I.

We have audited:

II.

In accordance with Articles 317 to 318 of the TFEU and the Financial Regulation, the Commission is responsible for the preparation and fair presentation of the consolidated accounts of the European Union on the basis of internationally accepted accounting standards for the public sector and for the legality and regularity of the transactions underlying them. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error. The Commission bears the ultimate responsibility for the legality and regularity of the transactions underlying the accounts of the European Union (Article 317 of the TFEU).

III.

Our responsibility is to provide, on the basis of our audit, the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the transactions underlying them. We conducted our audit in accordance with the IFAC International Standards on Auditing and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions. These standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the consolidated accounts of the European Union are free from material misstatement and the transactions underlying them are legal and regular.

IV.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated accounts and the legality and the regularity of the transactions underlying them. The procedures selected depend on the auditor's judgment, including an assessment of the risks of material misstatement of the consolidated accounts and of material non-compliance of the underlying transactions with the requirements of the legal framework of the European Union, whether due to fraud or error. In making those risk assessments, internal control relevant to the preparation and fair presentation of the consolidated accounts and legality and regularity of underlying transactions, is considered in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated accounts.

V.

For revenue, our examination of Value Added Tax and Gross National Income-based own resources takes as its starting point the relevant macroeconomic aggregates on which these are calculated, and assesses the Commission's systems for processing these until the contributions of the Member States have been received and recorded in the consolidated accounts. For traditional own resources, we examine the accounts of the customs authorities and analyse the flow of duties until the amounts are received by the Commission and recorded in the accounts.

VI.

For expenditure, we examine payment transactions when expenditure has been incurred, recorded and accepted. This examination covers all categories of payments (including those made for the purchase of assets) other than advances at the point they are made. Advance payments are examined when the recipient of funds is required to provide or provides justification for their proper use and the advance payment is cleared or becomes recoverable.

VII.

We consider that the audit evidence obtained is sufficient and appropriate to provide a basis for our opinions.

VIII.

In our opinion, the consolidated accounts of the European Union for the year ended 31 December 2014 present fairly, in all material respects, the financial position of the Union as at 31 December 2014, the results of its operations, its cash flows, and the changes in net assets for the year then ended, in accordance with the Financial Regulation and with accounting rules based on internationally accepted accounting standards for the public sector.

IX.

In our opinion, revenue underlying the accounts for the year ended 31 December 2014 is legal and regular in all material respects.

X.

Expenditure recorded in 2014 under the multi-annual financial framework headings 1 to 4 (3), covering operational spending, is materially affected by error. Our estimated level of error for payments underlying the accounts is 4,4 %. Our conclusion is corroborated by the Commission’s analysis of amounts at risk presented in the synthesis report.

XI.

In our opinion, because of the significance of the matters described in the basis for adverse opinion on the legality and regularity of payments underlying the accounts paragraph, the payments underlying the accounts for the year ended 31 December 2014 are materially affected by error.

XII.

The Financial Statement Discussion and Analysis is not a part of the financial statements. The information given in the Financial Statement Discussion and Analysis is consistent with the financial statements.

1.1.

EU spending is a significant instrument for achieving policy objectives. Other significant instruments are the use of legislation and the freedom for goods, services, capital and people to move throughout the Union. On average EU spending represents 1,9 % of EU Member States’ (see Graph 1.1 ) total general government expenditure.

1.2.

Our role, as laid down in the Treaty includes:

The work we do supporting the statement of assurance fulfils the first and second of these objectives. It assists us in identifying risks affecting economy, efficiency and effectiveness. It provides an important input to our opinions on proposed financial legislation.

1.3.

This chapter of the annual report:

1.4.

Our observations concern the consolidated accounts (5) (the ‘accounts’) of the European Union for the financial year 2014. We received them, together with the accounting officer’s letter of representation, on 23 July 2015 (6). The accounts are accompanied by a ‘Financial Statement Discussion and Analysis’ (7). This analysis is not covered by our audit opinion. In accordance with auditing standards, we have, however, assessed its consistency with information in the accounts.

1.5.

