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Brussels, 09 November 2011

Annual report of the European Court of Auditors

What is the Court of Auditors' annual report?

The European Court of Auditors (ECA) is the independent external auditor of the European Union. Each year, the Court publishes an Annual Report on the implementation of the EU budget. The main components of this report is an opinion called a "statement of assurance" (DAS) on the Commission's accounts (checking if the books were well kept) and EU expenditure (checking the legality and regularity of EU transactions, along with an explanation of the Court's findings.

The Court's findings are drawn mainly from audits that it carries out on sample transactions throughout the year, at EU, national, regional and individual beneficiary level. From these audits, any errors found are classified as either quantifiable (i.e. with a potential financial impact) or not. The impact of these errors is then extrapolated to reach a "most likely error rate", which the Court gives to each individual chapter that includes a cluster of policy programmes (e.g. cohesion, transport and energy), and to the budget as a whole. In the past, the Court used a traffic light system to apply 3 levels of error: Red = more than 5% level of error; Yellow = 2-5%; Green = less than 2%. While this colour code system is no longer used by the Court, if a spending area has an error level of less than 2%, it is still classified as free from material error (i.e. all payments were made in line with the rules and requirements).

What role does the report play in the budget discharge procedure?

The budget discharge is the final approval of the EU budget implementation for a given year. It is granted by the European Parliament on a recommendation from the Member States in Council. The Parliament uses the Court of Auditors' report (statement of assurance) as the primary basis for this decision. Discharge equates to approval of how the Commission implemented the budget in that financial year and the closure of the accounts.

How does the Commission use the Court of Auditors' report?

The Commission takes the European Court of Auditor's recommendations very seriously, using them to help identify the areas where improvement could be made. Over the past decade, there has been a dramatic decline in the overall error rate, thanks to continuous efforts by the Commission to follow up the Court's and discharge Authority's recommendations and so improve the financial management of EU funds. Just a snap-shot of measures taken in recent years include:

  • Simplification of rules across all policy areas. Simpler rules are easier to apply and easier to check for compliance, thereby reducing the risk of errors.

  • Introduction of stricter penalties. Interim payments are blocked if Member States systems are not considered to be up to standard, and payments are suspended or interrupted when serious weaknesses are identified.

  • Modernisation of the Commission's accounting system, so that it is now comparable to the any of the top accounting systems worldwide (public or private).

In the next generation of programmes for 2014-20, the Commission has included many new measures to further improve the management and control of EU funding, and ensure that EU money delivers maximum value to citizens.

Is the Court of Auditors' annual report directed only at the European Commission?

No. The Court of Auditors' annual report looks at how the EU budget was implemented for a particular year. Given that the spending of around 80% of this budget is under shared management of the Commission and Member States, national authorities also have a great responsibility in ensuring that EU money is properly managed, controlled and spent. The Court points also at Member States in indicating where the problem lies or improvements need to be made, and the European Commission and Parliament have urged Member States on many occasions to follow these recommendations and take their responsibilities seriously when it comes to managing EU funds.

Does an error mean that money has been lost, wasted or subject to fraud?

Absolutely not. Errors rates cannot be 'translated' into an amount lost. Errors in procedures do not mean failed projects or wasted funds: despite errors, the money may have well been spent in line with what it was meant for. The fact that there were errors in the application of a tendering procedure for a bridge construction project does not mean that the new bridge should be dismantled or that it is of poor quality.

Second, controls at various levels (project level, national and EU) ensure that EU taxpayers' money is protected. In fact, the multilevel controls for EU spending are probably much tighter than the controls for any national budget.

If errors with financial impact are discovered, undue payments are then clawed back from the project or country at fault, usually as part of the multiannual system of checks and audits (EU programmes are multiannual, and so are the checks).

Fraud is different from errors, in that it is an intentional deception and criminal action. Any suspicions of fraudulent activity involving EU funds are reported to the European Anti-fraud Office (OLAF). It should be noted that the Court only referred to OLAF on suspicions of fraud in 3 out of the many hundreds of cases it looked at in 2009, for instance.

How does the Commission respond to errors that are uncovered?

There is a robust, multi-layered system of controls and audits in place to avoid irregularities in EU spending. Nonetheless, errors do happen when large sums are distributed to millions of recipients in 27 different countries. The Commission takes a very strong stance on the principle that when an error is found, the money must be recuperated. In 2010, for example, the Commission recovered or corrected €1.55 billion of irregularly paid amounts. Also, it should be noted that in Structural Funds, the Commission now blocks interim payments if Member States systems are not considered to be up to standard, and payments are also suspended or interrupted when serious weaknesses are identified. Moreover, for the next generation of programmes under the Multi-annual Financial Framework 2014-20 (IP/11/799), even stricter corrective measures have been proposed, including the possibility of Member States losing EU funds for programmes definitively if they fail to identify and address irregularities on time.

What has been the trend in the Court of Auditors' findings over the past 10 years?

Over the last decade, the overall error rate for EU spending has declined significantly. In fact, looking at last year's report, for the first time the Court of Auditors reported an overall error rate for EU spending of less than 5% - which means that at least 95% of all payments made in 2009 were fully in line with all the rules and regulations. In agriculture – which accounts for almost half of the EU budget – the situation has been stable over recent years, with the level of error oscillating around the 'clean bill of health' threshold of 2%. This is a very good result given the complexity and scope of farm subsidies, paid directly to millions of farmers across Europe. Cohesion funds tend to be the most prone to error – partly due to the sheer scale and number of projects they cover - but there again a notable improvement in the error rate has been seen since 2006, and further measures are being introduced by the Commission to reduce the risk of error even more in the future.

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