1 Financial management
| Committee's assessment
| Politically important |
| Committee's decision | For debate in European Committee B, together with the 2013 Fight against fraud report, already recommended for debate
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| Document details | European Court of Auditors' 2013 audit reports on the general budget and the European Development Fund
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| Legal base | —
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| Department
Document numbers
| HM Treasury and International Development
(36497), —
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Summary and Committee's conclusions
1.1 The European Court of Auditors is responsible
for the external audit of the EU's public finances. It publishes
its main Annual Reports, on activity carried out under the General
Budget and the European Development Funds, on a particular financial
year about 12 months after the end of that year.
1.2 This document contains the Court's Reports, on
activity carried out under both the General Budget and the European
Development Funds in 2013. As is regrettably the continuing norm
the Reports show why the Court has again issued qualified Statements
of Assurance.
1.3 Because the European Court of Auditors' annual
audit reports have for many years revealed serious inadequacies
in implementation of EU expenditure it has become customary each
year for these reports to be debated, together with the Commission's
annual anti-fraud report, which we have already recommended for
debate.[1] Although
the present reports affirm the reliability of the accounts, the
Statements of Assurance are qualified. So we have no hesitation
in recommending that this document be debated in European Committee
B along with the Commission's anti-fraud report. We suggest Members
could focus in particular on the Government's efforts to improve
EU financial management. They might also examine the Court's comments
about the ineffectiveness of some of the UK's management of EU
funds and the Government's response.
1.4 We remind the Government that it is of the
utmost importance that the debate we recommend should take place
before the ECOFIN Council in February 2015, when it is probable
the Council will be considering its recommendation to the European
Parliament for the discharge of the 2013 General Budget.
Full details of the documents:
European Court of Auditors: 2013 Annual report on the implementation
of the budget and 2013 Annual report on the activities funded
by the 8th, 9th and 10th European Development Funds (EDFs): (36497);
—.
Background
1.5 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 the bodies (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
Audit Reports on agencies etc and, throughout the year, Special
Reports on its audits of particular areas of revenue or expenditure
or on its management audits. We regularly, but not always, report
on the Special Reports.
1.6 The main Annual Reports include the ECA's Statements
of Assurance[2] for the
financial year in question. They have assessments of the fairness
and accuracy of the EU budget accounts and the legality regularity
of the underlying transactions. They also contain the ECA's targeted
recommendations to address identified errors and weaknesses and
the Commission's responses to those recommendations.
1.7 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.
1.8 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
The report on the 2013 General Budget
1.9 In its introduction to this section of the document
the ECA describes its purpose 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 (or, where appropriate, the observations
of other EU institutions and bodies). The substance of the report
is in ten following chapters.
Chapter 1: the Statement of Assurance and supporting
information
1.10 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
concludes that the EU accounts are reliable and fairly represent
the financial position of the EU, the results of its operations
and its cash flows for the year. It also considers the revenue
and commitments to be legal and regular in all material aspects.
However, errors were identified in all categories of payment assessed,
with regional policy, transport and energy being the most affected.
Based on the transactions assessed, the estimated error rate for
the 2013 budget is 4.7%. This is a marginal reduction on the 4.8%
error rate for the 2012 Budget but remains above the ECA's 2%
materiality threshold.
1.11 The ECA concludes that the supervisory and control
systems examined were partially effective in ensuring the legality
and regularity of payments. Accordingly, the ECA has signed off
the accounts, but again only granted a qualified Statement of
Assurance. Although the Statement is unqualified for the seventh
consecutive year in relation to the reliability of the accounts,
it is the 20th consecutive year for which the Statement is at
least partially qualified.
Chapter 2: Revenue
1.12 The ECA concludes that the systems for Gross
National Income (GNI) and VAT-based own resources it examined
are effective. However, it notes that during 2013, the area of
non-observed economy was discussed in the meetings of the GNI
Committee, where it was acknowledged by the Commission that the
level of harmonisation of the data does not meet the usual standards
of EU statistics. The ECA adds that it has previously drawn attention
to this matter in its Special Report No. 11/2013.[3]
In relation to Traditional Own Resources, the ECA identifies weaknesses
in the three Member States visited but concluded that systems
examined are overall effective.
