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ECA/07/27
Strasbourg, 12 November 2007

Speech by Mr Hubert Weber,
President of the European Court of Auditors

Presentation of the 2006 Annual Report to the Committee on Budgetary Control of the European Parliament

The spoken text will prevail in the event of differences.

Chairman,

Dear Members,

Ladies and Gentlemen,

It is an honour for me to present to this Committee the European Court of Auditors' Annual Reports on the 2006 financial year. I will also present them to the ECOFIN Council tomorrow and to the plenary session of the European Parliament on 29 November, in Brussels.

In addition to the Annual Report on the implementation of the 2006 general budget - the 30th Annual Report of our institution - and the Annual Report on the European Development Funds, the Court has adopted 24 Specific Annual Reports on the EU agencies and other decentralised bodies this year. Our most recent Special Reports set out the results of our performance audit work relative to the Community transit system; implementation of mid-term processes on the structural funds; institutions' expenditure on buildings; the management of the European Refugee Fund; checks on export refunds, the management of the CARDS programme, the Communities fish resources, technical assistance in the context of capacity development and administrative cooperation in the field of VAT. Similarly, the Court has issued opinions on a regulation concerning investigations conducted by OLAF; on the executive agencies; and annual summaries and "national declarations" of Member States, to mention a few.

Today I wish to speak about:

  • the overall messages within the Annual Report, and the main findings supporting them;
  • issues of relevance to EU financial management; and
  • the development of the Court itself.

Main messages

I will now give an overview of the main messages of the 2006 Annual Reports:

Reliability of the 2006 accounts

The 2006 accounts present fairly, in all material respects, the Communities' financial position and results for the year, except for an overstatement of the amounts recorded for accounts payable and pre-financing in the balance sheet.

The Commission has made further progress with its implementation of accruals-based accounting, although some weaknesses still remain. The challenge now is for the Commission to provide fully reliable data and make best use of the oversight and management information the new accounts can provide.

Improvements in risk management

The Court found that the Commission has made considerable efforts to address the weaknesses in the management of the risks to the EU funds. Some changes are already having a positive impact, such as a marked reduction in the estimated level of overall error in agricultural transactions - although it still remains just above the materiality level. This positive development underlines the effectiveness of the integrated administrative and control system IACS and the simplification of claim and payment procedures in the newly introduced Single Payment Scheme.

The Court also identified improved rules and guidance covering the preparation of the Commission's Annual Activity Reports and declarations of Directors-General, although the resulting documents, and in particular the Commission's Synthesis Report, still give overly optimistic assessments for a large proportion of the EU budget, namely for agriculture, structural policies and external actions. It is important that these reports and associated declarations provide a realistic and objective assessment of the state of management and spending in order to ensure transparency and accountability and to promote change where needed.

Legality and regularity

Based on its audits of the legality and regularity of underlying transactions, the Court again gives an unqualified opinion on the transactions underlying revenue, commitments, administrative expenditure and pre-accession strategy, excluding Sapard. Furthermore, external actions' payments managed directly by Commission delegations in 2006 showed only a low incidence of error.

However, the Court again gives an adverse opinion on the legality and regularity of the majority of EU expenditure: primarily the part of agricultural spending not covered by IACS, structural policies, internal policies and a significant proportion of external actions. In these areas there is still a material level of errors found in the payments to final beneficiaries, although to different levels.

In addition, the Court is of the opinion that, taken as whole, the underlying transactions of the European Development Funds, except for payments authorised by the Commission's delegations in the beneficiary States, are legal and regular.

Reasons for the errors in the underlying transactions include neglect, poor knowledge of the often complex rules and presumed attempts to defraud the EU budget. Furthermore, in the area of non-IACS expenditure in agriculture, structural policies and internal policies checks on expenditure claims, which are mainly based on information supplied by the beneficiary, are in many cases insufficient in number and coverage, and often of inadequate quality. What is required is better management and control of Community spending in both shared and direct management areas, under the ultimate responsibility of the Commission.

For the main expenditure areas of the EU budget the Court found the following:

For agriculture as a whole - €49.8 billion in 2006 - the Court found a marked reduction in the estimated overall level of error, although it still remains just above the materiality threshold. Agricultural spending is characterised by different types of transactions, which are subject to different risks and control systems. For example the Court found agri-environmental measures under rural development to be prone to a high incidence of error due to often complex eligibility conditions. The Court found that in seven out of eight cases checked in rural development, the farmers audited had not met their commitments, or the commitments had not been checked effectively by the authorities. On the other hand, the Court again concludes that IACS, which covers about 70% of the CAP spending, is an effective system in limiting the risk of irregular expenditure, where properly applied. In Greece, however, problems with IACS still remain unresolved.

