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 (DAS) (5) 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 (6).

1.3.

The aim of the work on the reliability of the accounts of the European Union is to conclude on the extent to which revenue, expenditure, assets and liabilities have been properly registered and that the annual accounts faithfully reflect the financial position as of 31 December 2010, 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 2010 accounts is 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 1.14 for an overview of the results and Chapters 2 to 7 for more details).

1.5.

The Court analysed the reliability of Commission management representations, namely the declarations of Directors-General and the annual activity reports of the Commission’s services and the related synthesis report to assess the extent to which they provide a fair assessment of the quality of financial management, and contribute to the Court’s overall assurance (see paragraphs 1.17 to 1.20 as well as 1.23 to 1.25 and ‘Reliability of Commission management representations’ in Chapters 2 to 7). The work also involved examining the Commission’s internal auditor’s overall opinion which has been issued for the first time and covers the financial management of the Commission in the 2010 budgetary year (see paragraphs 1.21 to 1.22).

1.6.

The Court’s observations concern the annual accounts of the European Union (hereafter ‘the accounts’) for the financial year 2010, drawn up by the Commission’s accounting officer and approved by the Commission in compliance with Article 129 of the Financial Regulation of 25 June 2002 (7) and received by the Court on 27 July 2011. The accounts comprise:

1.7.

The Commission’s accounting officer provided the Court with a representation letter confirming that subject to certain immaterial limitations (8) the accounts are complete and reliable.

1.8.

The Court’s audit of the 2010 accounts found that these were free from material misstatements (see however paragraphs 1.26 to 1.37 and information on the follow-up of observations of prior years concerning the reliability of accounts in Annex 1.2 ).

1.9.

The Court provides specific assessments in Chapter 2 on Revenue and in Chapters 3 to 7 on groups of Activity Based Budgeting (ABB) policy areas (see Table 1.1 ). Each specific assessment provides an introduction, findings and conclusions on the regularity of transactions, the effectiveness of systems and the reliability of Commission management representations, and reports on the Commission’s response to the Court’s previous recommendations.

1.10.

For 2010, the policy group Research and other Internal Policies presented in Chapter 6 consists of policy groups/areas which in the 2009 Annual Report were part of other specific assessments (9).

1.11.

The Court concludes that Revenue (127 795 million euro) (10) and payments in the policy group Administrative and other expenditure (9 264 million euro) were free from material error and that the supervisory and control systems were effective (see Table 1.2 and paragraphs 2.41 to 2.42 and 7.33 to 7.34). Commitments in all policy groups were also free from material error.

1.12.

The Court concludes that the policy group Research and other Internal Policies (8 953 million euro) was free from material error and that the supervisory and control systems were partially effective in ensuring the regularity of payments. However, interim and final payments for the research framework programmes (FPs) were subject to material error (see Table 1.2 and paragraphs 6.48 to 6.49). The Court also concludes that the policy group External Aid, Development and Enlargement (6 543 million euro) was free from material error and that the supervisory and control systems were partially effective in ensuring the regularity of payments. However, interim and final payments were subject to material error (see Table 1.2 and paragraphs 5.35 to 5.36).

1.13.

The Court concludes that the policy groups Agriculture and Natural Resources (55 990 million euro reimbursed expenditure) and Cohesion, Energy and Transport (37 556 million euro reimbursed expenditure) were affected by material error. However, direct payments to farmers covered by the IACS (11) were free from material error. The Court also concludes that the audited supervisory and control systems of the policy group Agriculture and Natural Resources were partially effective. Furthermore, the Court concludes that audit authorities as a whole of the policy group Cohesion, Energy and Transport were partially effective in ensuring the regularity of transactions (see Table 1.2 and paragraphs 3.55 to 3.56 and 4.47 to 4.48)

1.13.

The Commission considers that the IACS is generally an effective control system for limiting the risk of error or irregular expenditure. As regards rural development, the Commission considers that the supervisory and control systems are constantly improving.

As to Cohesion, the Commission notes that, for the second consecutive year, the level of error remains well below those reported by the Court in the period 2006-2008. The Commission considers that this positive development reflects the reinforced control provisions of the 2007-13 programming period and its 2008 action plan (see also reply to paragraph 4.24).

1.14.

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

1.15.

The Court’s audit results for 2010 show an increase in its estimate of the most likely error concerning the payments for the policy group Cohesion, Energy and Transport (12) as compared to the policy group Cohesion of 2009 (13). The Court’s estimate of the most likely error concerning the payments for the other policy groups remained relatively stable.

1.15-1.16.

As to Cohesion, the Commission notes that the most likely error rate for 2010 is well below the levels reported in the financial years 2006 to 2008. The lower error limit in 2010, i.e. 4,7 %, compares favourably with 11 % in 2008.

1.16.

Taken together, this leads to an increase of the most likely error estimated by the Court for payments as a whole from 3,3 % in 2009 to 3,7 % in 2010 (see Graph 1.1 ) (14). The Court found around one third of the transactions tested to be affected by error (2009: a quarter of the total number of transactions).

1.17.

Each Director-General reports annually on the performance of her/his duties in an activity report. It is accompanied by a declaration 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.

1.18.

