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European Commission

Algirdas Šemeta

Commissioner responsible for Taxation and Customs Union, Audit and Anti-fraud

Statement on the Annual Report of the Court of Auditors

Budgetary Control Committee (Cocobu) European Parliament/ Brussels
6 November 2012

Dear Chairman,

Mr Rapporteur,

President Caldeira,

Honourable Members of this Committee and of the Court of Auditors,

The publication of the Annual Report of the Court of Auditors is a cornerstone of the budgetary discharge procedure. The following discussions in this Committee will be largely based on the Court's findings and observations as well as on the replies given by the Commission.

I am thankful that we could continue the good spirit of cooperation which once again proved to be an important constant in the tradition of the relations between the Court of Auditors and the Commission.

With the revised Financial Regulation, which was adopted last month, a sound and innovative basis has been set for the implementation of the sectoral legislation for the next financial period. I am grateful that the legislative authorities came to an agreement on this rather ambitious but necessary piece of legislation.

I want to particularly highlight the introduction of the annual management declaration for all shared management funds. This will mean that all those bodies responsible for managing EU Funds at Member States level will have to provide a genuine assurance and effectively accept their accountability.

This instrument translates concretely the new control and audit obligations of the Member states in the implementation of the budget and the resulting responsibilities introduced in the Lisbon Treaty.

Further important work with regard to the next programming period is on-going. I once again want to underline the paramount importance of the new multi-annual financial framework and the future sector legislation for improving the financial management of the next European programmes.

The Commission has made ambitious but realistic proposals which promote simplification and better spending. I refer in particular to Cohesion Policy where the Commission's proposal makes net financial corrections the rule where the Member State has not detected irregularities in due time. The Commission counts on the co-Legislators to support the proposals.

I would like to thank the Court of Auditors and its President for the excellent cooperation between the external auditor and its auditee. The positive trend confirmed in the annual report on 2011 demonstrates the added value of the Court's recommendations for the improvement of the budget execution.

I can only agree with President Caldeira when he says that today more than ever public money should be spent in full respect of sound financial management principles.

Let me now refer to some of the key messages of the Annual Report as outlined by President Caldeira.

The Annual Accounts

For the fifth consecutive time, the Court of Auditors issued an unqualified positive opinion on the Annual Accounts of the European Commission. I am very pleased to see that our accounting system gives a solid and reliable basis for preparing our accounts over many years now.

We will remain vigilant and that we will continue our efforts to maintain the quality and the high class standard of our accounting framework.

I would like to point out the key figures and elements of the 2011 annual accounts:

  • In 2011, the budgetary surplus amounted to 1,5 billion euros. This figure is significantly lower than in the previous year which demonstrates the high implementation rate of payment appropriations during 2011.

  • Looking at the balance sheet, we see a very large increase in loans given and borrowings outstanding of 27,7 billion euros. This is due primarily to the European Financial Stability Mechanism loans disbursed during 2011 to Ireland and Portugal. These are back-to-back operations, with no impact on the economic result or net assets.

  • The pre-financing heading shows an overall increase of 1,5 billion euros. This is largely due to the amounts related to State Aid [explanation please] which were included under this heading for the first time. The level of pre-financing managed by the Commission has actually decreased by EUR 700 million.

The regular clearing of these payments, as foreseen in the revised Financial Regulation will significantly contribute to a further mitigation of risks. Nevertheless, the Commission will continue to carefully analyse the situation in this regard.

Legality and regularity of transactions

Before going through the main conclusions of this Court of Auditors' report as regards the legality and regularity of transactions, I would like to thank President Caldeira and the Court for having concretely ensured the comparability of the error rates between 2011 and 2010.

By presenting a comparative table in the DAS Chapter of the report, the Court enables the readers to see the trend in the error rates by chapter, despite the new structure and the methodology changes introduced for this exercise. The Commission welcomes this measure and would suggest maintaining this presentation for the next exercises and ensuring a stable structure in the future.

The overall error rate for all payments made in 2011 is less than 4% (3,9%) and remains stable compared to 2010 (3,7%) as the Court states in its report. This means that more than 96% of the 2011 budget is free from errors with a financial impact.

This is encouraging not only because it confirms the sustained improvements introduced during the last five years but also considering that this stable result has been achieved even though the risk-profile of the transactions increased in 2011. Indeed not only the volume of payments grew but there were many more interim and final payments which are subject to more complex rules and conditions and therefore, more prone to error.

Moreover, in 2011, the Court has for the first time quantified failure to meet cross-compliance obligations by beneficiaries of the Common Agriculture Policy, which corresponds to 0,1 percentage point of the global error rate at 3,9%.

Thanks to its robust, multi-layered system of controls and audits, the Commission has recovered or corrected 1.84 billion Euro of incorrectly paid amounts in 2011. In fact, the total amount of financial corrections and recoveries represents around 1,4 % of the payments made in 2011.

If you set this percentage in relation to the error rate of 3,9 % calculated by the Court, you see, that the net impact of the inaccuracies is coming closer to the materiality threshold of 2 % used by our external auditor.

I would like to share with you another important conclusion we can draw from the Court's audit work.

In the case of programmes managed by Member States authorities, breaches to national rules account for a significant part of the overall estimated error rate.

For instance, as regards the European Social Fund, our in-depth analysis shows that breaches to national rules contribute to 86% of the overall error rate.

This means that for the ESF 1,9 % out of the 2,2 % error rate comes from breaches to national rules. These are rules decided by the Member States and that beneficiaries and national bodies have to respect and control.

