Documents considered by the Committee on 8th December 2010 - European Scrutiny Committee Contents

3 Financial management


European Court of Auditors: Annual report on the implementation of the budget

Legal base
DepartmentHM Treasury
Basis of considerationEM of 25 November 2010
Previous Committee ReportNone
To be discussed in CouncilFebruary 2010
Committee's assessmentPolitically important
Committee's decisionFor debate on the Floor of the House together with the Commission's 2009 report on the fight against fraud and related documents, which we have already recommended for debate: HC 428-vi (2010-11), chapter 1 (3 November 2010)


3.1 The European Court of Auditors (ECA) is responsible for the external audit of the EU's public finances. It examines the legality, regularity and soundness of the management of all the EU's revenue and expenditure, and the revenue and expenditure of any body (agencies etc.) created by the EU. The ECA publishes its main Annual Reports, on activity carried out under the General Budget and on the European Development Funds (EDFs),[10] on a particular financial year about 12 months after the end of that year. In addition to these Annual Reports, the ECA also publishes annually Special Audit Reports on agencies etc. and, throughout the year, Special Reports on its audits of particular areas of revenue or expenditure. We regularly, but not always, report on the Special Reports. The main Annual Reports include the ECA's Statements of Assurance for the financial year in question.

3.2 The Annual Reports and Statements of Assurance[11] allow the EU's Budgetary Authority (the Council and the European Parliament) to consider the quality of EU budget implementation, and whether the budgetary processes for the year should be closed by the European Parliament granting, on the recommendation of the Council, a "discharge" to the Commission. The Commission is required to act on any comments made by the Council and the European Parliament in granting the discharge, and to report back on the actions it has taken in response, if requested.

3.3 While the ECA's Annual Reports contain some material relating to fraud and irregularities, they are not primarily concerned with fraud against the EC's resources. We reported on the Commission's 2009 Annual Report, Protection of the financial interests of the Communities: Fight against fraud, and related documents in November 2010 and have recommended them for debate once this present document is available.[12]

The document

3.4 This document is the ECA's report of the audit of the General Budget accounts for 2009. It is over 240 pages long and in considering the report we have been assisted by the Explanatory Memorandum of 25 November 2010 from the Economic Secretary to the Treasury (Justine Greening). As well as providing the Government's views on the report, it contains a useful summary of the report's introduction and of each of the subject-specific chapters in the report. It also lists references in the document to the UK, which we annex.

3.5 The first part of the report is a general introduction to the audit in which the ECA notes that:

  • the report covers the third year of the 2007-2013 Financial Framework (or as previously known, the Financial Perspective), which sets the limits for each financial year's budgets;
  • in 2009 commitments totalling €142.5 billion (£123.8 billion) and payments totalling €118.4 billion (£102.8) were made;
  • its assessments are chiefly based on its testing of the regularity of transactions, an assessment of the effectiveness of the principal supervisory and control systems governing the revenue or expenditure involved and on a review of the reliability of Commission management representations; and
  • following the entry into force of the Lisbon Treaty, it has for the first time forwarded its annual report to the national parliaments of Member States at the same time as to the Council and the European Parliament.

3.6 The report itself is set out, apart from the actual Statement of Assurance, in two columns with the ECA's observations and comments in the first and the Commission's responses (or, where appropriate, those of other EU institutions and bodies) alongside in the second. It has chapters on the Statement of Assurance and supporting information, revenue, each of the seven activity based budgeting (ABB) policy areas of expenditure (agriculture and natural resources, cohesion, research, energy and transport, external aid, development and enlargement, education and citizenship, economic and financial affairs and administrative and other expenditure). The report has two annexes, the first showing financial information on the general budget and the second listing the Special Reports published by the ECA since its last annual report.