All the Directors-General declared that the requirements mentioned above were respected. Thirteen Directorates-General or services have issued one or more reservations (15), the majority of which refer to weaknesses concerning the regularity of the underlying transactions (see Annexes x.3 to Chapters 2 to 7).

1.19.

Directors-General include reservations in their declarations of assurance based upon their assessment of the materiality of weaknesses and/or observations related to the building blocks of their annual activity reports. An element of this assessment which has gained in importance particularly in 2010, is the calculation of a residual risk or residual error rate — generally an estimate of the control mechanisms’ impact on the error rate on a multiannual basis — which is compared with the materiality threshold of 2 % to determine whether a reservation is necessary.

1.19-1.20.

As management and control systems vary significantly between policy areas, Commission departments have different approaches in considering and calculating residual error rates. The Commission agrees that the existing guidance may not be sufficiently detailed to ensure a consistent use of terminology and criteria by all the services. It has put in place the peer review procedure to ensure that there is consistency, where different Directorates-General implement similar programmes.

The guidance has to allow the AOD a margin of appreciation in each individual case.

While the quantification of risks in the annual activity reports (AAR) is intended to give an indication of amounts at risk and to estimate the potential financial corrections for the payments in the reference year, the Director-General has at his/her disposal other tools to protect the EU funds, such as interruptions and suspensions of payment and financial corrections. The quantification of risk in the AAR does not have the same function as the error rate established by the Court of Auditors and the Commission considers therefore that they cannot and should not be compared. The Director-General can assess whether ‘mitigating measures’ exist, which limit the risk. In Cohesion, the existing legal requirements are indeed mitigating measures and the assessment of the 2010 exposure to risk should take into account those complementary control mechanisms, which may go well beyond the reference year of the Court’s audits (annual audits by the national audit authorities, complementary audits by the Directorates-General for Regional Policy (DG REGIO) and for Employment, Social Affairs and Inclusion (EMPL), and closure audits at the end the programmes).

1.20.

The standing instructions for the annual activity reports issued by the Secretariat-General and Directorate-General for the Budget do not contain guidance on the estimation of this residual risk or residual error rate. This results in an inconsistent application of this concept by the Directorates-General concerned (e.g. anticipation of expected recoveries without a link to actual amounts, for certain programmes non-quantification of risks of error of up to 5 % taking into account the retention rate provided for in the regulation (16), exclusion of negative audit results for newly started audit programmes with limited audit coverage).

1.21.

The Commission’s internal auditor issued his first overall opinion (17) on the state of control in the Commission. It is based, in particular, on assurances given in the annual activity reports and on work carried out by the Commission’s internal audit service (IAS) and the internal audit capabilities of the different Directorates-General in 2008 to 2010.

1.22.

The scope of the overall opinion is limited to the Commission’s own internal control framework. However, more than 90 % of all errors are identified outside the Commission at the level of beneficiaries. The Commission’s internal auditor assesses this framework to be, taken as a whole, adequate. The Court, however, notes that the supervisory and control systems in place do not prevent or identify and correct errors to such an extent that transactions underlying the budget, taken as a whole, are legal and regular.

1.22.

When examining the Commission’s control systems, the Commission’s Internal Auditor seeks assurance that each service has put into place a control strategy for which the costs of controls are proportionate to the risks of error in the underlying transactions, and which is effective in deterring errors in claims submitted by beneficiaries, and in recovering sums unduly paid when errors do occur.

1.23.

The introduction to the synthesis report (18) states that, by adopting it, the Commission assumes its political responsibility (19) for the implementation of the EU budget by its senior management. The Commission notes that Directors-General were successful in correcting the weaknesses in 25 % of the reservations formulated in 2009. In its view, the related improvements include increased compliance with the eligibility rules for expenditure declared by beneficiaries.

1.24.

The Commission acknowledges, however, that there are still areas which require further improvement, in particular in shared management, and proposes actions to address these concerns, such as:

—

revision of the Financial Regulation and sectoral regulations for the post-2013 period with a view to improve the design of funding schemes, to address the risk of error, to limit the administrative burden for beneficiaries and other stakeholders and to reduce the operating cost of controls,

—

—

rigorous exercise of Commission’s supervisory role and application of systematic and timely interruption of payments, suspension procedures and financial corrections whenever serious control deficiencies are identified,

—

—

enhanced efforts in the area of cohesion to address the significant increase, as compared to 2009, of the rate of error and the volume of erroneous payments caused by the bigger number of transactions and higher amounts of expenditure declared,

—

modernisation of the EU’s public procurement rules which are an important source of error, in particular in the area of cohesion (20),

—

further improvement of the readability and comparability of the annual activity reports.

1.25.

The Commission took note in its synthesis report of the reports from management and stated that they ‘provide comfort to the College as regards the performance of the governance and internal control in place in its services and give reasonable assurance as regards its capacity to achieve its objectives’ (21). The Court, however, underlines that it previously identified issues (22) which remain unresolved:

—

in several areas the scope or scale of reservations should be greater (see paragraphs 1.20; 3.52 to 3.54; 4.45 to 4.46; 5.31 to 5.34; 6.46 to 6.47 and Annexes x.3 to Chapters 2 to 7),

—

—

data from Member States on recoveries or withdrawals is still incomplete or has not yet been audited and/or validated by the Commission (see Annex 1.2 , point 3),

—

In Cohesion, for the programming period 2000-2006 the Commission verifies that information submitted for the closure of programmes is complete and reliable. For the 2007-2013 programming period, the Commission is carrying out a specific audit enquiry on the Member States’ systems for recoveries, in order to gain assurance on the quality of data submitted in the annual statements on recoveries and withdrawals. The first results of this audit are expected to be taken into account in the annual activity reports of 2011.

