3 Financial management: audit
| (35505)
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| European Court of Auditors: Annual report on the activities funded by the Eighth, Ninth and Tenth European Development Funds (EDFs)
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| Legal base | —
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| Deposited in Parliament
| 12 November 2013 |
| Department | International Development
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| Basis of consideration
| EM of 28 November 2013
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| Previous Committee Report
| None |
| Discussion in Council
| February 2014 |
| Committee's assessment
| Politically important |
| Committee's decision
| For debate in European Committee B, together with the Commission's annual "Fight against fraud" report, already recommended for debate,[13] and the European Court of Auditors' 2012 report on the EU General Budget.[14]
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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 the European Development Funds (EDFs), on a particular
financial year about twelve 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[15]
for the financial year in question.
3.2 The Annual Reports and Statements of Assurance
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, if requested,
to report back on the actions it has taken in response.
3.3 There is an important distinction between irregularities
and fraud, relevant to audit reports. An irregularity occurs
when a beneficiary is not in compliance with the EU rules and
requirements linked to the spending of EU funds and these are
usually the result of genuine errors. Fraud is a deliberately
committed irregularity, which constitutes a criminal offence.
While the ECA's Annual Reports contain some material relating
to fraud and irregularities, they are not primarily concerned
with fraud against the EU's resources.
3.4 The EDF is the EU's main development cooperation
instrument, which underpins the Cotonou Agreement and provides
funding to 78 African, Caribbean and Pacific states. The 2012
EDF expenditure includes the 10th EDF (running from 2008-13) and
also outstanding expenditure from the 8th and 9th EDFs. Total
expenditure and financial activities for 2012 was €52.5 billion
(£44.6 billion). The UK's share of the 10th EDF is 14.82%.
The document
3.5 This report concerns the ECA's 2012 audit of
the EDFs and is based on an assessment of EDF accounts, transactions
and supervisory and control systems. The ECA audited a sample
of 197 transactions, corresponding to 30 global commitments and
167 interim and final payments made by EU Delegations or the Commission's
headquarters (EuropeAid). Where necessary, implementing organisations
and final beneficiaries were visited on-the-spot in order to verify
the underlying payments declared in final reports or cost statements.
3.6 The ECA concludes that the EDF accounts for 2012
present fairly, in all material respects, the financial position
of the EDF and are in accordance with the provisions of the Financial
Regulation and accounting rules. In addition, the revenue and
commitments underlying the accounts are judged to be legal and
regular. However, as for previous years, the ECA found errors
in relation to payments which resulted in it providing an 'adverse
opinion' on the legality and regularity of the payments underlying
the accounts, saying that they are materially affected by error.
The ECA estimates that the most likely error rate was 3%. Supervisory
and control systems were also judged to be only partially effective.
3.7 As in previous years the ECA identified transactions
that had been incorrectly recorded in the Common RELEX Information
System (CRIS). Whilst it did not find any material errors for
the reliability of the accounts, these mistakes remain a source
of concern as they affect the accuracy of the data used for the
preparation of the annual accounts. The ECA also noted shortcomings
in CRIS on the results and follow-up of external audits, expenditure
verifications and monitoring visits. In its response the Commission
accepts the findings on the CRIS, saying that during 2012 the
Commission conducted an extensive study of the data quality issues
in CRIS and adopted an action plan which includes an improved
user interface, revised CRIS documentation and user training,
monitoring of CRIS data through automated checks and targeted
data quality checks. The Commission also notes that it is working
on an audit module to enable proper follow-up of external audit
reports.
3.8 The ECA also identified a number of new issues
during the audit:
· recovery of interest
on pre-financing payments from beneficiaries;
· timeliness of ex-ante
checks relating to final payments and contract closure;
· improving the methodology
and reporting of EuropeAid's residual error rate study; and
· application of conditions
for payment of budget support performance related tranches.
3.9 The Commission accepts the findings on pre-financing
arrangements and ensuring the timely clearance of payments and
agrees to refine the methodology for the residual error rate study
on the basis of lessons learnt from the first exercise and that
reporting on this in the EuropeAid's Annual Activity Report will
be made clearer in 2013. On budget support, the Commission notes
that whilst decisions to release payments need to take into account
individual indictors and conditions, these also have to take into
account a wider set of criteria including objectives, the context
and direction of travel — it will continue to ensure that
budget support guidelines are applied correctly.
The Government's view
3.10 The Parliamentary Under-Secretary of State,
Department for International Development (Lynne Featherstone)
says first that:
· the ECA's annual report
is important for monitoring the financial management of EDF activities;
· as the third largest
contributor to the EDF, with a 14.82% share, the UK is keen to
maintain oversight of EDF activities and ensure value for money
and sound public financial management of Member State contributions;
and
· this report contributes
to the material available to maintain oversight of the EDF finances.
3.11 The Minister comments that:
· the ECA recognises
that the EDF operates in a high risk environment due to the wide
range of delivery methods put into action in a large number of
countries;
· when compared to other
development organisations the Government assessed the EDF as 'very
good' on financial resource management in the 2011 Multilateral
Aid Review (MAR); and
· the Government expects
its 2013 update to the MAR, which will be published in December,
to corroborate these findings.