Therefore, addressing the complexity of rules, which is a main source of errors, is a shared responsibility.

The Commission launched an ambitious simplification agenda last year with the MFF package and the 57 sectoral proposals. However, this simplification objective is already threatened today.

In the first simplification scoreboard adopted last September, we can see that, if progress has been made for instance with the new Financial Regulation, proposals made during the on going negotiations on the sectoral legal bases are a serious source of concerns.

For instance, proposals included overloaded decision-making, creating unjustified burdensome procedures, for example comitology procedures or implementing acts replaced by delegated acts.

In the key area of research, the Commission proposed simplified rules of participation, under the programme Horizon 2020. The golden rule "one project – one funding rate" aims to make funding easier. In the same perspective, a single flat rate for indirect costs is foreseen. These concepts are now challenged by the legislators.

But, as we have seen, the simplification of EU rules is only part of the solution to reduce the risk of error.

The Member States have also their home work to do in addressing the excessive complexity of their national rules which leads the beneficiaries to make mistake and challenges the cost-effectiveness of controls.

This is a message that I have already passed to the Member States when discussing sound financial management in the ECOFIN. This is also an issue that attracts more and more the attention of Supreme Audit Institutions in the Member States. This is a message that we all need to repeatedly hammer home and that you could convey to your counterparts in the national Parliaments.

But let me now continue with outcome of the Court's audit on 2011.

All commitments and revenues for the entire Budget are free from material errors. So are also the payments for External aid, Development, Enlargement and Administrative expenditure.

The situation in Cohesion policy has significantly improved compared to 2010, with a considerable decrease of the error rate. In particular the European Social Fund - which for the first time has its "own chapter" in the Court's annual report - looks promising. As regards Regional Policy, the error rate decreased by 40% and the largest proportion of the remaining errors is due to errors in public procurement.

This positive development confirms again that the management and control systems are working much better for the current programming period compared to the previous one.

It also shows the Commission's vigilance and firm commitment to use all available legal tools to ensure that EU money is properly spent and if not, that payment processes are stopped until remedial actions are implemented on the spot. Still, Member States need to further step up their efforts to amplify the positive downwards trend of errors in this policy area, notably by ensuring that management verifications act as an efficient filter against errors.

The increased error rate in agriculture mainly concerns rural development. Most of the errors in this area are related to eligibility of investment projects, declaration of ineligible VAT or non-compliance with public procurement rules.

However it is worth mentioning that the Director General of DG AGRI had already anticipated this situation to a certain extent and introduced a reservation for rural development in his Annual Activity Report 2011.

The reservation was accompanied by actions to correct the identified irregularities and prevent similar issues to occur again in the current and the future programming period.

A thorough assessment of the root causes of errors was launched, in close cooperation with the managing authorities and paying agencies of the Member States, with a view to identifying corrective measures which could still be implemented in the current programming period.

Information and awareness activities among Member States were stepped up and the audit programme was adapted to put an increased focus on the error rate.

The Commission considers that, in this situation, the involvement of Member States authorities needs to be enhanced. This is shared management and national rules could be at stake.

In particular, the participation of representatives of the national bodies in the contradictory process with the Court has proved to be of great help when problems are identified at the level of the Member States' systems or when national rules are at stake.

Therefore, in those well justified cases, the so-called "tripartite" meetings can be considered as good practice to clarify the issues and reinforce the mutual understanding.

In the area of internal policies, we are also confronted with an increased error rate.

In my view this policy area gives a good example of the cyclical effect of our programmes where more complex payments are dominant towards the end of the financial period.

The Commission is looking into the cases and observations mentioned by the Court in order to avoid similar problems in the short term. In the longer term, Horizon 2020 will lead to further simplification thus to less errors.

However, I wish to recall that error does not mean fraud. Its occurrence does not mean that funds have disappeared, been lost or wasted. It means that some projects were affected, at the time of the ECA controls, by weaknesses in their implementation, such as the declaration of ineligible expenses or mistakes in the calculation of expenses.

Honourable Members of this Committee and of the Court of Auditors,

I am pleased, that the Court of Auditors once again confirms that the Commission is on the right track.

However, you can be assured that the Commission takes all necessary initiatives to address the weaknesses observed by the Court. This is in particular the case for rural development.

Some of the Court's observations have a clear link to the next generation of programmes. They are aiming at improving the design and the structure of rules and projects which could not be changed under the current financing period.

The Commission has therefore deployed to improve the design of rules and programmes in sectoral proposals in order to:

  • Simplify rules and processes, easing lawful access to EU funds and reducing risk of errors;

  • Reinforce responsibility of financial actors, in particular Member States, and transparency of management results;

  • Better equip the Commission and enable it to play its supervisory role under shared-management, an area where about 80% of the EU budget is implemented together with our partners in the Member States. In particular, the Commission proposes that all irregularities detected by the Commission or the Court of auditors that affect accounts submitted by the Member States lead to net financial corrections.

The Commission also gives more emphasis on performance of our programmes and the added-value they should deliver in particular to our citizens and businesses.

The EU budget is about investments for the people of Europe and our partners. This is why clear objectives and key performance indicators are included in all Commission proposals for the next Multiannual Financial Framework.

This will enable us to measure performance, to address weaknesses and to change direction where needed. I hope that the legislative authorities will come soon to an agreement so that the important preparation work for a proper financial implementation can be launched.

Intensive work and discussions are lying ahead of us. I can ensure you that the Commission is at your disposal to facilitate in the best way the upcoming debate on the discharge for the financial year 2011.

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