—

the difference between financial correction mechanisms and recoveries (financial corrections are a consequence of weaknesses identified in supervisory and control systems whereas recoveries are related to irregular payments) and their impact (financial corrections are borne by the taxpayers whereas recoveries are paid by the individual beneficiaries) is still not adequately taken into consideration (see Annex 1.2 , point 3).

—

1.26.

A significant component of payments made by the Commission provide funding in advance for costs which will be incurred by outside bodies at a later date. When these payments are correctly identified as pre-financing they are not treated in the Union’s accounts as definitive expenditure at the time they are made. Instead they are recorded as an asset in the balance sheet until justification is presented for costs incurred (or, less frequently completion of the required activity). On this basis, the Commission records the related expense in the economic outturn account and clears the balance sheet entry.

1.27.

If advances are recognised in the accounts as definitive expenditure, there is no accounting record of the need to present evidence of the final use of the funds. This increases the risk that the use of funds will not be justified, and that irregularities will not be detected or detected only after a considerable delay. This may make it more difficult to recover amounts irregularly paid.

1.27.

Notwithstanding the validity of the principle stated in the second part of the Court’s comment, it should be noted that, for instance, in the case of the financial engineering instruments (FEI’s) the legal basis foresees only one eligibility check of the expenses incurred, at the closure of the programme or at the end of the programming period (whichever comes first). Therefore, whatever the accounting treatment applied to cash disbursements by the Commission to Member States, eventual irregularities will only be detected at that time.

1.28.

The gross recorded value of accumulated pre-financing has more than doubled over the last six years (from 39 billion to 84 billion euro, see first row of Table 1.3 ). The Commission also estimates, during the cut-off exercise (23), the expenditure incurred at year-end by the beneficiaries for which payment requests have not yet been received. These accrued charges (see second row of Table 1.3 ) are deducted from the related gross outstanding pre-financing. The resulting net pre-financing amount in the balance sheet (see third row of Table 1.3 ) has grown significantly too, but less rapidly (from 29 billion to 49 billion euro).

1.28.

1.29.

While some element of estimation for clearing of pre-financing is always likely to be necessary, several Directorates-General in internal policies and external actions continue to record estimates in the accounts even when they have accepted expenditure statements as an adequate basis for making further payments to the beneficiary (24). The use of estimates for accrued charges has increased significantly over time, moving from less than a quarter of the amount advanced in 2005 to nearly a half in 2010 (see second row of Table 1.3 ). The Court has expressed disquiet over the growth of this practice (25).

1.29.

Because of the risk of error in uncertified and/or unaudited statements of expenses, a number of Authorising Officers by Delegation are reluctant to make payments on the basis of such statements. They then use uncertified and/or unaudited expenditure statements as an indication of progress in the action subsidised and pay additional pre-financings, in order to secure a continuous treasury float of payments for the subsidised projects. Clearing is then postponed until the end of the project.

It is worth mentioning that both the Commission and beneficiaries/contractors (in particular in internal policies and external aid) will face a challenge in terms of administrative workload when regular clearings of pre-financings become more effective.

1.30.

Since 2009, there has been a significant increase in payments mainly in financial engineering instruments (FEIs) for which justification of costs and/or activity is only expected at a later date. The audit has brought to light a significant number of cases where initially the Commission did not properly record payments as giving rise to an asset. Thus, in contradiction to the principle of substance over form (26) the accounts gave the impression that recipients have provided full justification for use of the funds, when in practice this was not the case.

1.30.

1.31.

Contributions to FEIs form the single most significant element of this problem. The relevant regulations in the areas of Cohesion and Rural development (27) provide for the inclusion of payments made from operational programmes to establish or contribute to funds implementing FEIs in the declarations of expenditure. The Commission has adopted the practice of recording the full amounts declared by Member States as expenses in the economic outturn account as if they were definitive settlement of a claim.

1.31.

On the basis of the information it requested and obtained from Member States in June 2011, the Commission has treated payments to FEIs as assets in the 2010 accounts including the comparative figures for 2009. See notes 2.5, 2.9, 2.10 and 3.4 to the consolidated accounts where all details are provided. See also reply to paragraph 1.32.

1.32.

However, according to the sectoral regulations, authorities in the Member States are only required to present a final declaration on their use in form of loans, guarantees or equity investments provided to final recipients at a later date (typically at the end of the programme period). This meant that in 2010 the Commission had no comprehensive information on the amounts actually used by the FEIs, and it was only after this problem came to light in early 2011 that it was able to collect the necessary information from the Member States. As a result, around 4,8 billion euro were not recorded as pre-financing in the balance sheet of the 2010 provisional accounts (28).

1.32.

The assets totalling 4,8 billion euro will be entirely depreciated by the end of 2015, by virtue of the application of the current legal basis.

See also reply to paragraph 4.32.

1.33.

