European Court of Auditors

12, rue Alcide De Gasperi, 1615 Luxembourg, LUXEMBOURG

1.1.

This Chapter of the Annual Report:

1.2.

The Court of Auditors provides the European Parliament and the Council with a Statement of Assurance concerning the reliability of the accounts and the legality and regularity of the underlying transactions. The Court may supplement this statement with specific assessments of each major area of EU activity (5).

1.3.

The aim of the work on the reliability of the accounts of the European Union is to obtain sufficient appropriate evidence to conclude on the extent to which revenue, expenditure, assets and liabilities have been properly recorded and that the consolidated accounts faithfully reflect the financial position as of 31 December 2011, and the results of its operations and cash flows for the year then ended (see paragraphs 1.6 to 1.8).

1.4.

The aim of the work on the regularity of the transactions underlying the 2011 accounts is to obtain sufficient appropriate evidence to conclude on whether those transactions are in accordance with the applicable regulations or contractual provisions, and have been correctly calculated (see paragraphs 1.9 to 1.15 for an overview of the results and Chapters 2 to 9 for more details).

1.5.

The aim of the work on the reliability of Commission management representations, i.e. the declarations by the directors-general and the annual activity reports of the Commission’s services and the related synthesis report, is to assess the extent to which they provide a fair assessment of the quality of financial management (including residual levels of error), and contribute to the Court’s overall assurance (see paragraphs 1.16 to 1.30 and related observations in the sections ‘Effectiveness of systems’ in Chapters 2 to 9).

1.6.

The Court's observations concern the consolidated accounts of the European Union for the financial year 2011 prepared by the Commission's accounting officer and approved by the Commission in compliance with the Financial Regulation (6) and received by the Court on 31 July 2012. The consolidated accounts comprise:

1.7.

The Commission's accounting officer provided the Court with a representation letter confirming that the consolidated accounts are complete and reliable in all material respects.

1.8.

The Court’s audit of the 2011 consolidated accounts found that these were free from material misstatements (see also Annex 1.2 ).

1.9.

The Court provides specific assessments on revenue in Chapter 2 and on the different expenditure policy groups based on Activity Based Budgeting (ABB) policy areas in Chapters 3 to 9 (see Table 1.1 ).

1.10.

The Court concludes that revenue (130 000 million euro) (7) and payments in the policy group administrative and other expenditure (9 777 million euro) were free from material error and that the examined supervisory and control systems were effective (see Table 1.2 and paragraphs 2.35 to 2.36 and 9.30 to 9.32). Commitments in all policy groups were also free from material error.

1.11.

The Court concludes that the policy group external relations, aid and enlargement (6 201 million euro) was free from material error and that the examined supervisory and control systems were partially effective. However, interim and final payments were subject to material error (see Table 1.2 and paragraphs 7.26 to 7.27).

1.11.

1.12.

The Court concludes that the following policy groups were affected by material error: agriculture: market and direct support (43 801 million euro reimbursed expenditure (8), rural development, environment, fisheries and health (13 310 million euro reimbursed expenditure (8)), regional policy, energy and transport (33 373 million euro reimbursed expenditure (8)), employment and social affairs (10 171 million euro reimbursed expenditure (8)) and research and other internal policies (10 591 million euro payments). Furthermore, the Court concludes that for these policy groups the examined supervisory and control systems were partially effective (see Table 1.2 and paragraphs 3.42 to 3.43, 4.51 to 4.52, 5.70 to 5.71, 6.27 to 6.28 and 8.37 to 8.38).

1.13.

The Court concludes that overall payments were materially affected by error and that the examined supervisory and control systems for payments were, in general, partially effective (see Table 1.2 ).

1.12-1.13.