While the Single Payment Scheme brings with it simplified claim and payment procedures, it has brought about side effects, such as the allocation of entitlements to landowners who never exercised previous agricultural activity, and has led to substantial redistributional effects of EU aid, away from farmers to landlords. Among new beneficiaries for EU agricultural aid are railway companies (the United Kingdom), horse riding or breeding clubs (Germany and Sweden) and golf or leisure clubs and city councils (Denmark and the United Kingdom). In addition, the Single Payment Scheme regulations also gave Member States discretion in relation to the allocation of entitlements, leading to unequal treatment of beneficiaries from one Member State to another, and even within the same country.

The Commission's annual financial clearance decisions are limited to ensuring that the paying agencies' accounts are complete and accurate, and according to the current regulations exclude the aspects of legality and regularity at the level of beneficiaries. The Court found limitations of scope and depth both at the level of the certifying bodies' work as well as at the level of the Commission's desk reviews of their certificates and reports. At the end of 2006 the Commission's multiannual conformity decisions for clearance were still not completed for any year later than 1998. These involve significant sums of money being repaid to the Community budget by Member States as corrections - or fines - imposed for failing to keep adequate systems. It should be emphasised that these recoveries to the Community budget are funded by national taxpayers, rather than the beneficiaries who have received Community funds irregularly. In addition, the Commission's oversight of the Member States' post-payment checks for agricultural subsidies not covered by IACS is not satisfactory.

For spending on structural policies - €32.4 billion in 2006 - the situation remains similar to previous years. The Court identified a material level of error estimated to represent at least 12% of the total amount reimbursed to beneficiaries. The most frequent errors were claims for ineligible expenditure and failure to carry out tender procedures as well as a lack of evidence to support the calculation of overheads or the staff costs involved. The supervisory and control systems in the Member States were generally ineffective or moderately effective, and the Commission maintains only a moderately effective supervision of their functioning. The main weaknesses found were the managing authorities' failure to check that costs claimed for reimbursement have really been incurred and are eligible, the failure of the paying authorities to identify weaknesses in the managing authorities' work and failure of the audit bodies to carry out sufficient checks of appropriate quality on the expenditure of the programmes.

For internal policies directly managed by the Commission - €9.0 billion in 2006 - the Court again found a material level of error in the legality and regularity of the underlying transactions, mainly due to reimbursements to beneficiaries who had overstated the costs for projects. This is often due to beneficiaries using budgeted rather than actual costs or claiming costs not related to the project. Beneficiaries are also often unable to substantiate personnel costs claimed. The Court's audits showed that the internal control systems were only partly satisfactory. For example, the independent auditors responsible for certification of the expenditure in 9 of the 15 cases audited by the Court had issued unqualified opinions, whereas in 4 of these 9 cases the Court identified errors with significant financial impact on the cost statements or systems not in line with requirements. Improvement was noted, however, in the number of the Commission's ex post audits, but they remain insufficient to compensate for other systems weaknesses.

External actions spending - €5.2 billion in 2006 - was satisfactory for the transactions managed and controlled by the delegations, but not so for implementing bodies carrying out the projects in the field. Errors included claims of ineligible expenditure and breach of tendering procedures.

Within pre-accession strategy - €2.3 billion in 2006 - the Court found that payments were legal and regular overall. The pre-payment checks by the Commission delegations for the Phare, Turkey and ISPA programmes continued to be effective at counteracting the risks at national level. Significant errors were again found in the Sapard transactions audited, as regards procurement procedures and checks carried out by national authorities. In Bulgaria the Commission approved a €19,6 million payment for a project despite the fact that the Sapard agency had not performed the required checks before its approval, thus relying on unverified information.

For administrative expenditure - €6.7 billion in 2006 - the Court's work showed no material level of error in the sample of transactions, and an adequate framework of systems operated by the institutions. However, there remain specific weaknesses in certain systems - including those covering the assistance allowances for the Members of the European Parliament.

The Commission has taken measures to step up recoveries and improve the protection of the financial interest of EU over the past few years. However, due to the complexity of the shared management of these funds with the Member States, the Commission still does not dispose of reliable information on recoveries of undue funding - the amounts and beneficiaries involved - nor of their financial impact on the EU budget. As a consequence, there is no basis for the Court to audit the accuracy of the figures put forward by the Commission.

Issues of EU financial management

I wish now to set out certain aspects of financial management relating to the 2006 Annual Report:

The key to adequate management in terms of assuring EU citizens that the use of EU funds is legal, regular and sound, is effective systems of internal control at all levels of the management of these funds. Based on the IFAC and INTOSAI International Auditing Standards and adapted to the specific EU environment, the evaluation of internal control systems is a key element of the Court's audit approach.