Additionally a number of other grant schemes allow cash advances to be made to beneficiaries, prior to presentation of final cost statements. In practice these are treated too as if they were definitive expenditure. Therefore, they are not recognised and presented in the balance sheet. The amount concerned is difficult for the Commission to quantify.

1.33.

See also reply to paragraph 1.36.

1.34.

The Commission has sought to obtain sufficient information for the final accounts. According to the information received from the Member States at the end of June 2011, the EU contribution to FEIs amounts to 6,4 billion euro. Based on the estimation of the amounts not used by FEIs as at 31 December 2010, the most significant adjustments to be made were a reclassification from expenses to assets in the 2009 and 2010 accounts (see notes 2.5, 2.9, 2.10 and 3.4 to the 2010 accounts explaining the adjustments made).

1.35.

The Commission corrected material problems concerning the completeness of pre-financing through cut-off bookings and adjustments (see paragraph 1.34). Nonetheless, the lack of current information on the EU funds actually used by the Member States reduces significantly the usefulness for management of the accounting information, notably for the Commission in its responsibilities for implementing the budget.

1.35.

1.36.

The Commission needs to take further action to ensure that necessary information is available, transactions are given consistent treatment in the accounts, and all Directorates-General maintain complete, accurate and up to date accounting records.

1.36.

Cost efficiency needs to be considered as the Commission must avoid that the reporting on advances required from beneficiaries becomes extremely complex and resource-consuming for all parties concerned.

The Commission has already proposed an appropriate modification to the current sectoral legal basis in the structural funds regulation. It will also introduce appropriate provisions in the proposals for future legal bases.

1.37.

The increased use of pre-financing in the EU budget and of new types of financial instruments makes it urgent for the Commission to revisit the relevant accounting rule in order to provide adequate guidance on the recognition and clearing of pre-financing. This should be accompanied by improved supervision (29).

1.37.

The Commission also emphasises that addressing the clearing of pre-financing before the final payments is not simply an issue of accounting guidance. In practice it means reimbursing interim cost statements of which the degree of compliance with complicated eligibility rules needs first to be verified. This cannot be obtained without a substantial increase in administrative workload, both for the beneficiaries and the Commission’s services.

In addition, it would necessitate changes in the Financial Regulation and in sectoral legislation which, at the moment, allow for successive pre-financings based on progress in the actions subsidised. The Commission has already proposed in the review of the relevant article of the Financial Regulation, that regular clearing of pre-financing becomes obligatory.

Finally, the Commission would point out that its accounting services have provided guidance, training and organised workshops on pre-financing during 2010 and 2011 and this will be continued.

1.38.

This section summarises the implementation of the EU general budget in 2010.

1.39.

The total appropriations available in 2010, taking into account appropriations carried over (30), assigned revenue (31) and amending budgets (32), amount to 147,3 billion euro for commitments and 130,5 billion euro for payments, an increase of 0,9 % and 4,8 % respectively compared to total appropriations available in 2009 (see Diagrams III and IV in the Annex to this Annual Report).

1.40.

The budgetary commitment appropriations of the year were 0,6 billion euro above the financial framework ceiling due to the utilisation of funds for which this is allowed (33). The total payment appropriations remained below the ceiling by 11,4 billion euro.

1.41.

The Commission produces a series of documents containing inter alia the following information on the implementation of the budget of the European Union (34):

—

The budgetary surplus at the end of 2010 was 4,5 billion euro (2009: 2,3 billion euro).

—

Utilisation rates in 2010 for commitments and payments were 99 % and 97 % respectively.

—

3,3 billion euro of accumulated outstanding commitments were decommited in 2010 (2009: 1,9 billion euro). The increase in decommitments stems mainly from title 04 — Employment and Social Affairs (1,4 billion euro).

—

—

1,5 billion euro of unused payment appropriations (excluding assigned revenues (35)) were carried over from 2010 to 2011.

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For the policy areas Agriculture and Rural Development (title 05), Cohesion (titles 04 and 13) and Fisheries and Maritime Affairs (title 11), the overall utilisation rate of payment appropriations was 98 %.

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In the policy area Regional Policy, payment appropriations were higher than foreseen (106 % of the initial budget). This was financed by transfers amounting to 1,8 billion euro mainly from titles 04 (Employment and Social Affairs) and 05 (Agriculture and Rural Development), for which payments were lower than expected due to interruption and suspension of payments for the European Social Fund (88 % implementation), lower claims in Rural Development (94 % implementation) or slow processing of closures of programmes (36).

—

1.42.

In the course of the financial year 2010 relevant regulations (37) were modified in order to provide for additional pre-financings to structural actions for the 2007-2013 period. On the basis of the adapted regulations additional advances for the European Social Fund amounting to 371 million euro, for the Cohesion Fund for an amount of 404 million euro and for the European Fisheries Fund for an amount of 0,8 million euro were paid to those Member States that were particularly affected by the economic crisis. For Agriculture and Rural Development, additional pre-financing of 401 million euro was paid to Member States during the budget year 2010 without an appropriate legal basis. The amount concerned is reported as a legality and regularity error in Chapter 3 (38).

1.42.

1.43.