The combined most likely error for Regional Policy, Transport, Energy and Employment and Social Affairs, as shown in Table 1.3, decreases considerably compared to 2010, from 7,7 % to 5,1 %. Also, for the third consecutive year, the level of error for each part of the former policy group Cohesion, Energy and Transport (MLE 6,0 % for Regional Policy, Energy and Transport and, 2,2 % for Employment) remains well below those reported by the Court in the period 2006-2008. This positive development derives from the reinforced control provisions of the 2007-2013 programming period, from the Commission’s strict policy of interruptions/suspensions when deficiencies are identified, in line with its 2008 Action Plan and from the positive impact of the simplification measures provided in the regulations for the current programming period. The Commission will continue to focus its actions on the most risky programmes and/or Member States.

Regarding research and other internal policies, the Commission considers that seen from a management perspective — i.e. when balancing the objectives in terms of legality and regularity with considerations on risk-proportionality and cost-effectiveness of controls — its management and control systems provide reasonable assurance subject to the reservations issued by the Authorising Officers by Delegation.

Finally, with particular reference to the provisions of the Financial Regulation applicable to the EU Budget (Article 22a(2)(f) of the Regulation laying down detailed rules for the implementation of the Financial Regulation and Article 28(2b)(g) of the new Financial Regulation), and in view of the proposed reduction of its available resources and of the current measures taken by the Member States, the Commission will consider the cost and benefits of the Court’s recommendations before taking and/or proposing appropriate action.

1.14.

The Court’s estimate of the most likely error concerning payments for 2011 is higher than in 2010 in:

—

Agriculture: market and direct support; and rural development, environment, fisheries and health (as compared with the former policy group agriculture and natural resources);

—

As regards rural development, the Commission agrees that there is a deterioration of the situation, albeit of a more limited magnitude than the one reported by the Court.

The Commission notes that the Court’s conclusion is on the policy group as a whole, not on subgroups.

The Commission considers that seen from a management perspective — i.e. when balancing the objectives in terms of legality and regularity with considerations on risk-proportionality and cost-effectiveness of controls — its management and control systems applicable to the research and other Internal Policies programmes provide reasonable assurance, subject to the reservations issued by the Authorising Officers by Delegation.

—

Research and other internal policies.

1.15.

Taken together the most likely error estimated by the Court for payments as a whole remained stable as compared to 2010 (3,9 % in 2011 and 3,7 % in 2010, see also Table 1.3 and Graph 1.1 ) (9). The Court found around two fifths of the transactions tested to be affected by error (2010: around one third of the transactions). The frequency of errors detected by the Court increased for all policy groups, except the former policy group cohesion, energy and transport and administrative and other expenditure for which it remained stable (see Table 1.3 ).

1.15.

1.16.

In accordance with Article 317 of the TFEU, the Commission is ultimately responsible for the implementation of the EU budget. A keystone of the Commission’s present system for managing EU funds (which was revised thoroughly on the basis of a reform launched in April 2000 (10) in response to a resolution adopted by the European Parliament (11)) is the responsibility of the directors-general. The latter must put in place effective supervisory and control systems which meet pre-defined standards (12).

1.17.

The Commission’s directors-general report annually on the performance of their duties in activity reports (13). These are accompanied by declarations inter alia on the extent to which resources have been used for their intended purpose, and control procedures ensure the legality and regularity of transactions. When they identify significant problems in these respects directors-general may include reservations in their declarations.

1.18.

The Commission assumes political responsibility for management by its directors-general through the synthesis report. This report draws on representations provided by directors-general in their annual activity reports, as well as on other sources, such as the overall opinion of the internal auditor. The report also describes the measures taken by the Commission to address management and control deficiencies.

1.19.

Although all directors-general declared that the control procedures put in place give the necessary guarantees concerning the regularity of transactions, the number of directorates-general or services which have issued one or more reservations increased to 16 in 2011 (2010: 13). The total number of reservations increased to 27 in 2011 (2010: 17), the majority of which, as in previous years, refer to weaknesses concerning the regularity of transactions. The estimated total financial impact of reservations increased to 1 959 million euro or 1,5 % of the payments made in 2011 (2010: 423 million euro or 0,3 %) (see Table 1.4 and Chapters 2 to 9).

1.20.