3.7 The first chapter of the report contains the ECA's Statement of Assurance. In this chapter the ECA:

  • gives an unqualified positive Statement of Assurance on the reliability of the EU accounts for the third year running;
  • gives an unqualified positive Statement of Assurance on the legality and regularity of the underlying transactions in the areas of revenue, economic and financial affairs and administration and other expenditure, estimating that errors in these areas have a financial impact of less than 2% — that is, below the threshold of materiality;
  • is unable to give a positive Statement of Assurance on the legality and regularity of expenditure in the areas of agriculture and natural resources, cohesion, research, energy and transport, external aid, development and enlargement and education and citizenship — that is, errors over the 2% threshold were detected;
  • estimates that overall payments are materially affected by error, with the most likely error rate being between 2% and 5%;
  • concludes that supervisory and control systems for payments are, in general, partially effective;
  • considers that the most likely error rate for payments continues to fall for the budget as a whole;
  • observes that in the notes to the 2009 accounts, the Commission has, at the ECA's request, provided more detailed information about recoveries and financial corrections than it has done in the past;
  • notes that reliable information about the effects of corrective mechanisms is not available; and
  • concludes that, although the Commission has taken steps to increase and improve the information it provides to the ECA on the corrective mechanisms applied to the budget, the information that the Commission receives from Member States is not completely reliable.

3.8 The second chapter of the report concerns the financing of the budget. In it the ECA:

  • notes that total revenue is composed of 12.4% Traditional Own Resources (TOR), that is customs duties and sugar levies, 11.7% Value Added Tax (VAT) based contributions, 70.3% Gross National Income (GNI) based contributions and 5.9% from other revenue, including surpluses, refunds and interest payments;
  • says Member States' payments of TOR, VAT and GNI based resources and other revenue were all free from material error;
  • notes, however, that in December 2009 the Commission detected an error in its calculation of provisional estimates of the UK abatement for the years 2008 and 2009, representing an overestimation of €138 million (£120 million) and €458 million (£398 million) respectively, and Member States which finance the UK abatement therefore made a higher than expected contribution in 2009 — this error will be corrected through revised estimates in subsequent budgets;
  • as in previous years, detected problems in the procedures and systems which affect the amounts included in the B accounts,[13] in particular delayed recovery of duties and late making available of recovered amounts and unjustified write-off of customs duties — in two of the Member States audited, the national authorities were not able to fully justify the amounts recorded in the B statements; and
  • recommends that the Commission should continue to press Member States to provide timely and adequate information on VAT-based resources and that it should complete its verification of GNI inventories in Member States.

3.9 The ECA's third chapter concerns the policy group "agriculture and natural resources", which includes the policy areas agriculture and rural development, environment, maritime affairs and fisheries and health and consumer protection. In the area of agriculture and rural development virtually all expenditure is implemented through shared management with Member States, whereas in other areas funds are spent under the direct and indirect management of the Commission. The exception is the European Fisheries Fund, which is also implemented under shared management.

3.10 In the area of agriculture and natural resources as a whole, the ECA says that:

  • the most likely error rate for payments lies between 2% and 5%;
  • of 241 transactions examined 66 (or 27%) were materially affected by error;
  • this represents an improvement compared with 2008, when 32% of payments were materially affected by error;
  • of these 66 transactions 42 (or 64%) were affected by quantifiable errors, notably concerning eligibility and accuracy.

he ECA concluded that:

  • the supervisory and control systems are generally, at most, partially effective in ensuring the regularity of payments; and
  • significant improvements were necessary to the Integrated Administration and Control System (IACS) of three of the eight paying agencies audited (Greece, Cyprus and Malta).

3.11 The ECA recommends that the system weaknesses it identifies should be resolved:

  • as issues affecting the Single Payments Scheme and Single Area Payments Scheme are the most urgent, including errors relating to ineligible land or over-declarations of land, ensuring that all IACS databases provide a reliable and full audit trail, clarifying and further enforcing rules on EU direct aid payments and setting minimum EU-level annual maintenance requirements for grassland;
  • further simplifying the rules and conditions relating to Rural Development;
  • reviewing the Commission's guidelines on the work of certification bodies; and
  • taking measures to avoid the payment of ineligible grants for fisheries projects, in cooperation with national authorities.