Outstanding budgetary commitments representing open commitments for which payment and/or decommitment have not yet been made (39) increased by 17 billion euro (9,7 %) to 194 billion euro, mostly in policy areas financed through differentiated appropriations (40), and represent the equivalent of 2,2 years worth of differentiated commitments or 2,8 years of differentiated payments at the 2010 spending rate in the respective policy areas.

1.43-1.44.

1.44.

Most outstanding commitments are in the Cohesion policy group (see Graph 1.2 ). In this field, outstanding commitments amounted to 128 billion euro (41) (around 66 % of the total amount), representing 2,6 years worth of commitments or 3,4 years worth of payments in that area at the 2010 spending rate. The vast majority of these outstanding commitments (113,2 billion euro or 88 % of the total amount) refers to the current period 2007-2013. This shows the impact of the efforts to settle outstanding commitments by payments prior to the application of the automatic decommitment rule (n + 2 rule/n + 3 rule (42)).

2.1.

This chapter presents the Court’s specific assessment of Revenue which comprises own resources and other revenue. Key financial information on Revenue in 2010 is provided in Table 2.1 . Own resources constitute by far the main source of financing of budgetary expenditure (93,8 %). The chapter also includes a summary of how the Commission has responded to the findings of the Court’s Special Report No 2/2008 concerning Binding Tariff Information.

2.2.

There are three categories of own resources (1): traditional own resources (customs duties collected on imports and sugar production charge — TOR), 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, 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).

2.4.

The VAT- and GNI-based own resources are contributions resulting from the application of uniform rates to Member States’ notionally harmonised VAT assessment bases or to the Member States’ GNI respectively.

2.5.

Certain Member States benefit from a reduced call rate for VAT (3) and a gross reduction in their annual GNI contribution (4) for the period 2007-2013. In addition, 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.

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.

Annex 1.1, Part 2 , describes the Court’s overall audit approach and methodology. For the audit of Revenue, the following specific points should be noted:

2.8.

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

2.9.

The Court carried out an assessment of supervisory and control systems in Italy, the Netherlands and the United Kingdom which contribute around 38 % of the total of TOR. It reviewed their accounting systems and examined the flow of TOR from establishment to declaration to the Commission in order to obtain reasonable assurance that the amounts recorded were accurate and complete. The auditors carried out testing of key controls relating to the application of preferential duty rates, the granting of the ‘super simplification’ for users of Local Clearance Procedures (notification waiver) (6) and the treatment of freight and insurance costs in these Member States.

2.10.

In addition, for the six TOR recovery orders included in the sample referred to in paragraph 2.7 the Court reconciled the selected monthly statement with the underlying accounting records of the Member State concerned (7).

2.11.

The Court also assessed the supervisory and control systems at the Commission including its inspections in Member States.

2.12.

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 receipt by the Commission 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 budget and the correctness of the contributions by Member States.

2.13.

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, its verification of GNI inventories in the Member States and its monitoring of the application of the VAT directives. The Court’s audit does not provide a judgement on the quality of VAT and GNI data received by the Commission from Member States.

2.14.

Annex 2.1 contains a summary of the results of transaction testing. The Court’s testing of its sample of transactions found them to be free from a material level of error (8). The most likely error estimated by the Court is 0 %. However, some systems weaknesses relating to transaction testing were observed and are set out below.

2.15.

The Court found that overall the Member States’ A accounts’ statements sent to the Commission were free from material error. However, for one transaction (9) out of the six audited, it was not possible to reconcile the amount of TOR declared with the underlying accounting records.

2.15.

2.16.

The Court's audit found the calculation of Member States' contributions and their payment to be free from material error. However, the Court detected an error in the Commission’s calculation of the 2006 definitive amount (10) of the UK correction entered in the 2010 budget, resulting in an excessive correction granted to the United Kingdom of 189 million euro (3,5 % of UK correction 2006) (see Annex 2.5 , in particular its paragraphs 6 and 7). In order to correct the error the Commission has exceptionally proposed to amend the 2011 budget, in agreement with all Member States.

2.16.

2.17.

The Court found that overall the transactions tested in respect of other revenue were free from material error.

2.18.

Annex 2.2 contains a summary of the results of the examination of systems. The Court found that overall systems were effective in ensuring the regularity of transactions.

2.19.

As in previous years (11), the Court detected problems in the procedures and systems which affect the amounts included in the B accounts’ statements. These concern in particular:

2.19.

2.20.

The national authorities of Italy, the Netherlands and the United Kingdom were not able to fully justify the amounts reported in the B accounts’ statements, because they did not match the underlying documents.

2.20.

2.21.

In the Member States visited the Court’s audit also revealed deficiencies in the performance of checks before the release of goods, in particular concerning the application of preferential duty rates, the granting of the ‘super simplification’ for users of Local Clearance Procedures and the treatment of freight and insurance costs. Partially effective national customs supervision increases the risk that incorrect amounts of TOR are collected.

2.21.

2.22.

Reservations are a means to keep doubtful elements in the VAT statements submitted by Member States open for correction after the statutory time-limit of four years. In 2010, 52 reservations were placed and 67 were lifted. At the end of the year, a total of 152 were in place (see Table 2.2 ). The net effect of the lifting of the 67 reservations was to increase VAT-based own resources by almost 90 million euro (15).

2.23.