The increases in the number of reservations, directorates-general concerned and financial impact estimated reflect the recognition, by the directors-general, of a high risk of error in some areas, such as rural development, cohesion or the 7th Framework Programme (FP7). This also corroborates the Court’s audit results for 2011 (see paragraphs 1.10 to 1.15).

1.20.

1.21.

Each directorate-general is required to assess the extent to which transactions remain affected by error after the operation of supervisory and control systems. This can be done by calculating a residual error rate (RER). In the simplest terms the RER is the error rate obtained from an examination of a representative sample of transactions less any corrections resulting from the supervisory and control systems. If the RER exceeds 2 %, the director-general must include a reservation in the declaration which is included in the annual activity report.

1.21.

1.22.

The Commission for the first time provided directorates-general with guidance on how to calculate the RER in the instructions for preparing the 2011 annual activity reports. This led to an improvement in some declarations, in particular for the cohesion directorates-general (see paragraphs 5.66 and 6.25) and the Directorates-General for Research and Innovation and for the Information Society and Media (see paragraphs 8.35 to 8.36). However, the Court found weaknesses in these instructions and their implementation. Some directorates-general provided unclear information and/or underestimated RERs, which meant that they failed to make reservations or understated their seriousness (15). For example:

1.22.

It considers that the DGs referred to by the Court followed the instructions and made appropriate reservations.

—

the guidance did not sufficiently explain what to do when it was not possible to calculate a reliable RER;

—

—

amounts were included in the calculation although, due to long delays, they had not been received or otherwise recovered;

—

—

different types of corrective actions (financial corrections/withdrawals and recoveries) were included in the calculation of the RER despite their inherent differences (16). Furthermore, the instructions also foresaw suspensions to be included.

—

1.23.

The Court concludes that the RER is not yet a reliable indicator of the extent to which transactions remain affected by error.

1.23.

1.24.

In the introduction to the synthesis report (17), the Commission takes overall political responsibility for management of the EU budget primarily based on the assurances and reservations in the AARs from directors-general and heads of service.

1.25.

The principal sources for the synthesis report are the AARs. The Commission notes that they all give reasonable assurance concerning the regularity of the underlying transactions. The Court has noticed improvements in some AARs recognising a high risk of error and providing quantitative indicators for measuring regularity of transactions (see paragraphs 1.20 and 1.22). However, the Court emphasises that issues previously identified remain unresolved (see paragraph 1.22 and Annex 1.2 , paragraph 2).

1.25.

1.26.

The synthesis report also draws on the second overall opinion issued by the Commission’s Internal Auditor. The overall opinion is based on the work carried out from 2009 to 2011 by the IAS and the Internal Audit Capabilities as well as the assurance given in the AARs for 2011 by senior management. Compared to last year, the overall opinion has improved by providing more detail on the matters raised. The opinion remains positive, building in most cases on the same reservations as contained in the AARs. The Court considers that the issues identified by the Internal Auditor as requiring further attention — such as the weaknesses in the external aid area (18) — should be appropriately addressed by the directorates-general concerned.

1.26.

All risks brought to the attention of Authorising officers by delegation by the Internal Auditor are appropriately addressed by the directorates-general concerned through the drawing up and implementation of action plans which are rigorously monitored by directors-general and by the Audit Progress Committee of the Commission.

1.27.

The Commission recognises the high risk of error by increasing the amount of payments under reservation (see paragraph 1.20). It states that this effect can be attributed to a series of factors of which some are:

1.27.

1.28.

In relation to this, the Commission also acknowledges that further improvement is required to present transparent information on the quality of financial management and proposes action to address these concerns, such as:

—

reporting in the relevant AARs on implementation, results and audits of financial instrument activities;

—

In addition, further to the Court’s observations concerning financial instrument activities in its 2010 Annual Report, the Commission has conducted specific audit work in 2011 focusing on this area and reported its results in the AARs of DG REGIO (page 73) and DG EMPL (pages 45-46). The Commission intends to pursue with its audit work in this area in 2012 and subsequent years.

