4 Financial management: audit
| (35506)
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| European Court of Auditors: Annual report concerning the financial year 2012
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| Legal base | —
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| Deposited in Parliament
| 12 November 2013 |
| Department | HM Treasury
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| Basis of consideration
| EM of 25 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,[20] and the European Court of Auditors' 2012 report on the European Development Funds[21]
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Background
4.1 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 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[22]
for the financial year in question.
4.2 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.
4.3 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.
The document
4.4 In its introduction to its annual audit report
for 2012 the ECA describes the purpose of the report and notes
that its specific assessments are based on the results of its
testing of the regularity of transactions and on its assessment
of the effectiveness of the principal supervisory and control
systems applicable to the revenue and expenditure involved. The
report also contains the Commission's responses to the ECA's observations
(and, where appropriate, the observations of other EU institutions
and bodies).
CHAPTER 1: THE STATEMENT OF ASSURANCE AND SUPPORTING
INFORMATION
4.5 The Statement of Assurance is based on the ECA's
assessment of the reliability of the financial accounts and the
legality and regularity of the underlying transactions. The ECA
reports that for the third year running the error rate for payments
has increased. This error rate now stands at 4.8%, up from 3.9%
for 2011 and 3.7% for 2010. Errors were identified in all categories
of payment assessed, with rural development, environment, fisheries
and health the most error prone. As a result, the ECA has not
provided a favourable Statement of Assurance for the nineteenth
consecutive year. It does, however, find that revenue and commitments
transactions underlying the accounts are legal and regular in
all material respects and, for the sixth consecutive year, it
gives an unqualified Statement of Assurance on the reliability
of the EU accounts, concluding that they fairly represent the
financial position of the EU and the results of its operations
and its cash flows for the year.
CHAPTER 2: REVENUE
4.6 The ECA concludes that the regularity of transactions
and the effectiveness of the systems for own resources and other
revenue are not affected by material error and sets the estimated
error rate for transactions tested as nil.
4.7 Other points in this chapter are that:
· the supervisory and
control systems for GNI-based own resources and traditional own
resources are effective;
· the audit found that
the examined supervisory and control systems for VAT based and
traditional own resources to be effective but revealed weaknesses
in the Commission's verification of Gross National Income (GNI)
data assessing this as "partially effective";
· as a result, there
is a recommendation that the Commission review its control framework
for the verification of GNI data;
· the size of the UK's
abatement in 2012, which resulted in a €4 billion (£3.4
billion) reduction in the UK's own resources contribution in that
year, is noted; and
· corrections were also
made in respect of own resources contributions from Sweden, the
Netherlands, Austria, and Germany.
CHAPTER 3: AGRICULTURE: MARKET AND DIRECT SUPPORT
4.8 This chapter includes assessments of the European
Agricultural Guarantee Fund, one of two main instruments of the
Common Agricultural Policy, as well as the Single Payment Scheme.
Points included are that:
· the ECA assessed all
Member States, and conducted an additional audit of the reliability
of the management and control procedures within three payment
agencies ¯ Luxembourg
and, in the UK, England and Northern Ireland;
· it estimates the most
likely error rate for payments in this chapter to be 3.8%;
· of the three national
supervisory and control systems examined, two, England and Northern
Ireland, were assessed as not effective and Luxembourg was found
to be partially effective; and
· the ECA concludes
that national authorities had enough information to detect and
correct these errors in a "significant" number of cases.
4.9 The ECA recommends that:
· the Commission and
Member States increase and accelerate efforts to ensure that eligible
land is accurately assessed and recorded;
· immediate remedial
action is taken where administrative and control systems and/or
classification systems are identified as deficient or out of date;
· payments are based
on inspection results;
· on-the-spot inspections
are of an appropriate quality; and
· the design and quality
of work by directors of paying agencies and the certification
bodies in support of their respective declarations and statements
offer reliable basis for assessing the underlying transactions.
CHAPTER 4: RURAL DEVELOPMENT, ENVIRONMENT, FISHERIES
AND HEALTH
4.10 This chapter includes expenditure on health
and consumer protection and environment and climate action. The
ECA estimates that the most likely error rate for this area of
expenditure is 7.9%, concluding that accepted expenditure within
this chapter is affected by material error. It assesses the supervisory
and control systems in this area to be partially effective.