The Court noted good progress in the lifting of long-outstanding VAT reservations. Eight of these were still in place at the end of 2010 covering years prior to 2000, compared to 20 at the end of 2009. The Court considers that long-outstanding reservations should be defined as those reservations relating to a year at least ten years previously. This adds a further eight reservations which concern 2001.

2.23.

2.24.

The Commission is responsible for ensuring the correct application of the VAT directives and should monitor the transposition and the conformity of the national implementing measures put in place by Member States. An incorrect or incomplete transposition could affect the amount of VAT received and thus the amount payable in VAT-based own resources. In 2010, three VAT directives came into effect: two concerning the ‘VAT package’ (16) and one relating to the common system of VAT to combat tax evasion for intra-Community transactions (17).

2.25.

For seven Member States, the Commission’s assessment of national implementing measures of the ‘VAT package’ was still ongoing at the end of 2010, 12 months after the directives entered into force. By the same date, the Commission’s assessment procedure of the implementation of the VAT directive on combatting tax evasion had only started in respect of two Member States.

2.25.

Concerning the VAT directive on combating tax evasion, the Commission launched infringement cases in March 2010 for nine Member States in order to be in the position to make a proper assessment.

In the course of 2009 and 2010 the Commission raised and discussed the problem of another two Member States in the ATFS (Anti Tax Fraud Strategy Group) and SCAC (Standing Committee on Administrative Cooperation). A full assessment will therefore be available by the end of 2011.

2.26.

General reservations (18) existed at the end of 2010 on GNI data of EU-15 Member States for the period 2002 to 2006, and on EU-10 Member States for the period 2004 to 2006, pending the completion of the analysis of the updated or new GNI inventories (19).

2.27.

At the beginning of 2010, there were four (20) open specific GNP reservations (21) relating to the period 1995 to 2001. During 2010, the Commission did not lift any of these. As no additional specific reservations were set, the number of outstanding specific reservations at the year-end is unchanged.

2.27.

2.28.

In 2010, the Commission carried out visits in six Member States to verify GNI inventories and performed direct verification in four of these, but restricted to a very small number of GNI components. As set out in Eurostat guidelines, this direct verification approach is not normally expected to draw conclusions on all parts of GNI estimates.

2.28.

2.29.

At the end of 2010, Eurostat had not prepared any assessment reports on GNI data of Member States for the period 2002 onwards and could not therefore replace any general reservations (see paragraph 2.26) with specific reservations concerning these years.

2.29.

2.30.

Supervisory and control systems in the National Statistical Institutes (NSI) of Member States should help ensure the comparability, reliability and exhaustiveness of GNI data (22). However, Eurostat has not yet completed its assessment of the supervisory and control systems in the NSI and has not yet adopted guidelines on the application of these systems for the compilation of National Accounts in Member States.

2.30.

2.31.

In its calculation of the UK correction for reference years from 2007 to 2009 the Commission did not include around 2 % of total payments of EU funds in the figure for total allocated expenditure, a basic element in the calculation of the correction. The Commission excluded these sums because information on where the expenditure was made was not available. The Commission did not check whether this expenditure could have been allocated for the purposes of the calculation (see Annex 2.5 , in particular its paragraphs 3 to 5 and 10 to 11).

2.31.

2.32.

The Court also noted that in its definition of ‘actual payments’ for calculating total allocated expenditure the Commission:

(a)

does not include expenditure financed by assigned revenue (earmarked expenditure) which increased significantly from 2007 to 2009, from 1 % to 5 % of total payments from the budget;

(a)

(b)

does not deduct from allocated expenditure amounts covered by recovery orders cashed, notably relating to Budget Title 6 ‘Contributions and refunds in connection with Community agreements and programmes’: receipts from this source varied between 3 % and 5 % of payments over the same period.

(b)

2.33.

The omissions noted in the previous two paragraphs reduce the precision of the calculation of the UK correction. It is not possible to say in which direction they affect the result of the calculation.

2.34.

According to the Financial Regulation’s implementing rules (23), recovery orders may be waived in cases where the foreseeable cost of recovery would exceed the amount to be recovered, where the amount receivable cannot be recovered in view of its age or of the insolvency of the debtor and where the recovery is inconsistent with the principle of proportionality. The waiver decision must be substantiated.

2.35.

The audit of the systems for waivers revealed that in general the Commission applied the procedures set for waiving recovery orders and substantiated the decisions taken. However, the Court found weaknesses in the Commission’s management during the period 1995-2008 which increased the risk that the amounts receivable are not recovered. For each of the waiver cases below, one or more weaknesses were identified (Examples 2.1, 2.2 and 2.3).

2.35.

2.36.

Annex 2.3 contains a summary of the results of the review of Commission management representations. The Court describes significant observations in further detail below.

2.37.

The significant system weakness revealed by the Court’s audit on the reliability of the accounts for TOR in one Member State (see paragraph 2.15) was also found by the Commission’s inspection work. The Court considers that this weakness should have been mentioned in the Annual Activity Report of DG BUDG.

2.37.

2.38.

The error which the Court detected in the Commission’s calculation of the 2006 definitive amount of the UK correction (see paragraph 2.16) is described in the Annual Activity Report of DG BUDG, which sets out the additional control measures put in place subsequently. However, taking into account the Commission’s own materiality criteria, in the Court’s view a reservation should have been made in the declaration of assurance of the Director-General of DG BUDG.