1.13 The ECA's recommendations in this chapter include
the Commission encouraging Member States to provide more clarification
on the methodologies they use for the compilation of data in the
area of non-observed economy and promoting harmonisation between
Member States in this area.
Chapter 3: Agriculture: market and direct support
1.14 In this chapter the ECA reports its assessments
of the European Agricultural Guarantee Fund (EAGF), one of main
instruments of the Common Agricultural Policy. It conducted an
audit of 17 Member States, including the UK, which focussed on
cross-compliance on selected good agricultural and environmental
condition obligations and selected statutory management requirements.
1.15 The control systems assessed involved an audit
of the Integrated Administration and Control System (IACS), which
is the main management and control system to ensure the regularity
of direct aid payments and represents over 90% of EAGF expenditure.
The estimated error rate for this area of expenditure is 3.6%,
a reduction from 3.8% for the 2012 Budget. Errors were identified
in four main categories, including payments to ineligible beneficiaries,
for ineligible activities or expenditure and payments affected
by administrative errors. Of the five control systems examined,
one was assessed as effective, two as partially effective and
two as not effective.
1.16 The ECA's recommendations include the Commission
and Member States ensuring that the IACS is used to its full potential
and the Commission taking steps to ensure that remedial action
is undertaken in respect of identified issues within specific
Member States.
Chapter 4: Rural development, environment, fisheries
and health
1.17 The ECA audited a sample of transactions involving
16 Member States and one candidate country and the audit of control
systems involved a total of nine Member States. The estimated
error rate for this area of expenditure is 6.7%, a reduction from
7.9% for the 2012 Budget. Of the 13 control systems examined,
seven were found to be partially effective and six as not effective.
1.18 The ECA sets out separate recommendations for
rural development and the Common Agricultural Policy, which include
Member States improving their administrative checks to better
detect and correct errors and the Commission taking steps to further
reduce the backlog of open audit files to enable all audits carried
out prior to 2012 to be closed by the end of 2015.
Chapter 5: Regional policy, transport and energy
1.19 In this chapter the ECA covers regional policy,
largely implemented through the European Regional Development
Fund and the Cohesion Fund, which collectively account for 96%
of expenditure in this area. It undertook an audit of transactions
from 19 Member States and assessed the Commission's supervisory
activities of national audit authorities as well as the Annual
Activity Reports of relevant DirectoratesGeneral. The estimated
error rate is 6.9%, an increase on 6.8% for the 2012 Budget. The
ECA highlights that failures to comply with public procurement
rules account for more than a third of the estimated error rate
for this area of expenditure. The systems examined were found
to be partially effective.
1.20 The ECA's recommendations include that the Commission
should assess 'first level checks' conducted during 2007-13 and,
taking account of weaknesses identified, analyse the costs and
benefits of possible corrective measures and take appropriate
action.
Chapter 6: Employment and social affairs
1.21 This chapter covers the European Social Fund
which is the main tool for implementing employment and social
policy and accounts for approximately 98% of expenditure in this
area. For 15% of the transactions audited, the ECA identified
the reimbursement of ineligible costs and incorrectly calculated
costs. Breaches were identified in 21% of the transactions involving
the application of public procurement rules while several cases
involved failures to observe procedural requirements.
1.22 The ECA audited transactions from 13 Member
States, including the UK. Based on this assessment, the ECA estimates
that the error rate for this area of expenditure stands at 3.1%,
a slight reduction from 3.2% for the 2012 Budget. It concludes
that the control systems examined were partially effective.
1.23 The ECA's recommendations include a call for
the Commission to confirm in its Annual Activity Reports that
it has conducted appropriate checks to ensure that the 'residual
error rate' (that is, the extent to which transactions are affected
by error after the operation of the supervisory and control systems)
is based on accurate and complete and reliable information on
financial corrections.
Chapter 7: External relations, aid and enlargement
1.24 This chapter concerns expenditure on enlargement
and humanitarian policy. Errors were identified in compliance
with procurement procedures and ineligible expenditure, including
by the Directorate General for Humanitarian Aid and Civil Protection
ECHO). The ECA estimates the error rate for this area of expenditure
as 2.6%, which is a reduction from 3.3% for the 2012 Budget. The
systems examined at the Directorate-General for Development and
Cooperation (EuropeAid)
were assessed as partially effective.