The accounts (summarised in Annex 1.3 ) show that at 31 December 2014 total liabilities amounted to 220,7 billion euro compared to 162,7 billion euro of total assets. The economic result for 2014 amounts to a deficit of 11,3 billion euro (see also paragraphs 2.12 and 2.13).

1.6.

Our audit found that the accounts were not affected by material misstatements (see also Annex 1.2 ). Our observations on the financial and budgetary management of EU funds are made in chapter 2.

1.7.

In 2014 the Commission has made several changes in the presentation of the accounts. These take account of the new MFF, and further strengthen alignment with international standards. There are notable improvements in the presentation of certain notes to the accounts (8).

1.7.

1.8.

The following issues affect the accounts:

(a)

The Commission has made progress in terms of the presentation of Note 6 to the accounts (on ‘Protection of the EU budget’) as discussed in paragraph 1.13 of our 2013 annual report and point 2 of this year’s follow-up table ( Annex 1.2 ). The note now provides more focussed information. For cohesion, it discloses the extent to which corrections are made prior to expenditure being recorded, during implementation and at closure. The note now describes (but does not always quantify) the impact on the EU budget of the corrective measures (for example, creation of assigned revenue, withdrawals and replacements by Member States, etc) (9).

(a)

Regarding Note 6, it provides a summary of the results of the Commission's corrective actions (decided and implemented) and also its preventive actions for the year 2014. More detailed information on this subject is included in the annual Commission Communication on the Protection of the EU Budget.

(b)

Note 2.5.2 on pre-financings (advances to Member States) indicates that the Commission has limited information on the use of funds advanced for financial instruments under shared management (FISM) (3,8 billion euro) and other aid schemes (3,6 billion euro). This may impact their valuation at year end. The Commission may need to make significant adjustments at closure of the 2007-2013 programming period.

1.9.

We examine EU revenue and spending to assess whether it is in accordance with applicable laws and regulations. We present our audit results on revenue in chapter 4 and on expenditure in chapters 5 to 9 (see Table 1.1 ).

1.10.

Revenue was free from material error (see paragraph 4.26). In expenditure, we continue to find a material level of error. The estimated level of error in expenditure (after taking account of relevant corrective actions, see paragraph 1.32 (10)) was 4,4 %, at a similar level to 2013 (4,5 % (11)) (see Table 1.1 ). Spending on MFF heading 5 (‘Administration’) was free from material error (see paragraph 9.15). Expenditure for all remaining headings, covering operational spending, was affected by material error (see paragraphs 5.32 to 5.33, 6.76 to 6.77, 7.72 to 7.73 and 8.26 to 8.27).

1.10.

1.11.

Overall audit results have been relatively stable at a level significantly exceeding our benchmark for materiality over the last three years (see Graph 1.2 ).

1.11.

The Commission underlines that it is bound by the Financial Regulation, which stipulates, in Article 32(2)(e), that its internal control system should ensure, among other things, ‘adequate management of the risks relating to the legality and regularity of the underlying transactions, taking into account the multiannual character of programmes as well as the nature of payments concerned’.

In the 2014 Synthesis Report (COM(2015)279 final), the Commission estimated the future impact of corrective mechanisms to be 2,7 billion euro, which represents 1,9 % of payments made by the EU budget.

The Commission will continue to exercise its supervisory role by implementing financial corrections and recoveries at the level that corresponds to the level of irregularities and deficiencies identified throughout the whole period and even after the closure of the programmes.

1.12.

EU spending is dominated by two types of expenditure programmes involving distinct patterns of risk (13):

—

Entitlement programmes, where payment is based on meeting certain conditions. Such programmes include student and research fellowships (chapter 5), direct aid for farmers (chapter 7), direct budget support (14) (chapter 8), salaries and pensions (chapter 9).

—

Cost reimbursement schemes, where the EU reimburses eligible costs for eligible activities. Such schemes include research projects (chapter 5), investment schemes in regional and rural development (chapters 6 and 7), training schemes (chapter 6), and development projects (chapter 8).

1.13.