2.38.

2.39.

Based on its audit work (24), the Court concludes that:

for the year ended 31 December 2010 were free from material error.

2.40.

Based on its audit work, the Court concludes that the supervisory and control systems were effective in ensuring the regularity of Revenue. However, the Court draws attention to the weaknesses set out below:

(a)

The Court’s audits continue to reveal problems with the use of the B accounts (paragraph 2.19) and with the reliability of the A and B accounts’ statements (paragraphs 2.15 and 2.20). Weaknesses were also found in national customs supervision (paragraph 2.21). The Court concludes that supervisory and control systems of Member States audited are only partially effective at ensuring that TOR recorded are complete and correct.

(a)

(b)

Long-outstanding reservations still exist (paragraph 2.23). The Court also found weaknesses in the Commission’s monitoring of the Member States’ application of the VAT directives examined (paragraph 2.25).

(b)

Concerning the VAT Package, the assessment of the 5 remaining Member States is still ongoing and the Commission expects to finalise it by September 2011. Concerning the VAT directive on combating tax evasion, the Commission, after having received the late notifications from Member States, is now in a position to finalise the full monitoring of the implementation by the end of 2011 via a report from the Commission to the Council. (see paragraph 2.25).

(c)

The Commission has not yet completed its verification of GNI inventories covering GNI data of Member States for the period 2002 onwards (paragraph 2.29), and has not yet lifted the remaining four open specific GNP reservations on the period 1995-2001 (paragraph 2.27).

(c)

(d)

There was an error in the definitive calculation of the 2006 UK correction (25) (see paragraph 2.16). There were weaknesses in the calculation of the correction for subsequent years (see paragraphs 2.31 to 2.33). The Court concludes that supervisory and control systems of the Commission are partially effective at ensuring that the UK correction is correctly calculated.

(d)

The Commission considers the methodology for calculating the allocated expenditure to be sufficiently robust to calculate the UK's share therein. The existence of these ’weaknesses’ raised by the Court is the result of the assessment that the marginal cost of the search for further refinement in the calculation would not be cost-effective.

(e)

The losses suffered by the budget relating to the waiver of amounts receivable might have been avoided or at least reduced if the Commission had been more proactive (paragraph 2.35).

(e)

2.41.

Annex 2.4 shows the result of the Court’s review of progress in addressing recommendations made in previous annual reports. The following points should be noted:

—

in the area of TOR, the Commission has made an assessment of weaknesses relating to simplified customs procedures for imports. The Court maintains its view concerning the entry into the B accounts of customs debts incurred on seized goods,

—

The Commission's position concerning the entry into the B accounts of customs debts incurred on seized goods differs from that of the Court of Auditors. The Commission has examined the rulings of the ECJ in Elshani (Case C-459/07) and Dansk Logistik (Case C-230/08) and concluded that its current position can be maintained.

See Commission’s reply in Annex 2.4.

—

concerning GNI-based own resources, the guidelines on communications of major statistical revisions are not always applied by Member States and no progress has been made in respect of the implementation of a common revision policy in the EU.

—

—

continues its efforts to ensure that B accounts are correctly used, that accounting systems allow A and B accounts’ statements of Member States to be demonstrably complete and correct, and that national customs supervision is further strengthened (TOR),

—

—

presents to the GNI Committee the assessment reports on GNI data of Member States so as to be able to replace in 2011 all existing general reservations with specific reservations for the period 2002 onwards. In the assessment of Member States’ GNI, it should take into account the evaluation of supervisory and control systems in the NSI for the compilation of National Accounts and make clear the scope of the opinion it provides (GNI-based own resources).

—

2.42.

In 2008, the Court published its Special Report No 2/2008 concerning Binding Tariff Information (BTI) (26). BTI is a tariff classification decision given in writing by the customs authorities of a Member State at the request of economic operators. It is legally binding on all EU customs authorities vis-à-vis the holder for up to six years from the date of issue.

2.43.

Overall, the BTI system was found to be functioning well. Nevertheless improvements were needed.

2.44.

In its 2007 discharge decision (27) the Parliament urged the Commission to endeavour to resolve the outstanding weaknesses and the tariff-classification disputes. The Council invited the Commission to further improve the BTI system and to monitor its implementation and application in the Member States but stressed that the possible financial responsibility of Member States, if any, should be assessed with the utmost caution (28).

(a)

Recommendation: The Commission should reduce the delays in resolving inconsistent tariff classifications (paragraphs 43 and 44 of Special Report No 2/2008).

(b)

Recommendation: The Commission should evaluate the full financial impact of incorrect BTI and update the European Binding Tariff Information (EBTI-3) database (paragraphs 45 and 46 of Special Report No 2/2008).

(c)

Recommendation: The legislation, complemented by the administrative guidelines of the Commission, should be strengthened (paragraph 47 of Special Report No 2/2008).

(d)

Recommendation: The Commission should encourage Member States to correct weaknesses detected (paragraph 48 of Special Report No 2/2008).

(d)

2.45.

The Commission has improved the BTI system and monitored its implementation and application in the Member States. However, the key remedial measures will only be effective when the IPMCC come into force and the Commission should continue its efforts to reduce the time taken to resolve classification issues.

2.45.