1.25 The ECA's recommendations include one directed
to the Commission to ensure that instructions to staff state that
clearings should only be made on the basis of incurred expenditure
and not estimates.
Chapter 8: Research and internal policies
1.26 This chapter covers a number of areas of expenditure,
including justice, communication, internal market and trade.
Of the 150 transactions assessed, 89 concerned the Seventh Framework
Programme, which was also the focus of the assessment of control
systems. The ECA concludes that the most likely error rate for
this category of expenditure is 4.6%, which is an increase on
3.9% for the 2012 Budget. The system examined was found to be
partially effective. The ECA highlights that the most common type
of error relates to personnel costs and notes that in the area
of research spending, the types of errors are similar to those
seen in previous years. Further, it confirms that non-compliance
with public procurement rules contributed significantly to the
error rate in this area.
1.27 The ECA's recommendations include a suggestion
that the Commission moves to make its control activities more
risk-driven, focussing on high-risk beneficiaries and reducing
the burden on the less risky and that the new 2014-20 programmes
for research and other internal policies provide timely guidance
to beneficiaries and managing authorities on the revised eligibility
and control requirements.
Chapter 9: Administrative and related expenditure
1.28 This chapter covers the administrative expenditure
of EU institutions and bodies. It does not include EU agencies
and other bodies, European schools or the European Central Bank.
The audit covered expenditure on human resources (including salaries
and pensions) as well as buildings, equipment and communications.
The ECA's estimated error rate for this area of expenditure is
1.0%, an increase from nil for the 2012 Budget. The systems examined
were assessed as effective.
1.29 The ECA summarises the results for each institution
and provides clear recommendations, including for the Commission
and EEAS to take further steps to confirm their staff's personal
status regularly and for this information to be processed in a
timely manner where it has an impact on family allowances.
Chapter 10: Getting results from the EU budget
1.30 In this chapter the ECA considers in detail
the performance based on sound financial management and includes
the results and impacts of EU expenditure. In addition to considering
the EU budgetary rules and their intended focus on performance
of EU budget funds, the ECA also focusses on compliance with expenditure
rules. It confirms that the general focus during the 2007-2013
programming period on spending, at the expense of achieving results,
was noted in a number of special reports published in 2013. The
ECA says that the use of financial corrections and recoveries
during this programming period also contributed to encouraging
a primary focus on spending in line with rules. It comments that
while these and other corrective actions are triggered by compliance
issues, there is no such process for cases where projects or programmes
have not delivered the results expected. The ECA concludes that
the 2014-20 programming period would have an increased focus on
performance and sets out five specific aspects of this approach,
including a renewed approach to evaluation and a performance reserve.
1.31 In this chapter the ECA also considers aspects
of the Commission's reporting on performance. Noting the Commission's
assertion that EU added value is key to justifying EU budget expenditure,
it concludes that none of the three main reports published in
2013 by the Commission (Report on Budgetary and Financial Management:
Financial Year 2013,[4]
Commission Communication about its management achievements in
2013 and Commission 2013 Report of an evaluation of the EU's finances
based on results[5]) offered
a comprehensive assessment of the results in terms of EU added
value. The ECA also found that the objectives of identified Directorates
General were not fit for management purpose and that there was
insufficient cooperation between Directorates General.
1.32 In this chapter the ECA also considers the main
themes arising from its special reports on performance and its
follow-up of how its recommendations have been implemented, noting
that of the 19 ECA special reports adopted in 2013, seven addressed
added value as a means of improving the performance of limited
EU budget funds. Further, the ECA also considers 'deadweight',
which refers to the extent to which a beneficiary of EU funds
would have undertaken the project in the absence of EU support.
It adds that the Commission followed up on 79% of the recommendations
from the eight special reports adopted in 2007-10.
1.33 The ECA recommends that the Commission rationalises
its reporting framework for performance when the Financial Regulation
is next reviewed and looks to further develop its performance
managing and reporting system to allow it to take responsibility
for sound financial management as well as the EU Budget's contribution
to policy achievements.
