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Brussels, 5 November 2013
Annual report of the European Court of Auditors – Frequently Asked Questions
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 "statement of assurance" on the Commission's accounts (checking if the books were well kept) and EU expenditure (checking if the transactions were made in accordance with the rules), 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. If a spending area has an error level of less than 2%, it is classified as free from material error (i.e. all payments were made in line with the rules and requirements). If the level of error reaches or exceeds 2% the spending area is classified as affected by material error.
Does an error mean that money has been lost, wasted or subject to fraud?
Absolutely not. Error 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. Mistakes in a form for a tender procedure for a bridge construction project do 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 refers very few cases per year to OLAF on suspicions of fraud out of the many hundreds of cases it looks at. Fraud only amounts to around 0.2% of all expenditures.
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 28 different countries. The Commission takes a very strong stance on the principle that when an error is found, the money must be recovered. In 2012, for example, the Commission recovered or corrected €4.4 billion of incorrectly paid amounts. In total, financial corrections and recoveries for 2009-12 correspond to 2% of the average volume of payments in that period.
Also, it should be noted that in Structural Funds, the Commission blocks interim payments if Member States systems are not considered to be up to standard, and payments are also interrupted and programmes suspended when serious weaknesses are identified. In 2012, payments were interrupted in every Member State at one point or another, until the identified problems were properly addressed. This not only ensures that the EU budget is protected, but also incentivises the national authorities to implement proper structural improvements. The Commission also provides support and guidance to both beneficiaries and national authorities on how to comply with EU spending rules.
How will EU spending be further improved in the 2014-20 programming period?
For the next financial framework (2014-20), much focus has been put on designing rules and programmes in a way which will further reduce errors across the board, while also ensuring greater focus on the quality of the spending. Among the key measures are:
Simplification: Simpler rules are easier to comply with and easier to control. Therefore, rules, procedures and eligibility requirements have been simplified under the new MFF. For example, from 2014, eligibility rules will be harmonised across all structural and investment funds (Regional development, Social Fund, Cohesion, Rural Development and Fisheries). This will cut costs, reduce the scope for error and increase the efficiency of controls. Greater use of simplified cost options, such as flat rate financing and lump sums, will also reduce the administrative burden for beneficiaries and national control authorities. And greater electronic, online management of EU funds will help cut the administrative burden and decrease the number of mistakes.
In Research, simplification has been put at the heart of Horizon 2020. The principle of "one project – one funding rate" will considerably reduce the administrative burden for beneficiaries compared to today.
Stronger incentives: More focus will be put on the performance of programmes and the added-value EU funds deliver for citizens and businesses under the next MFF. Clear transparent and measurable targets will be set, and best performers will be rewarded with additional funds at the end of the programming period.
Stronger deterrents: For the next generation of programmes, there will be even stricter corrective measures to protect EU funds. For example, Member States will risk definitively losing EU funds for programmes if they fail to identify and address irregularities on time. And Commission's right to interrupt and suspend payments when serious mismanagement is identified will be extended to cover agricultural payments from 2014.
What has been the trend in the Court of Auditors' findings over the past 5 years?
Firstly, the Court has signed off the EU's accounts. In fact, for the sixth year in a row the Court of Auditors gave a completely clean bill of health to the Commission's accounting books. This means that every euro spent from the EU budget was duly recorded in the books and properly accounted for.
When it comes to payments, the Court requires an error rate of less than 2% before it will declare the EU budget to be free from material error. This means that more than 98% of EU spending must be free of error with a quantifiable impact for it to be "signed off".
The Commission is constantly working to move closer to this goal. For some years now, it has had a success rate of less than 5% error rate. In other words, out of every 100 euro spent by the EU, at least 95 euro was free from quantifiable error. While this is not enough to get the Court of Auditors' "green light", it does indicate the very high standard of management and control applied to taxpayers' money at EU level. Moreover, many millions of citizens and businesses across the EU have benefited greatly from EU funding.
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 significant decline in the overall error rate thanks to continuous efforts by the Commission to follow up the Court's and so improve the financial management of EU funds.
Just a snap-shot of measures taken in recent years include:
The Commission recently published a Communication on the protection of the EU budget, setting out the measures taken by the Commission to safeguard EU funds against undue or irregular spending. Full report can be found at: http://ec.europa.eu/budget/library/biblio/documents/management/COM_2013_682_en.pdf
Is the Court of Auditors' annual report directed only at the European Commission?
No. The Court of Auditors' annual report assesses how well expenditures made from the EU budget followed the administrative rules 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.
What role does the Court of Auditors' 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 but it examines as well other sources of information, in particular the Annual Activity Reports of the Commission's Directors-Generals and the Communications from the Commission, such as the Communication on the protection of the EU Budget1. Discharge equates to approval of how the EU budget was implemented in that financial year and the closure of the accounts.
For more information, see IP/13/1028.