4.11 The ECA identified shortcomings in the implementation
of cross-compliance requirements within the European Agricultural
Fund for Rural Development, particularly in relation to the identification
and registration of animals. To improve expenditure on rural development
it recommends that:
· Member States use
all relevant information available to improve the quality of their
existing administrative checks by better detecting and correcting
errors;
· the Commission ensures
that all cases of error detected by the ECA are followed up appropriately;
and
· the Commission applies
a similar approach for the European Agricultural Fund for Rural
Development as for decoupled area aid, where it takes account
of the results of its own conformity audits in assessing the error
rate for each paying agency.
4.12 For the Common Agricultural Policy as a whole,
the ECA recommends that the Commission:
· ensures adequate coverage
in its conformity audits;
· addresses identified
weaknesses in its conformity audits and seeks to rectify the long
delays in the conformity procedure; and
· further improves its
method of determining financial correction to take better account
of the nature and gravity of detected infringements.
4.13 The ECA recommends that for health and consumer
protection the Commission addresses the identified weaknesses
in systems for procurement and grant agreements.
CHAPTER 5: REGIONAL POLICY, ENERGY AND TRANSPORT
4.14 This chapter covers regional policy, which accounts
for 96% of spending within this area. Regional policy is mostly
implemented through the European Regional Development Fund and
the Cohesion Fund, which accounted for 97% of the spending within
this policy area for 2012. The ECA estimates the most likely error
rate for transactions tested within this chapter to be 6.8% and
assesses the examined supervisory and control systems as partially
effective.
4.15 The ECA recommends that the Commission:
· addresses weaknesses
in 'first level checks' conducted by authorities and bodies for
the European Regional Development Fund and the Cohesion Fund,
through specific guidance and, where appropriate, training;
· builds on experience
under the 2007-13 programming period to conduct an assessment
of the use of national eligibility rules to identify further areas
for simplification and elimination of unnecessary, complex national
rules ('gold-plating');
· sets out clear rules
and guidance on how to assess the eligibility of projects and
calculate the co-financing for revenue-generating European Regional
Development Fund and Cohesion Fund projects under the 2014-20
programming period; and
· seeks to improve the
work by audit authorities and the quality of information provided
in audit opinions and annual control reports.
CHAPTER 6: EMPLOYMENT AND SOCIAL AFFAIRS
4.16 This chapter covers the European Social Fund,
which is the main tool for the implementation of employment and
social policy, accounting for approximately 97% of the spending
in this policy area for 2012. The European Social Fund finances
investment in human capital, through training, to improve access
to employment. The ECA concludes that expenditure in this area
was affected by material error with the most likely error rate
estimated at 3.2%. It also identifies inconsistencies in the
Commission's analysis of national audit authorities' annual control
reports and rates the assessed national audit authorities as effective
(Slovakia) and partially effective (England).
4.17 The ECA recommends that the Commission:
· addresses weaknesses
in its 'first level checks' conducted by authorities and bodies
through specific guidance material and, where appropriate, training;
· builds on experience
under the 2007-13 programming period to conduct an assessment
of the use of national eligibility rules to identify areas for
further simplification of rules;
· promotes the extensive
use of simplified cost options to reduce the risk of error and
the administrative burden in this area; and
· seeks to improve the
work done by audit authorities and the quality of information
provided in audit opinions and annual control reports.
CHAPTER 7: EXTERNAL RELATIONS, AID AND ENLARGEMENT
4.18 This chapter includes expenditure on external
relations, development and EU enlargement. The ECA estimates
the error rate for this area as most likely to be 3.3%. It also
notes that there has been a notable increase in the error rate
from 2011, which should be considered in light of changes to the
ECA's sampling approach.
4.19 The ECA recommends that the Commission:
· ensures the timely
clearance of expenditure;
· promotes improved
document management by implementing partners and beneficiaries;
· improves the management
of contract awarding procedures by establishing clear selection
criteria;
· takes effective steps
to enhance the quality of expenditure checks by external auditors;
and
· applies a consistent
and robust methodology for the external relations directorates-general
to calculate residual error rates.
CHAPTER 8: RESEARCH AND OTHER INTERNAL POLICIES
4.20 This chapter spans a number of areas including
education and culture, economic and financial affairs, justice,
trade and competition. The ECA estimates the most likely error
rate to be 3.9% and concludes that expenditure within these areas
are affected by material error. It also concludes that the supervisory
and control systems for the main funding instruments in this chapter
are partially effective or effective.
