The European Court of Auditors' 2006 Annual Report identifies some improvements, particularly in agricultural spending, although errors of legality and regularity still persist in the majority of EU expenditure due to weaknesses in internal control systems both at the Commission and in Member States
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 Court's estimated level of overall error in agricultural transactions - although it remains just above the materiality limit. 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 2006 consolidated 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.
In 2006 the EU made payments totalling €106.6 billion.
The Court again gives an unqualified opinion on the transactions underlying EU 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, albeit to different levels.
In addition, the Court is of the opinion that, taken as a whole, the underlying transactions of the European Development Funds, with the exception of payments authorised by the Commission's delegations in the beneficiary states, are legal and regular.
ECA President Mr Hubert Weber said at the meeting of the Committee on Budgetary Control last night: "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 agriculture as a whole - €49.8 billion in 2006 - the Court found a marked reduction in the estimated overall level of error, although it remains just above the materiality threshold. Agricultural spending is characterised by different types of transactions, which are subject to different risks and control systems. IACS, which covers about 70% of CAP spending, is effective in limiting the risk of irregular expenditure, where properly applied. The Court notes that, while the Single Payment Scheme simplifies claim and payment procedures, it has side effects, such as the allocation of entitlements to landowners who never exercised previous agricultural activity, leading to a substantial redistribution of EU aid away from farmers to landlords. Among new beneficiaries for EU agricultural aid are railway companies, horse riding or breeding clubs and golf or leisure clubs and city councils.
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, while the Commission maintains only a moderately effective supervision of their functioning.
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. The Court's audits showed that the internal control systems were only partly satisfactory.
External actions spending - €5.2 billion in 2006 - was satisfactory for the transactions managed and checked 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, although significant errors were again found in the Sapard transactions audited.
The Commission has taken measures to step up recoveries and improve the protection of the financial interests of the 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 have at its disposal reliable information on recoveries of undue funding - the amounts and beneficiaries involved - nor of their financial impact on the EU budget.
ECA President Hubert Weber concluded:
"The Commission should lead by example by paying particular attention to devising and operating its own internal control systems effectively in the area of 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 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's citizens are entitled to expect EU funds to be properly managed and controlled across the Union."
European Court of Auditors
Notes for Editors
The European Court of Auditors is the external auditor of the European Union. It is an independent institution of the European Union and is based in Luxembourg.
The Court produces its Annual Reports in November each year covering the previous financial year: one annual report covers the general budget of the Union, the other covers the European Development Funds (development aid financed outside the general budget).
The general budget is the main budget of the European Union, comprising income or 'own resources' and expenditure, and is divided into five principal areas: agriculture; structural spending; internal policies, including research; external actions (development aid) and pre-accession strategy. A sixth area covers the Union's own administrative spending.
The main content of the Annual Reports is the Court's Statements of Assurance (Déclaration d'Assurance, DAS) and accompanying information. These comprise annual conclusions on i) the reliability of the accounts; and ii) the legality and regularity of underlying transactions, based on the EC Treaty.
The opinion on the reliability of the accounts sets out the extent to which the accounts (the financial statements) completely and accurately report the financial results for the year and the assets and liabilities at the year end.
The opinion on the legality and regularity of underlying transactions sets out the extent to which the income and payment transactions underlying the accounts - payments to farmers, local authorities, development projects - are accurately calculated and comply with the relevant rules and regulations.
The Court's opinions are based on the evidence provided by its audit work and can be either: i) unqualified - the accounts are reliable, or the underlying transactions are legal and regular in all material aspects; or ii) adverse - the accounts are not reliable, or the underlying transactions are not legal and regular in all material aspects, or iii) qualified - the accounts are reliable, or the underlying transactions are legal and regular in all material respects, except for the effects of the matter(s) to which the qualification relates.
Errors of legality and regularity occur when beneficiaries either overclaim or otherwise do not meet the obligations that they must fulfil in order to receive EU aid or grant. Evidence of a material or unacceptably high level of error will cause the Court to give an adverse opinion.
The Court bases its opinions on analysis and testing of systems, as well as the testing of statistically representative samples of underlying transactions. This involves obtaining direct evidence on the accuracy and physical reality of the transaction at the level of the final beneficiary.
Internal control is the range of procedures and processes (such as checks) by which the European Union administers and manages its budget and ensures that funds are collected and spent properly and in accordance with the rules. Control procedures - which are designed to prevent or detect and correct errors - are the responsibility of the Commission, and, in the case of shared management, of member or beneficiary states. Internal audit is part of internal control and helps ensure the systems function correctly.
IACS - the Integrated Administration and Control System - is the system EU Member States are required to apply for certain aspects of agricultural spending currently representing around 70% of the total. The requirements of the scheme are laid down by regulation. They involve maintaining databases, identification of land and animals and coordinated checks. Expenditure not covered by IACS is subject to other systems.
Under the Single Payment Scheme - SPS - aid is decoupled from production, meaning that farmers are no longer paid on the basis of the crops they grow or the number of animals they keep. Beneficiaries' entitlements are based either on payments received during a reference period (historical model) or land farmed during the first year of implementation (regional model).