3.12 The fourth chapter concerns the ECA's assessment of the cohesion policy group, comprising the policy areas employment and social affairs and regional policy. The European Regional Development Fund, the European Social Fund and the Cohesion Fund account for the vast majority of the spending covered by this chapter. Management of cohesion spending is shared with Member States, who also co-finance the projects concerned. The ECA:

  • notes that audit controls have been strengthened for the 2007-2013 programming period;
  • concludes that, in common with previous years, a large number of payments in the area of cohesion were affected by errors — 36% of the 180 projects audited in 2009, representing an improvement on 2008, where the figure was 43%;
  • concludes that for cohesion as a whole, the most likely estimated error rate is above 5% and that the error rate is for the most part due to eligibility errors;
  • says that eligibility errors were found in 24 of the payments audited and were caused principally by the inclusion of costs which are not eligible for reimbursement, and failures to respect public procurement rules;
  • says that non-respect of procurement rules alone accounts for 43% of quantifiable errors and makes up around three quarters of the estimated error rate;
  • notes that 53% of the payments affected by error contained non-quantifiable errors and are therefore not included in the estimation of the error rate;
  • finds that for at least 30% of the errors detected, Member State implementing authorities had access to sufficient information to have prevented the error;
  • finds that for 11 of the 16 audited Operational Programmes, through which cohesion expenditure is channelled, the verifications carried out by managing authorities in the Member States were only partially compliant with regulatory requirements;
  • notes weaknesses in terms of reporting recoveries and financial corrections to the Commission in many cases; and
  • concludes that interim and final payments for the cohesion policy area were materially affected by error, and that many of these errors (at least 30%) could have been avoided.

3.13 The ECA recommends that:

  • the Commission encourages more rigorous application of corrective mechanisms by national authorities;
  • the Commission ensures that Member States do not commit further irregularities when substituting ineligible expenditure with new expenditure;
  • importance is attached to ensuring effective functioning of the control system for the 2007-2013 programming period; and
  • the Commission monitors application of procurement rules in Member States.

3.14 The fifth chapter covers the ECA's assessment of the policy group research, energy and transport, comprising the policy areas energy and transport, research, information society and media and direct research. Around 70% of the policy group's operational expenditure is on research projects, while 11% of expenditure is on energy and transport projects. The majority of expenditure is implemented by the Commission under direct centralised management and by indirect centralised management through agencies and joint undertakings. The ECA:

  • concludes that the most likely error rate for the policy group is between 2% and 5%;
  • finds that 36 of the 150 sample transactions audited were affected by error, equivalent to 24% — most of the errors related to the reimbursement of ineligible or inaccurately declared costs in interim and final payments;
  • says that 13 of the sampled transactions related to payments under the 7th Framework Programme for Research — six payments were affected by error, equivalent to 46%;
  • finds, in the 44 non-research payments sampled, errors in six cases (equivalent to 14%); and
  • finds that systems were partially effective in ensuring the regularity of transactions — although checks generally operate as intended, in four cases anomalies which should have been picked up by the checks were not detected.

The ECA concludes that:

  • payments under the research, transport and energy policy group were materially affected by error;
  • the 2009 audit shows, however, a reduced error rate compared with 2008;
  • in order to make further progress, the Commission should take action to improve certification of cost statements, by alerting the independent auditors who have incorrectly certified cost statements and by reviewing methodological issues;
  • the Commission should reduce the backlog in recovery of undue amounts paid; and
  • given the increasing complexity of rules governing research framework programmes, the Commission should further simplify these rules while also ensuring proper accountability.