—

disclosing, for the AARs concerned, indicators that are relevant to multiannual control strategies as is done for cohesion and further harmonising the materiality criteria in the AARs between cohesion directorates-general and other directorates-general responsible for funds under shared management; and

—

—

the modifications which it has proposed to the Financial Regulation and the sectoral regulations for the 2014 to 2020 period (which are currently being discussed by the European Parliament and the Council) with a view to improving the design of funding schemes, addressing the risk of error, limiting the administrative burden for beneficiaries and other stakeholders, reducing the operating costs of controls and obtaining annual management declarations of assurance for all programmes under shared management.

—

1.29.

The Court considers that the initiatives of the Commission to strengthen accountability and improve transparency of information on the quality of financial management are steps in the right direction. However, the Court has recently pointed out that although these proposals might contribute to increasing assurance that expenditure is legal and regular, the Commission has not shown how it intends to use this information to arrive at the situation that transactions are free from material error (19).

1.29.

The relevant Commission managers will take full account of the underlying assurance declarations in framing their own management declarations thus providing a solid basis for assurance and action to address weaknesses in the management and control systems where necessary.

1.30.

Interruption and suspension of payments may be a useful tool to prevent deficiencies resulting in irregular expenditure, but these instruments need to be complemented by actions correcting the errors (i.e. financial corrections and recoveries). The Court considers that when presenting figures concerning financial correction and recoveries the Commission needs to put these into an appropriate context — the related data from Member States is still incomplete or not fully audited and/or validated and the inherent difference and impact of the two corrective instruments is still not adequately taken into account.

1.30.

1.31.

This section analyses some key 2011 budgetary management data, notably the implementation of budgetary appropriations for commitments and payments, the utilisation of payment appropriations at year end and the level of outstanding budgetary commitments (RAL).

1.32.

The EU budget in 2011 included budgetary appropriations for commitment (20) of 142,5 billion euro (21), and appropriations for payment (22) of 128,3 billion euro (23). The implementing institutions arrived at high implementation rates: 99,3 % of appropriations for commitment (the same as in 2010) and 98,6 % of appropriations for payment (2010: 96,6 %) (24). Appropriations, excluding carryovers, were below the financial framework ceilings in commitments by 0,1 billion euro and in payments by 7,0 billion euro, all reserves included.

1.33.

Implementation of the budget overall resulted in a budgetary surplus (25) at the end of 2011 of 1,5 billion euro (2010: 4,5 billion euro). This will offset, in principle, the own resources to be collected from Member States in the following year(s).

1.34.

However, in the three main funds of the heading 1b of the multiannual financial framework ‘Cohesion for growth and employment’ (European Social Fund (ESF), European Regional Development Fund (ERDF) and Cohesion fund (CF)) there was an acceleration of payment requests by Member States towards the end of the year. In fact, payments could have been up to 5 billion euro higher had the increased need for funds been correctly anticipated and had the required payment appropriations been made available, e.g. by transfers of unused amounts in other areas (26).

1.34.

Moreover, interruptions and suspensions decisions are elements which can hardly be taken into account when forecasting appropriations needed. Interruptions may last up to six months according to the regulation. Upon correction of the deficiency by the Member States and application of financial corrections if necessary, the Commission lifts the interruption and as a consequence, payments may resume.

The Commission wrote to Member States in the beginning of 2012 to emphasise the need to transmit most of the claims by 31 October. It would allow the Commission, in addition to the global transfer exercise, to request an amending budget to the budgetary Authority to increase the payment appropriations to honour the claims received, based on payment claims actually received instead of on the basis of forecasts.

1.35.

The Court notes that under some budget titles a disproportionately high amount of payments was made in the month of December compared to the total payments in the rest of the year (27). Such a concentration of a significant proportion of payments in a limited period may adversely affect the effectiveness of supervisory and control systems and increase the risk of error.

1.35.

1.36.