THE REPORT ON THE EUROPEAN DEVELOPMENT FUNDS
1.34 The ECA's Annual Report on EDF activities assesses
the financial activities and expenditure of the EDF in 2013. 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. EDF expenditure in 2013 includes
the 10th EDF (running from 2008-2013) and also outstanding expenditure
from the 8th and 9th EDFs. Total expenditure and financial activities
for 2013 was €3.51 billion (£2.75 billion). The UK's
share of the 10th EDF is 14.82%.
1.35 The Report is based on an assessment of EDF
accounts, transactions and supervisory and control systems. The
ECA audited a sample of 195 transactions, corresponding to 30
commitments and 165 transactions, designed to be representative
of the entire range of payments within the EDF, an examination
of all contributions from Member States and a sample of other
types of revenue transactions. The ECA notes that the Commission
achieved higher commitments than initially forecast (a 29% increase
in commitments relating to finance decisions and 31% increase
in those relating to individual contracts), and payments were
7% higher.
1.36 The ECA concludes that the EDF accounts for
2013 present fairly, in all material respects, the financial position
of the EDF as at 31 December 2013 and are in accordance with the
provisions of the Financial Regulation and internationally accepted
accounting standards for the public sector. 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 results in it giving an adverse
opinion on the legality and regularity of the payments underlying
the accounts. The ECA estimates that the most likely error rate
was 3.4%. While it did not find any material errors in the reliability
of the accounts, as in 2012 errors were found in transactions
relating to programme estimates, grants and contribution agreements.
The ECA also notes continuing shortcomings with Common RELEX Information
System (CRIS) on the results and follow up of external audits,
expenditure verifications and monitoring visits.
1.37 The ECA makes five recommendations:
· reiteration about recovery of interest
on pre-financing payments from beneficiaries;
· completion of the development of the CRIS
system by the end of 2014, to allow interest payments to be recognised
as revenue;
· revision of the quantification of benefits
of controls;
· reporting on the progress of the Action
Plan to address weaknesses in the control system; and
· better disclosure of the scope of the
residual error rates studies in the Annual Activity Report.
1.38 The Commission accepts all the ECA's recommendations,
noting that:
· there have been delays to the CRIS developments
necessary to allow interest on pre-financing of between €250,000
and €750,000 to be recognised as financial revenue;
· this will now be finalised in the last
quarter of 2014;
· actions it has taken to ensure all authorising
officers by sub-delegation recover interest generated by pre-financing
have already produced good results;
· it will intensify these actions in 2014;
· it will continue to improve the quantification
of benefits of controls implemented and accept the recommendation
to report in the Annual Activity Report on progress with addressing
weaknesses in the control system; and
· it agrees to disclose in the Annual Activity
Report the scope of the residual error rate studies and the estimated
lower and upper error limits, and will further discuss with the
ECA how to implement this recommendation.
1.39 The ECA also reviewed progress on previous recommendations:
three have been fully implemented, four in most respects, five
in some respects and two yet to be implemented. The Commission
notes that it continues to take action on the outstanding recommendations.
The Government's view
1.40 In his Explanatory Memorandum of 24 November
2014 on the report on the General Budget, the Financial Secretary
to the Treasury (Mr David Gauke) says that:
· the Government remains committed to working
with the Commission and other Member States to ensure that EU
budget funds are properly controlled and spent;
· it has been clear that EU budget expenditure,
which is funded by taxpayers, should represent value for money
and offer added value;
· it therefore welcomes the report's focus
on performance and the added value of EU budget expenditure, which
remain key priorities for the Government;
· while noting the marginal reduction in
this year's error rate, the Government remains of the view that
the ECA's conclusions seriously undermine the credibility of EU
expenditure;
· when governments across the EU are taking
difficult decisions to tackle their deficits, taxpayers need to
have confidence that every effort is being made to improve the
way EU budget funds are managed;
· that is why for the past three years the
Government has voted against discharge of the EU budget and pressed
for improvements in the management of EU budget funds;
· focussing on performance and added value
will also affect the approach to controls and audits; and
· the Government continues to assert that,
while the use of EU budget funds should be subject to controls
and audits, they must be targeted to reduce duplication of effort
and take into account costs and benefits.