3.15 In the sixth chapter the ECA discusses its assessment of the policy group external aid, enlargement and development, which comprises the policy areas external relations, development and relations with African, Caribbean and Pacific States, enlargement and humanitarian aid. External relations and development expenditure is implemented by the Europe Aid Cooperation Office and the Directorate-General for External Relations (DG RELEX), enlargement expenditure is implemented by the Directorate-General for Enlargement (DG ENLARG) and humanitarian aid is implemented by the Directorate-General for Humanitarian Aid and Civil Protection (DG ECHO). The ECA sampled a total of 180 transactions, comprising 83 advances, 48 interim and 49 final payments, and it:

  • estimates that the most likely rate of error is between 2% and 5% — of the transactions affected by errors, 26% (six out of 23) contain quantifiable errors, while the remaining 74% (17 out of 23) contain non-quantifiable errors;
  • draws attention to the fact that some errors detected in final payments should have been picked up by the Commission's controls but were not; and
  • concludes that the supervisory and control systems in place are partially effective.

The ECA examines the controls for the relevant Commission departments, Europe Aid, DG RELEX, DG ENLARG and DG ECHO, at four different levels — ex-ante, monitoring and supervision, ex-post and internal audit. It notes, in particular, that some of the identified weaknesses in DG RELEX and DG ENLARG systems have yet to be remedied and assesses only DG ECHO as having generally effective controls at all levels.

3.16 The ECA concludes that payments under the heading external aid, development and enlargement were materially affected by error and makes a number of recommendations to the Commission, including that:

  • DG RELEX should improve ex-post controls and pro-actively close contracts whose deadlines have expired;
  • DG ENLARG should review its internal controls and address data quality issues; and
  • DG ECHO should improve the documentation of its assessments and improve data collection.

Recommendations to EuropeAid are included in the report on the European Development Funds.

3.17 The seventh chapter of its report concerns the ECA's assessment of the policy group education and citizenship, comprising the policy areas education and culture, communication and freedom, security and justice. Expenditure for this policy group is managed almost exclusively by the Commission. The audit focused on advance payments to EU and national agencies and transactions underpinning closures (that is to say, the finalisation of projects and the process of beneficiaries settling their accounts with the Commission).The ECA says that:

  • advance payments account for 87% of the total payments in the education and citizenship policy group;
  • on the basis of a sample of 30 payments, it found that advance payments were free from material error;
  • it concluded that the most likely error rate for closures, which make up the remainder of expenditure, was between 2% and 5%;
  • 29 of the 120 closures audited (or 24%) contained quantifiable errors, the most common of which were errors relating to eligibility;
  • its audit of systems was focussed on those relating to closures made in 2009;
  • it found that, although new systems had been put in place for the current programming period (2007-2013) and that these systems should have prevented many material errors, a number of errors concerning closures were left undetected and uncorrected;
  • it concluded that closures for the education and citizenship policy group were affected by material error;
  • it concluded that the supervisory controls were partially effective; and
  • it recommended that the Commission continue to reinforce checks on closures to ensure that errors are identified and corrected.

3.18 The eighth chapter relates to the ECA's assessment of the policy group economic and financial affairs, comprising the policy areas economic and financial affairs, enterprise, competition, single market and trade. Economic and financial affairs and enterprise together account for almost 83% of the group's total operational expenditure. The ECA:

  • audited a total of 80 payments, 51 of which were interim or final payments;
  • found that 21 out of 80 payments (26%) were affected by error — of these 13 were affected by quantifiable errors (62%), while the remaining eight (38%) were affected by non-quantifiable errors;
  • divided its assessment of systems into three areas, ex-ante controls, audit certification and ex-post controls — the 80 transactions sampled did not reveal any significant weaknesses in the operation of ex-ante checks;
  • found, for ex-post controls, that the Directorate-General for Enterprise and Industry (DG ENTR) had satisfactory controls in place, while the other relevant Directorates General had only recently put controls into place;
  • detected, nevertheless, inconsistencies between the results of the Commission's audit certification and its own assessments;
  • concluded that payments for the economic and financial affairs policy group were free from material error, but nevertheless draws attention to the type and extent of errors found in research framework expenditure; and
  • concluded that the supervisory and control system for the policy area enterprise was only partially effective.