Outstanding budgetary commitments (RAL) (28) for which payment and/or decommitment have not yet been made (29) increased by 13 billion euro (6,7 %) to 207 billion euro, mostly in policy areas financed through differentiated appropriations (30), and represent the equivalent of 2,3 years worth of differentiated commitments or 2,7 years of differentiated payments at the 2011 spending rate.

1.37.

Most outstanding commitments concern cohesion (31) (see Graph 1.2 ). In this field, outstanding commitments amounted to 136 billion euro (32) (65,5 % of the total amount), representing 2,7 years worth of commitments or 3,2 years worth of payments in that area at the 2011 spending rate. The vast majority of these outstanding commitments (124,6 billion euro or 92 % of the total amount) concerns the current period 2007-2013 (33).

1.36-1.37

The validity of the indicator ‘2011 spending rate’ is relative for payments, because of the lack of available appropriations at year end (see item 1.34 last sentence).

1.38.

The substantially higher level of accumulated outstanding commitments shown for the programming period 2007-2013 can be explained to a large extent by the late implementation of programmes (34). Payments could only be made once Member States' management and control systems were approved by the Commission, as required by the relevant regulations for Structural Funds. According to the interinstitutional agreement on budgetary discipline and sound financial management (35), it must be ensured that sufficient payment appropriations are made available in future years to cover the widening gap between outstanding commitments and appropriations for payments (see also paragraph 1.34).

1.38.

Full execution of the available credits by the Structural Funds in both 2010 and 2011 show that the growth in the RAL can also result from a lack of budget credits available at year end (see also point 1.34).

Graph 1.2 gives evidence of the likely absorption of outstanding commitments accumulated during the financial framework programming period.

Finally, the Commission agrees that sufficient payment appropriations need to be made available in future years. The Commission is firmly committed to present draft budgets covering the widening gap between outstanding commitments and appropriations for payments.

2.1.

This Chapter presents the Court's specific assessment of revenue, which comprises own resources and other revenue. Key information on revenue in 2011 is provided in Table 2.1 . Own resources constitute by far the main source of financing of budgetary expenditure (91 %).

2.2.

There are three categories of own resources (1): traditional own resources (TOR) (customs duties collected on imports and sugar production charge), own resources calculated on the basis of value added tax (VAT) collected by Member States, and own resources derived from Member States' gross national income (GNI).

2.3.

TOR are established and collected by the Member States. Three quarters of these amounts are paid to the Union budget (16 778 million euro, 12,9 % of revenue), the remaining quarter being retained to cover collection costs. Each Member State sends the Commission a monthly statement of established duties (the ‘A accounts’) and a quarterly statement of those established duties which are not included therein (the ‘B accounts’) (2). The principal risks regarding TOR are the completeness, accuracy and timeliness of the duties made available to the Union.

2.4.

The VAT-based own resources are contributions resulting from the application of a uniform rate to Member States' notionally harmonised VAT assessment bases (14 077 million euro, 10,8 % of revenue). The GNI-based own resources result from the application of a uniform rate to the Member States' GNI (87 258 million euro, 67,1 % of revenue). The principal risk to regularity in respect of these own resources is that the underlying statistics either are not compiled in compliance with Union rules or are not processed according to these rules and that, as a result, an incorrect amount of VAT- and/or GNI-based own resources is paid by all Member States.

2.5.

The United Kingdom is granted a correction in respect of budgetary imbalances (‘the UK correction’) which involves a reduction in its payments of GNI-based own resources (3). In addition, Germany, the Netherlands, Austria and Sweden benefit from a reduced call rate for VAT, and the Netherlands and Sweden have a gross reduction in their annual GNI contribution for the period 2007-2013 (4). The principal risk is that the Commission makes an error in these calculations, notably in respect of the complex UK correction calculations.

2.6.

After taking into account the total of TOR, VAT-based own resources and other revenue, the GNI-based own resources are used to balance the budget. Any understatement (or overstatement) of GNI for particular Member States — while not affecting the overall GNI-based own resources — has the effect of increasing (or decreasing) the contributions from the other Member States, until the problem is corrected.

