals they keep. Beneficiaries' entitlements are based either on payments received during a reference period (historical model) or land farmed during the first year of implementation (regional model).

Source: European Commission