The ECA acknowledges that the Commission has taken steps to simplify eligibility and application rules, but nevertheless recommends that it should raise awareness of eligibility issues and encourage ex-ante certification. It also recommends that the Commission should improve its ex-ante controls on procurement procedures and interim and final payments.

3.19 The ninth chapter concerns the administrative expenditure that is managed by the institutions of the EU for human resources, that is to say, payment of salaries, allowances and pensions and for buildings, equipment, energy, communications and information technology. It covers administrative rather than policy expenditure and covers the areas of taxation and customs union, fight against fraud, the Commission's policy coordination and legal advice, the Commission's administration, the Budget and statistics. The ECA audited a sample of 57 transactions, assessed compliance of the relevant supervisory and control systems, and reviewed the management representations of the four Commission Directorates-General responsible for administrative expenditure. It concluded that payments as a whole for the institutions' administrative expenditure were free from material error and found that the compliance of systems designed to ensure the regularity of transactions displayed no material weakness. In relation to its own accounts, the ECA's external auditor considered that the financial statements give a true and fair view of the its financial position.

3.20 This chapter dealt also with three other matters:

  • for payment of social allowances the ECA recommended to the institutions and bodies concerned that they request documents to confirm the personal situation of staff at specific intervals and that these documents be monitored in a timely manner;
  • the ECA concluded that the accounts of the European Schools are not affected by material errors; and
  • it notes that separate reports on the EU Agencies and Executive Agencies will be published before the end of 2010.

The Government's view

3.21 The Economic Secretary to the Treasury says that the Government is very concerned that the ECA has once more, and for the 16th year in succession, been unable to provide a positive Statement of Assurance on the majority of payments from the EU Budget. She comments further that:

  • the high error rate for cohesion policy remains a cause for concern;
  • although the Government notes that the error rate has fallen compared to 2008, the likely error rate of around 6% is still too high, particularly given that cohesion policy accounts for around 30% of EU Budget expenditure;
  • 36% of payments to cohesion policy projects were affected by error, compared to 43% in 2008;
  • the Government notes with concern that overall rates of recovery from beneficiaries who received EU funds incorrectly seem to have fallen compared to 2008;
  • the Government welcomes, however, the unqualified positive Statement of Assurance given by the ECA for the third year in succession concerning the reliability of the EU accounts;
  • it notes that only one area of spending, cohesion policy, now has a likely error rate above 5%, and that this has decreased considerably from last year's report;
  • it also welcomes reductions in the overall levels of error, but notes that error rates remain unacceptably high and it believes it is vital that further progress is made rapidly;
  • it notes that the ECA does not provide an updated version of the chart in the report on the 2008 EU Budget, which enables identification of a clear year-on-year trend of error reduction;
  • the chart suggested that 47% of the 2008 EU Budget was free from error, compared to 40% in both 2006 and 2007, 35% in 2005 and just 6% in 2003 — however, no such figure is provided for the 2009 EU Budget;
  • the Government underscores that a qualified statement on the EU Budget year after year affects confidence in EU expenditure and the public's perception of the value of membership of the EU;
  • it notes that the pace of reform of EU financial management appears to be incremental and that much more needs to be done by both the Commission and Member States to achieve the mutual aim of a positive statement of assurance on the EU Budget;
  • given that Member States are implementing tough consolidating measures to reduce fiscal deficits, it is essential that EU expenditure is closely scrutinised on the basis of value for money;
  • the Government will therefore continue to champion reform through engagement with the Commission and other Member States and has signalled this intention with its call for more transparency and accountability in EU spending;
  • the Government remains committed to improving its management of EU expenditure and will publish the third Consolidated Statement on the use of EU funds in the UK — this statement is audited by the National Audit Office and presented to Parliament;
  • the objectives of producing the statement are to encourage better financial management of EU funds and to help increase assurance of, and transparency in, the UK's use of EU funds;
  • the UK is taking the lead in encouraging Member States to take greater responsibility for the roughly 80% of the EU Budget that is co-managed and hopes that such initiatives will contribute to the achievement of a positive Statement of Assurance in the future;
  • the Government welcomes the ECA's continued support for the Consolidated Statement, in comments in this report, and for such initiatives which promote transparency of EU expenditure and have the potential to reduce error rates by ensuring increased operational effectiveness of systems;
  • it notes that the Commission made an error in calculating the UK abatement in 2008 and 2009, but that this miscalculation had no material policy implications and is now long since corrected;
  • while the Government recognises that the current programming period 2007-2013 has brought about improvements in terms of simplifying complex rules and legal requirements, it considers further simplification a priority and looks forward to working with the Commission and others in achieving this while also safeguarding sound financial management;
  • the Government notes the ECA's conclusion that for many policy areas, supervisory and control systems are only partially effective;
  • it supports the ECA's recommendation that the Commission should enhance controls in many areas and notes with concern that in certain cases (notably in the education and citizenship policy group), supervisory and control systems at Commission level left a significant number of errors undetected and hence uncorrected; and
  • the Government also notes, however, the importance of Member States providing accurate and timely information to the Commission, for instance on recoveries, and commits itself to carrying out such improvements if deemed necessary.