2.7.

The principal risks in other revenue include the Commission’s management of fines and the determination of the financial corrections the Commission imposes on agricultural and cohesion expenditure.

2.8.

Annex 1.1, Part 2 , of Chapter 1 describes the Court's overall audit approach and methodology. For the audit of revenue, the following specific issues should be noted:

2.9.

The Court's audit of transactions underlying the accounts cannot cover undeclared imports or those that have escaped customs surveillance.

2.10.

The Court carried out an assessment of supervisory and control systems in Germany, Spain and France, which together contribute more than one third of the total of TOR. It reviewed their accounting systems and examined the flow of TOR from establishment until declaration to the Commission in order to obtain reasonable assurance that the amounts recorded were accurate and complete. The audit included testing key controls relating to the application of preferential duty rates in France, Local Clearance Procedures (LCP) in Germany and Spain, and warehousing and the treatment of freight and insurance costs in Germany, Spain and France.

2.11.

In addition, the Court reconciled the seven TOR recovery orders included in the sample referred to in paragraph 2.8(a) with the corresponding monthly statement from the Member States concerned (7).

2.12.

Lastly, the Court assessed the supervisory and control systems at the Commission, including its inspections in Member States, the procedure for writing off irrecoverable amounts and the procedure for following up both its and the Court's previous findings.

2.13.

VAT- and GNI-based own resources are based on statistical data for which the underlying transactions cannot be audited directly. For this reason, the audit took as its starting point the Commission's receipt of the macroeconomic aggregates prepared by the Member States, and then assessed the Commission's systems for processing the data in order to determine the amounts to be included in the final budgetary accounts. The Court thus examined the drawing-up of the EU budget and the correctness of the contributions by Member States.

2.14.

The Court assessed the Commission's supervisory and control systems, which are intended to provide reasonable assurance that these resources are correctly calculated and collected. The audit also covered the Commission's management of VAT and GNI reservations and its verification of GNI inventories in the Member States. The Court's audit cannot provide a judgement on the quality of VAT and GNI data received by the Commission from Member States.

2.15.

Annex 2.1 contains a summary of the results of transaction testing. The Court's testing of its sample of transactions found 1,8 % to be affected by error. The most likely error estimated by the Court is 0,8 % (8).

2.15.

2.16.

The Court found that, overall, the recovery orders raised by the Commission reflect the A accounts' statements sent by the Member States.

2.17.

The Court's audit did not find any error in the calculation of Member States' contributions and their payment.

2.18.

The Court found that one of the six transactions tested in respect of other revenue contained an error. The Court reviewed the calculation of a financial correction imposed by the Commission on a Member State in the field of agricultural expenditure (Title 6 in Table 2.1 ). While the Court does not call into question the methodology used by the Commission, it found an error in its application with the result that the Commission underestimated the loss to the EU budget. The financial correction should have been 30 million euro instead of the 21 million euro calculated (9).

2.18.

With regard to the case mentioned by the Court, the calculation of the error rate was made by the Member State on the basis of a methodology accepted by the Commission and using the best information available at that time. The Member State later provided additional and more precise information on the population at risk and the Commission considered it justified to take that information into account without, at that very late stage, re-opening the whole conformity clearance procedure in order to recalculate the error rate.

2.19.

Annex 2.2 contains a summary of the results of the Court’s examination of supervisory and control systems. Some deficiencies in the systems were found, as reported below.

2.20.

In the Member States visited, the Court's audit (see paragraph 2.10) revealed deficiencies in national customs supervision in:

2.20.

(a)

the application of preferential duty rates (10);

(a)

The two cases where evidence of direct transport is missing will be followed up by the Commission in order to determine whether there are any financial consequences.

(b)

the control and ex-post audit of Local Clearance Procedures (LCP) (11);

(b)

(c)

the ex-post audit of customs warehousing (12);

(c)

(d)

the risk analysis applied at import stage (13);

(d)

(e)

the treatment of freight and insurance costs (14).

(e)

2.21.