3.12 On the document as a whole the Minister says
that:
· the Government welcomes
the ECA's annual report and its Statement of Assurance on the
EDF, as well as the steps taken by EuropeAid to address previous
recommendations;
· whilst payments are
still considered to be affected by material error, with a most
likely error rate of 3%, this is an improvement on previous years
(5.1% in 2011 and 3.4% in 2010);
· to put this into context,
the Court's estimated likely error rate for the overall EU Budget
(not just overseas aid) is 4.8% in 2012, which is up from 3.9%
in 2011;
· for the EDF, this
is a clear step in the right direction and seems to demonstrate
that changes introduced by EuropeAid are having a positive effect;
but
· there is still clearly
further work required.
3.13 In relation to the CRIS system the Minister
says that:
· this continues to
be the most significant area for improvement;
· this was the subject
of a specific Court of Auditors' review in 2012;[16]
· the Commission is
one year into a three year plan to upgrade CRIS;
· in September Department
for International Development officials met the Head of Unit in
the Commission responsible for CRIS to review recent progress;
· some progress is already
apparent that will address some of the ECA's criticisms, including
reducing duplication of data between CRIS and the accrual-based
accounting system and improvements to system security; and
· a consultation amongst
Commission staff has also just concluded how CRIS can be made
more user-friendly.
3.14 On the new issues identified in this report,
the Minister says that:
· the recommendations
on pre-financing arrangements and the timely clearance of payments
will need to be addressed and the Commission has undertaken to
do so;
· the refinements to
the residual error rate study are perhaps to be expected as this
was the first time that EuropeAid had undertaken and reported
on this;
· on budget support,
the Government agrees with the Commission's assessment that budget
support is based on long-term relationship of trust with the partner
countries and that assessment of indicators needs some degree
of flexibility and to take into account the context and direction
of travel; and
· the Government remains,
however, vigilant about disbursement of budget support and it
will continue to raise specific concerns with the Commission where
it feels that continued disbursement is unwarranted or even counter-productive.
3.15 On financial management more generally the Minister
says that:
· in response to the
ECA's 2011 report, Member States called for the Commission to
produce an action plan for addressing the weaknesses identified
in their supervisory and control systems;
· the Commission presented
its first progress report against this action plan at a Council
working group on 16 September;
· this highlighted how
the Commission will conduct annual reviews of data quality using
external consultants and that from 2014 EuropeAid will ensure
that the correction of any error found is made within two months
of detection;
· the Government will
call for a working group discussion on the latest ECA report and
how the Commission will adapt its action plan in light of the
new findings;
· it will continue to
press for regular updates on progress with improvements to CRIS;
· the Government is
also working with EuropeAid to improve financial management and
Member State oversight of EDF finances;
· it lobbied successfully
for a technical seminar on financial forecasting which took place
on 8 July — the Government presented on its forecasting
systems and its view of best practice;
· the Commission gave
an open and constructive presentation of where it has recognised
limitations in its processes, such as CRIS, and what it is doing
to address them;
· the Government also
notes that forecasting seems to have improved recently, as evidenced
by the two last requests for payments — this has been the
result of more active management by the Commission, with Member
States providing challenge on its forecasts;
· negotiations are also
currently underway on the Financial Regulation of the EDF;[17]
· as far as possible,
the financial rules and procedures in place for the EU budget
are being adopted for the EDF as well;
· the aim is to ensure
coherent procedures between the EDF and the EU budget to make
management and implementation of programmes more effective; and
· overall the Government
expects this to be a positive change, but is carefully reviewing
the changes to ensure that the current level of Member State control
over EDF finances is not reduced.
Conclusion
3.16 Because the ECA's annual audit reports have
for many years revealed serious inadequacies in the implementation
of the EU General Budget it has become customary each year for
the latest report to be debated, together with the Commission's
annual anti-fraud report. Elsewhere in this week's Report we are
recommending that the former document be debated in European Committee
B.[18]
3.17 We recommend also that the debate should
cover this ECA audit report on the European Development Funds.
We suggest Members could focus in particular on the Government's
efforts to improve EDF financial management.
3.18 The debate we recommend should take place
before the ECOFIN Council in February 2014, when it will be considering
its recommendation to the European Parliament for the discharge
of the 2012 Budget. In connection with this timetable we reiterate
our comments in the chapter on the ECA report on the 2012 EU General
Budget:
· we note that we
made similar requests in relation to the 2010 and 2011 audit reports;
· in both cases the
debates took place, pointlessly, months after the Council's adoption
of its discharge recommendations;
· this showed a serious
disregard for parliamentary scrutiny; and
· we trust that this
time the Government will show more respect for the House's right
of scrutiny and schedule the debate we are now recommending in
a timelier manner.[19]
13 See (35233) 12772/13 + ADDs 1-5: HC 83-xvi (2013-14),
chapter 1 (9 October 2013). Back
14
See (35506) -: chapter 4 of this Report. Back
15
The Statement of Assurance is often referred to as the DAS, from
the French déclaration d'assurance. Back
16
See (33887) 9935/12: HC 86-vii (2012-13), chapter 6 (4 July 2012),
HC 86-xiii (2012-13), chapter 7 (17 October 2012) and HC 86-xxi
(2012-13), chapter 27 (21 November 2012). Back
17
See (35334) 14081/13 + ADD 1: HC 83-xix (2013-14), chapter 2 (30
October 2013). Back
18
Op cit. Back
19
Op cit. Back
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