1.41 In her Explanatory Memorandum of 27 November
2014 the Parliamentary Under-Secretary of State, Department for
International Development (Baroness Northover) says that:
· the 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 — this
report contributes to the material available to maintain oversight
of the EDF finances;
· the most significant area for improvement
remains the CRIS system, which continues to be the cornerstone
of EU programming and financial management;
· it is critical that the Commission improves
both the system's functionality and staff's use of it;
· CRIS was the subject of a Court of Auditors'
review in 2012[6] and the
Commission, two years into a three year plan to upgrade the system,
is making progress; and
· the ECA particularly notes the continuing
frequency of errors found through the ex-ante checks (that is,
before payment is made).
1.42 Turning more specifically to the UK position
the Minister first says that:
· the ECA recognises that the EDF operates
in a high risk environment due to the wide range of delivery methods
used across a large number of countries;
· against this background, the Government's
own assessment of the EDF's financial resource management in the
2011 Multilateral Aid Review (MAR)[7]
found it to be "very good" when compared with other
development organisations; and
· the Government's 2013 update[8]
to the MAR corroborated these findings.
1.43 The Minister continues that:
· the Government welcomes the ECA's 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 affected by
material error, with a most likely error rate of 3.4%, this is
an improvement on previous years (5.1% in 2011) while slightly
higher than 2013 (3%); and lower than the Court's estimated likely
error rate for the overall EU Budget (4.7%);
· the Government's assesses that changes
introduced by EuropeAid are having a positive effect, though there
is still clearly further work required;
· the Commission has piloted new software
over the summer of 2014 and this will be rolled out across all
delegations from the beginning of December;
· the new system will provide consolidated
data on budgeting, forecasting and expenditure;
· it has been accompanied by extensive training
of staff;
· data will also feed into the new Results
Framework;
· the Government has maintained links with
EuropeAid to press for improved financial management and Member
State oversight of EDF finances;
· it notes that the improvement in forecasting
has been maintained, as evidenced by the requests for payments;
· this has been the result of more active
management by the Commission, with Member States providing challenge
on their forecasts;
· negotiations have been concluded on the
Financial Regulation for the 11th EDF;[9]
· 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 being to ensure coherent procedures between
the EDF and the EC budget to make management and implementation
of programmes more effective;
· overall the Government expects this to
be a positive change and it will continue to monitor the impact;
and
· the Government will continue to press
for improvements in CRIS and will monitor progress especially
against the ECA's report recommendations.
UK member of the European Court of Auditors
1.44 When, on 5 November 2014, these ECA reports
were published, Mr Phil Wynn Owen, the UK Member of the Court,
wrote to us drawing our attention to them and their structure
and main points. He also enclosed an annex listing references
in the General Budget report to the UK, some of which concern
perceived failings in the UK. We annex that list.
Previous Committee Reports
None.
1 See (36253), 12213/14 + ADDs 1-6: Thirteenth Report
HC 219-xiii (2014-15), chapter 5 (15 October 2014). Back
2
The Statement of Assurance is often referred to as the DAS, from
the French déclaration d'assurance. Back
3
See (35640), -: Thirty-first Report HC 83-xxviii (2013-14), chapter 20
(22 January 2014). Back
4
See http://ec.europa.eu/budget/library/biblio/publications/2013/2014.04.04_RBFM_Report_en.pdf. Back
5
See (36132), 10944/14 + ADD 1, and (36183), 11473/14 + ADDs 1-2:
Ninth Report HC 219-ix (2014-15), chapter 45 (3 September 2014). Back
6
See (33887), 9935/12: Seventh Report HC 86-vii (2012-13), chapter 6
(4 July 2012), Thirteenth Report HC 86-xiii (2012-13), chapter 7
(17 October 2012) and Twentieth Report HC 86-xx (2012-13), chapter 27
(21 November 2012). Back
7
See https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/67583/multilateral_aid_
review.pdf. Back
8
See https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/297523/MAR-review-dec13.pdf. Back
9
See (35334), 14081/13: Twentieth Report HC 83-xix (2013-14),
chapter 2 (30 October 2013) and Thirty-third Report HC 83-xxx
(2013-14), chapter 17 (29 January 2014). Back
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