In its 2010 Annual Report the Court reported that, for one A statement relating to a Member State (15), it was not possible to reconcile the amount of TOR declared with the underlying accounting documents. In DG BUDG's Annual Activity Report for 2011 there is now a reservation on the reliability of the accounting data of this Member State.

2.21.

Remedial action is underway. The Member State submitted a plan of action at the end of November 2011 setting out the corrective measures that will be taken. The plan contains short-term (2012), medium-term (2012-2013) and long-term objectives (2013-2014 and subsequent years). The Commission is monitoring the implementation of the plan. The first stage consists in carrying out an external audit of the accounting system.

2.22.

The Court found that several findings reported by it or by the Commission in previous years continue to be reported by these two institutions without remedial action being taken by the relevant Member States (for example the findings raised in the Court’s Special Report No 1/2010: ‘Are simplified customs procedures for imports effectively controlled?’ (16)).

2.22.

2.23.

A reservation is a means by which a doubtful element in a VAT statement submitted by a Member State can be kept open for correction after the statutory time limit of four years. The use of reservations is thus part of the internal control process. However, the Commission and Member States should endeavour to resolve doubtful elements as soon as possible.

2.24.

In 2011, the Commission placed 46 reservations and lifted 42. According to the Commission, the net effect was to decrease VAT-based own resources by approximately 88 million euro (17). At the end of the year, a total of 156 reservations were in place (see Table 2.2 ). Of the reservations put in place by the Commission, 51 relate to infringements of VAT legislation. These can only be lifted after the infringement procedure has been closed and the effect on the VAT base for the years concerned has been determined.

2.24.

2.25.

The Commission is continuing its efforts to lift long-outstanding VAT reservations. The Court defines such reservations as relating to a year at least 10 years previously, that is reservations still in place at the end of 2011 concerning 2002 and earlier years. There were 15 such reservations at the year end, some dating back to 1995, compared to 16 at the end of 2010 (paragraph 2.23 of the 2010 Annual Report).

2.25.

2.26.

General reservations (18) existed at the end of 2011 on the GNI data of EU-15 Member States for the period 2002 to 2007, EU-10 Member States for 2004-2007, and Bulgaria and Romania for 2007.

2.26.

2.27.

At the beginning of 2011, there were four open specific GNP reservations (19) relating to the period 1995 to 2001. The Commission subsequently lifted two reservations concerning the United Kingdom, leaving a balance of two (20) at the end of 2011.

2.27.

2.28.

Based on Eurostat verification of GNI inventories the GNI Committee adopted the assessment reports on the EU-25 Member States, in July and October 2011. No general reservations were lifted or specific reservations put in place in respect of GNI data for the period 2002 onwards until the end of January 2012 (see paragraphs 2.29 and 2.41, fourth indent, of the 2010 Annual Report).

2.28.

2.29.

The Financial Regulation’s implementing rules (21) set out that the Commission should enforce the recovery of amounts receivable by any available means where neither provisional payments have been made nor guarantees lodged by debtors to cover the full amount by the due date. At the end of 2011 around 2 % (22) of fines pending were not covered either by a provisional payment or by a guarantee after the due date.

2.29.

It is thanks to such negotiations that a part of the uncovered fines (including default interest) imposed on undertakings in a weak financial situation can be collected or covered by a guarantee and a payment plan covered by a financial guarantee can be agreed under the current rules (see paragraph 2.32). Some fines cannot however be collected because they are imposed on undertakings in bankruptcy, in a precarious financial situation or established outside the Union.

2.30.

The Court examined a sample of 14 of such fines and found that in eight cases the Commission had not used all available means to enforce the recovery.

2.30.

These examples show that the Commission always seeks, with regard to debtors in a precarious financial situation, to obtain coverage of fines by negotiating with the companies in order to safeguard collection of the fine.

2.31.