For the purposes of the Statement of Assurance, an important indicator of the quality of systems is the extent to which they limit the risk of irregular and illegal use of EU funds in practice. As stated in the 2006 Annual Report - and supported by both testing of transactions and analysis of the systems themselves - control systems still remain unsatisfactory in structural policies, and only partially satisfactory for the non-IACS part of agriculture, internal policies, external actions and pre-accession strategy.

The 2006 Annual Report identifies weak systems at the level of Member and beneficiary States, as follows:

  • weaknesses in the scope and depth of the clearance of accounts work of the certifying bodies for agricultural expenditure;
  • insufficient on-the-spot checks by the Managing Authorities on the eligibility of expenditure and inadequate checks by the Audit Bodies on structural policy spending;
  • weaknesses in key aspects of Sapard systems in the area of pre-accession strategy;

The Court also identified weaknesses in the Commission's checks and audits including:

  • the Commission not meeting the deadline for conformity audits in agricultural spending, thereby foregoing potential corrections of irregular payments valued at €100 million at the most;
  • the Commission's lack of conformity audits on rural development expenditure, despite the high risks involved;
  • despite their increased number, the Commission's ex post financial audits remain insufficient for research expenditure within internal policies with a coverage of only 2.3% of contracts;
  • the Commission's ex post controls and verification missions in external actions were limited at the level of project implementing organisation.

As mentioned last year, the Commission should lead by example by paying particular attention to devising and operating its own internal control systems effectively in the directly managed EU funds - internal policies and external action. This would provide a model and encouragement to Member States operating systems under shared management.

The Court's Single Audit model recommended the establishment of an efficient framework for all internal control systems covering EU funds. All systems should be based on common principles and standards, while taking into account both the inherent risks involved and the balance between the costs of control and the benefits they bring.

The Court's audit results show that in practice the risks involved in the EU spending vary considerably in different areas of the budget: the estimated error rate on agricultural spending is close to the Court's materiality limit, whereas for structural policies the Court's work continues to identify a much higher level of error of legality and regularity. Given that the legal framework for the 2007-2013 programming period has been adopted, the higher inherent risk in structural policy transactions indicates the need to ensure that the resources for managing and checking this spending are better employed at all levels.

Among significant recent developments are the new requirements for Member States to provide annual summaries of the results of audits and controls, the volunteer initiatives by some Member States' audit bodies to issue "national declarations" and audit reports on national use of EU funds. In our opinion 6/2007, the Court states that these exercises could: stimulate a greater awareness at national level of responsibilities for management of EU funds; identify weaknesses to be resolved and examples of best practice; and increase transparency and accountability in financial management.

Moreover, the Court continues to play an active part in promoting cooperation with the Supreme Audit Institutions in Europe and beyond, and has taken a lead in a new working group dealing with common standards for the audit of EU funds throughout the Union.

Court developments

For 30 years the Court's work has helped improve legislation and promoted a more effective internal control structure and increased accountability for the use of public funds. The Court will continue in the future to respond to the challenges of the changing audit environment in order to assure the usefulness of its work for the discharge authority, the auditees and the public at large.

Auditing complex EU programmes in the 27 Member States and in well over 100 other beneficiary countries around the world is particularly challenging. The Court has further reinforced the efficiency of its DAS approach through the introduction of an assurance model, which involves an assessment of inherent and control risks with the internal control systems, thus allowing for a reduction in the number of transactions tested in cases where internal control systems are tested and found to be effective.

Following the self-assessment exercise carried out last year, the Court has started to implement an action plan aimed at further developing our institution. A peer review of the Court's organisation and methods is currently under way, involving senior colleagues from the Supreme Audit Institutions of Austria, Canada, Norway and Portugal. You will be informed of progress in due course.

Conclusions

Allow me to conclude by saying that:

  • despite considerable efforts by the Commission to address the weaknesses in the management of the risks to Community funds, the Court once again provides an adverse opinion on the legality and regularity of transactions over the majority of the budget. Improvements have been found in particular in agriculture;
  • the high level of error found in the underlying transactions is caused by beneficiaries overclaiming - sometimes due to complicated legal requirements and rules, and unclear eligibility criteria - as well as continuing deficiencies in internal control;
  • the key to effective management of EU funds lies in efficient and reliable internal control systems at all levels of administration.

I believe that the EU citizens are entitled to expect EU funds to be properly managed and controlled across the Union.

Thank you for your kind attention.


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