4.21 The ECA recommends that the Commission:
· intensifies efforts
to address the errors in interim and final payments and clearings;
· reminds relevant project-coordinators
of their responsibility to distribute funds received without undue
delay;
· reviews cases of weaknesses
in ex ante checks identified by the ECA to assess whether
they require modification;
· reduces delays in
implementation of ex post audits and increases the implementation
rate for extrapolation cases; and
· reinforces the supervisory
and control systems for identified programmes.
CHAPTER 9: ADMINISTRATIVE AND OTHER EXPENDITURE
4.22 This chapter covers the expenditure of EU institutions,
including human resources (such as salaries, pensions), buildings,
equipment and IT. This area of expenditure is the only one awarded
an estimated error rate of nil. The ECA also assesses the supervisory
and control systems to be effective and concludes that overall
expenditure within this chapter is not affected by a material
level of error. The report does not contain any recommendations
for improving expenditure within this area.
CHAPTER 10: GETTING RESULTS FROM THE EU BUDGET
4.23 In this chapter the ECA sets out its observations
on the management plans and annual activity reports of some of
the directors-general, the Commission's second and third evaluation
reports and some of the themes and lessons that can be learned
from the 2012 report. The ECA:
· concludes that the
quality of annual activity reports has improved but that they
remain of limited use;
· finds that many areas
of the EU budget have complex legislative frameworks and lack
focus on performance;
· says existing proposals
for new legislation for the 2014-20 programming period risk maintaining
a focus on expenditure compliance rather than performance; and
· encourages the Commission
and the legislator (the Council and the European Parliament) to
ensure there is a focus on performance in the 2014-20 period.
The Government's view
4.24 The Economic Secretary to the Treasury (Nicky
Morgan) comments that the ECA not giving a positive Statement
of Assurance for the nineteenth consecutive year seriously undermines
the credibility of EU spending. She continues that:
· at a time when public
resources are scarce, confidence is needed that EU spending is
being implemented as effectively as possible;
· the Commission and
individual Member States need to ensure that EU funds are properly
controlled;
· at the same time,
the Commission and the ECA should promote a risk-based approach
to control and audit with a focus on fraud and other serious irregularities
and on whether EU policies represent value for money and deliver
the intended outcomes; and
· accordingly, the Government
will continue to press the Commission for further simplification
of EU regulations.
4.25 With regard to the issues specifically relating
to the UK, the Minister says that:
· the Government notes
that many of the issues raised in the report, including the management
of expenditure under the Common Agricultural Policy and the European
Structural Fund, have been addressed already; and
· the Government, nevertheless,
remains committed to improving national systems and processes
to ensure that the UK manages EU budget funds effectively and
to working with the Commission to ensure that guidance and processes
are clear, transparent and consistent in support of good financial
management.
4.26 The Minister tells us that the ECA will present
its report to the ECOFIN Council shortly and that the expected
timetable for consideration of the report, based on previous years,
is as follows:
· the Council's Budget
Committee and the European Parliament's budgetary control committee
will discuss the report in January 2014 and prepare a draft recommendation
on discharge;
· this will be considered
by Finance Ministers at the ECOFIN Council in February 2014; and
· the European Parliament
will vote on discharge, on the recommendation of the Council,
in May 2014.
Conclusion
4.27 Because the ECA's annual audit reports have
for many years revealed serious inadequacies in 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. Although the present ECA report affirms
the reliability of the accounts, for the nineteenth successive
year there is not a positive Statement of Assurance. So we have
no hesitation in recommending that this document be debated in
European Committee B. We suggest Members could focus in particular
on the Government's efforts to improve EU financial management.
They might also examine the ECA's comments about the ineffectiveness
of some of the UK's management of EU funds and the Government's
response.
4.28 We recommend also that the debate should
cover the ECA's latest annual audit report for the European Development
Funds, which we discuss elsewhere in this Report.[23]
4.29 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 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.
20 See (35233) 12772/13 + ADDs 1-5: HC 83-xvi (2013-14),
chapter 1 (9 October 2013). Back
21
See (35505) -: chapter 3 in this Report. Back
22
The Statement of Assurance is often referred to as the DAS, from
the French déclaration d'assurance. Back
23
Op cit. Back
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