3 Financial management
| (32166)
—
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| European Court of Auditors: Annual report on the implementation of the budget
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| Legal base | —
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| Department | HM Treasury
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| Basis of consideration | EM of 25 November 2010
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| Previous Committee Report | None
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| To be discussed in Council | February 2010
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| Committee's assessment | Politically important
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| Committee's decision | For 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)
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Background
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.
Conclusion
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 |
| 41 | Revenue
| 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.
|
| 45 | Revenue
| Open GNI reservations relating to the period 1995 to 2001.
|
| 72 | Agriculture 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.
|
| 87 | Agriculture 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).
|
| 90 | Agriculture and natural resources
| Important failures were found in the application of key elements of the Integrated Administration and Control System (IACS) in Scotland.
|
| 91 | Agriculture 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'assurance. Back
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
|