3.1.

This chapter presents the Court’s specific assessment of Agriculture and Natural Resources, which comprises policy areas 05 — Agriculture and rural development, 07 — Environment, 11 — Maritime Affairs and Fisheries and 17 — Health and Consumer Protection. Key information on the activities covered and the spending in 2010 is provided in Table 3.1.

3.2.

The objectives (1) of the common agricultural policy as set out in the Treaty are to increase agricultural productivity, thus to ensure a fair standard of living for the agricultural community, to stabilise markets, to assure the availability of supplies and to ensure that supplies reach consumers at reasonable prices.

3.3.

The EU budget finances the common agricultural policy expenditure mainly through two Funds (2): the European Agricultural Guarantee Fund (‘EAGF’), which fully finances EU direct aid and market measures (3), and the European Agricultural Fund for Rural Development (‘EAFRD’), which co-finances at varying rates rural development programmes.

3.4.

The main measures financed by EAGF (43 990 million euro) are:

3.5.

The EAFRD co-finances Rural Development expenditure which covers a large number of measures such as agri-environmental schemes, compensatory amounts for farming in less-favoured areas, investments in farms and infrastructure in rural areas (11 497 million euro) (6).

3.6.

Under all EAGF direct aid schemes (7) and certain EAFRD aid schemes, beneficiaries of EU aid have a legal obligation to fulfil ‘cross compliance’ requirements relating to the protection of the environment, public health, animal and plant health, animal welfare (Statutory Management Requirements) and to the maintenance of agricultural land in good agricultural and environmental condition (GAEC) (8). EU legislation provides that when non-compliance with those requirements is noted, a reduction or exclusion (9) shall be applied on the overall amount of direct payments made in respect of the applications submitted in the course of the calendar year of the finding.

3.6.

3.7.

Only farmers are eligible for EU area aid. A farmer is defined as a natural or legal person who carries out an agricultural activity which is defined as the production, rearing or growing of agricultural products including harvesting, milking, breeding animals and keeping animals for farming purposes, or maintaining the land in GAEC (10). The maintenance of land in GAEC constitutes the minimum agricultural activity required of the applicant to be eligible for aid.

3.8.

Expenditure under both funds is channelled through some 80 (11) national or regional paying agencies in the 27 Member States. These paying agencies are responsible for making payments to the beneficiaries and prior to doing so, they must, either directly or through delegated bodies, satisfy themselves of the eligibility of the aid applications. The accounts and payment records of the paying agencies are examined by independent audit bodies (certification bodies) which report to the Commission in February of the following year.

3.8.

3.9.

The Union’s policy on the Environment is designed to contribute to protecting and improving the quality of the environment, human health, and rational utilisation of natural resources, including at international level. The Financial Instrument for the Environment (LIFE) (12) is the most important instrument in terms of funding (205 million euro expenditure in 2010) covering the EU contribution for projects in the Member States in favour of nature and biodiversity, as well as environment policy, governance, information and communication.

3.10.

The European Fisheries Fund (13) (EFF) is the main instrument (395 million euro expenditure (14) in 2010) for the policy area Maritime Affairs and Fisheries. In its designated domain the common fisheries policy pursues the same objectives as the common agricultural policy (see paragraph 3.2).

3.11.

Concerning Health and Consumer Protection, the EU contributes, on the one hand, to human, animal and plant health protection and, on the other hand, to consumer welfare (478 million euro expenditure in 2010).

3.12.

For EAGF the expenditure mainly consists of reimbursements (interim/final payments) by the EU of subsidies paid to farmers and other beneficiaries by the Member States.

3.13.

For EAFRD, in 2010, all payments charged concerned advances and interim payments. For the EFF, only interim payments were made.

3.14.

There are no advance payments for Health and Consumer Protection, Member States are reimbursed on the basis of their declared expenses. For Environment, pre-financing of up to 40 % of the EU contribution for a LIFE project, as established in the grant agreement, is foreseen.

3.15.

In the area of EAFRD, payment appropriations were decreased by 1 160 million euro (around 9 % of inititial payment appropriations) at the end of 2010 (15) primarily as a consequence of a slowdown in Member States’ expenditure due to difficulties in providing national co-financing in the current economic situation.

3.16.

Annex 1.1 , Part 2 , describes the Court’s overall audit approach and methodology. For the audit of policy group Agriculture and Natural Resources the following specific points should be noted:

3.17.

Annex 3.1 contains a summary of the results of transaction testing. The Court’s testing of its sample of transactions found 37 % to be affected by error. The most likely error resulting from transaction testing estimated by the Court is 2,3 % (17). The Court also identified irregular advance payments to Member States of 401 million euro (equivalent to 0,7 % of total payments for the year) by the Commission (see paragraph 3.22) (18).

3.17.

Moreover, the risk to the EU budget is adequately covered by the conformity clearance procedure.

The 401 million euro advance payments do not represent irregular payments to final beneficiaries. Moreover, the recovery of the amounts in question is ongoing and will be completed by the end of 2011.

3.18.

The Court’s audit confirmed previous years’ results that frequency and impact of errors in payments were not distributed evenly across all the policy areas. The Court notes that Rural Development expenditure is particularly prone to error. Direct payments covered by IACS, by contrast, were not found to contain material error.

3.18.