3.22 As in previous years, the European Court of Auditors (ECA) identifies weaknesses in the procedures for financial control and management, such that again it is unable to give a wholly unqualified Statement of Assurance for the General Budgets. The document identifies some positive developments in improving management of the EU's financial resources and we note the Minister acknowledges these. But she emphasises that the need for further improvements in financial management and control remains clear — a sentiment which we echo.

3.23 It is customary for the annual report of the ECA to be recommended for debate together with the Commission's annual report Protection of the financial interests of the Communities and fight against fraud and related documents. As mentioned above we have decided previously to recommend that once this present document was available it should be debated with those documents and we now so recommend. However, given the general discussion now developing throughout the EU on its financing, we now think it more appropriate that this debate should be on the Floor of the House.

3.24 Such a debate will provide an opportunity:

  • to consider again not only the continuing weaknesses in financial management but also the need for further improvement identified in the ECA's Report; and
  • to examine what scope there is for optimism about future improvements in financial management in the EU.

Annex: Detail of specific references to the United Kingdom
Page Policy group Detail
41Revenue The Commission detected an error in its calculation of provisional estimates of the UK correction for years 2008 and 2009, representing an overestimation of 138 million euro and 458 million euro respectively.
45Revenue Open GNI reservations relating to the period 1995 to 2001.
72Agriculture and natural resources European Agricultural Fund for Rural Development (EAFRD): the ECA found errors in the determination of the exchange rate used to convert to euro amounts of aid paid in national currencies.
87Agriculture and natural resources Commission declaration expresses reservations concerning the management and control systems for identified operational programmes and measures of the Financial Instrument for Fisheries Guidance (FIFG).
90Agriculture and natural resources Important failures were found in the application of key elements of the Integrated Administration and Control System (IACS) in Scotland.
91Agriculture and natural resources Substantial deficiencies of Land Parcel Identification System (LPIS) that seriously affects the efficiency of administrative cross-checks.

10   For the latter, see (32162) in chapter 1 of this Report. Back

11   The Statement of Assurance is often referred to as the DAS, from the French déclaration d'assuranceBack

12   (31822) 12393/10 + ADDs 1-2, (31913) 13075/10 + ADD 1 (31952)-: see HC 428-vi (2010-11), chapter 1 (3 November 2010). Back

13   Where duties or levies remain unpaid and no security has been provided, or they are covered by securities but have been challenged, Member States may suspend making these resources available to the Commission by entering them in a "B-account". Back

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