All of these cases concerned debtors which, the Commission claims, were in a precarious financial condition. DG BUDG states in its 2011 Annual Activity Report that it will not seek to enforce recovery if it assesses that the Union's financial interest is best protected by negotiating a payment plan. The Commission is proposing to modify the Financial Regulation’s implementing rules to allow this course of action ‘in exceptional circumstances’.

2.32.

Under Article 28a of the Financial Regulation (23), the safeguarding of assets is a management objective of the Commission. In order to ensure that the guarantees covering fines are safeguarded, the Commission sets minimum credit rating requirements for the financial institutions providing the guarantees. The Court found cases where these requirements were not respected.

2.33.

On 13 May 2011 the Commission made the conditions for such guarantees less stringent to reflect the deteriorating market conditions. The Court found examples where even these updated conditions were not respected.

2.34.

In view of the current state of the banking sector, the Commission states in DG BUDG's Annual Activity Report that it is reviewing its risk management policy.

2.32-2.35.

2.33-2.34.

In the examples referred to by Court, guarantees concerned respected the risk policy in force, when accepted by Commission. Guarantors were later downgraded, which in view of the reduced number of banks fulfilling the criteria still on the market, led Commission again to reconsider its risk policy for bank guarantees in June 2012. While taking into account the evolution of the financial markets, the new decision also ensures a sufficient degree of diversification in the Commission's overall exposure vis-à-vis individual guarantors.

2.35.

Based on its audit work (24), the Court concludes that, for the year ended 31 December 2011,

were free from material error.

2.36.

Based on its audit work, the Court found that the examined supervisory and control systems for revenue were effective. However, the Court draws attention to the matters set out below:

(a)

The Court's audits revealed weaknesses in national customs supervision (paragraph 2.20). The Court concludes that the supervisory and control systems of the Member States audited are only partially effective in ensuring that the TOR recorded are complete and correct.

(a)

(b)

Long-outstanding reservations still exist in connection with VAT-based own resources (paragraph 2.25).

(b)

There has been an ongoing improvement in the frequency of consultations with Member States plus enhancement of the levels of cooperation between the Commission and Member States which will continue.

(c)

At the end of 2011 the Commission had still not lifted general reservations and placed specific GNI reservations in respect of the EU-25 Member States for the period 2002 onwards (paragraph 2.28).

(c)

(d)

At the end of 2011 the Commission had not yet lifted the two remaining specific GNP reservations for the period 1995 to 2001 (paragraph 2.27).

(d)

(e)

The Court takes note of the reasons for not enforcing recovery in all cases (paragraph 2.31). The Commission is proposing to modify the Financial Regulation’s implementing rules to allow this course of action ‘in exceptional circumstances’.

(e)

(f)

The Commission is also reviewing its risk management policy concerning the reliability of guarantees covering outstanding fines and penalties, in order to reflect the situation in the banking sector (paragraph 2.34).

(f)

2.37.

Annex 2.3 shows the result of the Court's review of progress in addressing recommendations made in previous annual reports (2008 and 2009). The following points should be noted:

(a)

In its previous annual reports (for example paragraph 4.14 of the 2008 Annual Report and paragraph 2.20 of the 2009 Annual Report), the Court stated that it continued to find problems with the use of the B accounts. In 2011 the Commission was still finding such problems in its inspections.

(a)

(b)

Concerning GNI-based own resources, the Court has recommended (in, for example, paragraph 2.38 of the 2009 Annual Report) that the Commission should (i) make clear the scope of the opinion it provides in its assessment reports on Member States' GNI data and (ii) take into account its evaluation of supervisory and control systems in the National Statistical Institutes (NSI) for the compilation of national accounts. These recommendations were not implemented by the Commission in its assessment of the GNI data of the EU-25 Member States (see paragraph 2.28).

(b)

2.38.

Following this review, and the findings and conclusions for 2011, the Court recommends that the Commission:

—

Recommendation 1: encourages Member States to strengthen customs supervision in order to maximise the amount of TOR collected.

—

Recommendation 2: continues its efforts to ensure that B accounts are correctly used and that accounting systems allow the Member States' A accounts to be demonstrably complete and correct.