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European Commission - Fact Sheet

Annual report of the European Court of Auditors – Frequently Asked Questions

Brussels, 05 November 2014

The European Commission welcomed today the European Court of Auditors' latest report on the management of the EU budget. It states that in 2013 the error rate was 4.7%, compared to 4.8% in 2012, and it continues to be below 5% for many years now. This shows that the Commission's continuous efforts to improve the management of EU funds pay off.

With regard to the EU's account keeping, this is the seventh year in a row that the Commission has been given a clean bill of health by the Court of Auditors. In other words, the day-to-day accounting practices of the Commission have proven themselves solid and reliable throughout the entire 2007-2013 period.

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.

Do errors found by the European Court of Auditors mean that money has been lost or wasted?

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 an airport project do not mean that the new facilities should be dismantled or that they are 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).

Is a large part of the EU budget affected by fraud?

Not at all! Fraud is different from errors, in that it is an intentional deception and criminal action. Fraud only amounts to around 0.2% of all spending and the Commission has a very hard-line zero-tolerance to fraud policy. 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.

Why does not the Commission do more controls to avoid errors?

The Commission is auditing the implementation of EU programmes and projects at all levels. This comprises on-the-spot checks as well as the audit of national authorities. Given the number of projects and programmes which are co-financed by the EU budget, the Commission cannot check all payments which were made to final beneficiaries, e.g. farmers, researchers and project managers. Moreover, Member States themselves are obliged to check the spending and to establish control systems at national level. However, the Commission will further reinforce its controls to identify risky areas and to continue its consultations with the Member States to achieve further improvements in the control of EU funds.

It should not be forgotten that more controls cost more money and may result in increased administrative burden for the national authorities as well as for the final beneficiaries. The Commission has therefore to ensure a reasonable cost-benefit ratio of controls. To make the cost of controls more transparent, the Financial Regulation requires the Commission to estimate the costs and benefits of control systems for every revised or new spending proposal. Therefore, the Commission's possibilities to increase its control activities are limited.

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 different countries around the globe. The Commission takes a very strong stance on the principle that when an error is found, the money must be recovered. In 2013, for example, the Commission recovered or corrected €3.4 billion of incorrectly paid amounts. In total, financial corrections and recoveries for 2009-13 correspond to 2.2% 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 the established standard, and payments are also interrupted and programmes suspended when serious weaknesses are identified. 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.

The Commission recently published a Communication on the protection of the EU budget (Com(2014) 618 final), setting out the measures taken by the Commission to safeguard EU funds against undue or irregular spending and quantifying their impact to end 2013. Full report can be found at:http://europa.eu/!fK79cG

How will EU spending be further improved in the 2014-20 programming period?

The rules and programmes for the current financial framework (2014-20), will further reduce errors across the board, while also ensuring greater focus on the quality of the spending. Among the key measures are:

  • Stronger incentives for performance

More focus will now 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.

  • 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 on, eligibility rules have been 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 deterrents

For the next generation of programmes, there are now even stricter corrective measures to protect EU funds. For example, Member States 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 has been extended to cover agricultural payments from 2014.

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 also points 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.

How does the Commission support Member States in improving their national control systems?

Under the shared management system it is up to Member States to set up appropriate administration and control structures to ensure that funds are correctly spent and to define clear rules and procedures for beneficiaries. The Commission has been actively supporting the national authorities in fulfilling this obligation in various ways, from providing detailed guidance documents and trainings to dissemination of best practices among MS or organisation of expert seminars.

For instance, tailor-made actions plans have recently been set in motion in the area of agriculture, aimed at encouraging Member States to address the root causes of errors. If measures are not taken by the national authorities, the Commission can suspend payments – an incentive for the Member State concerned to speed up the implementation of the action plans. So far action plans have been very effective.

For cohesion policy, a specialised competence centre has been active since 2013 in improving Member States' administrative capacity to efficiently and effectively plan, implement and evaluate high quality investment. It does so via a range of activities such as guidance, training, knowledge development, networking and pilot projects. The competence centre has already launched 3 initiatives to improve administrative capacity, public procurement management and audit capacity.

Furthermore, the necessary support is given to Member States to ensure that all possibilities for simplification under the new MFF are considered through training, guidance on simplified cost options and Technical Working Groups which encourage an active exchange of best practices. Such possibilities for implementing simplification measures are also reflected in the adoption of Partnership Agreements whereby Member States are required to demonstrate the necessary actions to achieve a reduction in the administrative burden as well as their administrative capacity. A guidance note on simplification is also being prepared in order to assist Member States to fully leverage the significantly strengthened simplification opportunities in the new programming period.

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.

In its recent Special Report n° 19/2013, the ECA concluded that “the Commission adequately follows up the Court’s recommendations” and “the Court’s review of a sample of recommendations showed that the recommendations implemented by the Commission have contributed towards improving financial management in a number of areas of the EU budget”. This demonstrates that the Commission has been taking the European Court of Auditor's recommendations very seriously, using them to help identify the areas where improvements 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:

  • 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 one of the top public sector accounting systems worldwide.
  • The new EU Financial Regulation includes many new measures to further improve the management and control of EU funding, and ensure that EU money delivers maximum value to citizens while reducing to red-tape to the greatest possible degree.
  • The new generation of programmes for 2014-2020 will include simplified cost options or eligibility rules that will reduce the risk of errors, as well as indicators to better measure the performance and the added value of the EU projects.

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 Budget[1]. Discharge equates to approval of how the EU budget was implemented in that financial year and the closure of the accounts.

[1] COM(2014) 618 final

For further information:

Jakub Adamowicz: + 32 229 50 595, email: jakub.adamowicz@ec.europa.eu

Andreana Stankova: + 32 229 57 857, email: andreana.stankova@ec.europa.eu

MEMO/14/1420

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