For 2014 we updated our approach to the quantification of serious infringements of public procurement rules. This resulted in a clarification of the way in which we assess the impact of these infringements. In particular, we introduced a proportional approach to the calculation of errors related to the modification of contracts.

1.13.

1.14.

To ensure the comparability of results presented in this report we have adjusted the 2013 and 2012 figures in Table 1.1 , Graphs 1.2 , 1.3 , 1.4, 1.5 and 1.6 in accordance with the updated approach. The unadjusted historical information on the estimated level of error reported in the 2009-2013 period is given in Annex 1.4 . The impact of the adjustment was to decrease the overall estimated level of error by 0,2 % in 2013 and by 0,3 % in 2012. This adjustment has no impact on the conclusions that we reached in either year. The level of error remains clearly material.

1.15.

In 2015 we will adjust our approach to cross-compliance to the changed legal framework of the common agricultural policy. We will report on information the Commission provides on cross-compliance but will no longer include this element in our audit testing. This year we found many cross-compliance errors affecting one in four farms visited. Their contribution to our overall estimated level of error is 0,2 percentage points (2013: 0,2) (15) and is 0,6 percentage points for the ‘Natural Resources’ chapter (2013: 0,5).

1.15.

1.16.

As described in the General Introduction (paragraphs 0.5 to 0.7), we have updated the structure of chapters in the annual report. In order to preserve comparability, we show below ( Graph 1.3 ) how last year’s audit results would have appeared under the new structure, and taking account of the updated approach to quantification of public procurement (see paragraphs 1.13 and 1.14). We used these figures in Table 1.1 .

1.17.

As shown in Graph 1.4 , Cohesion was the biggest contributor to our estimated level of error for 2014, followed by ‘Natural Resources’, ‘Competitiveness’ and ‘Global Europe’. This distribution is in line with our findings for 2013.

1.18.

Eligibility errors in cost reimbursement schemes dominate the errors detected for 2014 (see also paragraph 1.20 to 1.22, Graph 1.5 and Graph 1.6 ).

(a)

For reimbursement expenditure the estimated level of error is 5,5 % (2013: 5,6 %). Typical errors in this area include:

(a)

The Commission has also identified similar problems during its audits. Considerable efforts have been made by the Commission during the 2007-2013 programming period to identify the root cause of problems and implement corrective actions where necessary.

(b)

For entitlement programmes, the estimated level of error is 2,7 % (2013: 3,0 %). Typical errors in this area include:

1.19.

The figures for 2013 in Graph 1.5 are on the same basis as for 2014, i.e. on the basis of the approach described in paragraph 1.13.

1.20.

We have analysed the relationship between expenditure type and risk of error. A feature of EU spending is the extent to which correct calculation of payments to recipients of funding depends upon information provided by the recipients themselves. This is true of the largest category of entitlement expenditure — the area-based subsidies paid to farmers. It is especially significant in the area of reimbursement activities: recipients must provide information supporting their claim to be engaged in an activity eligible for support and to have incurred costs for which they are entitled to reimbursement. This affects all management modes (16).

1.20.

LPIS is established and maintained by the national authorities. Payments to final beneficiaries are only possible after their claim has been cross-checked with the information available in LPIS.

As a result of LPIS, the level of errors for area-based subsidies is lower than for any of the other types of subsidies under shared management.

The Commission considers that box 1.2 and box 1.3 confirm this view.

1.21.

Graph 1.6 is based on all audit testing of EU spending over the last two years (17), for the annual reports on the general budget and the European Development Funds. Payment streams are grouped according to their nature. The size of the circles in this graph represents their weight in overall spending; their position along the 45o line indicates relative levels of estimated errors; their colour indicates whether the expenditure is based upon entitlement or reimbursement.

1.22.

This graph incorporates both elements of professional judgement (assessment of the impact of systems and of risks related to transaction type — see Annex 1.1 , paragraph 1) and empirical elements (measuring estimated levels of error over a two-year period). It is intended both to respond to requests from stakeholders for more information on differing risk profiles, and to assist the Commission in taking action to deal with areas of persistently high levels of errors.

(1)

Reimbursement for ‘Global Europe’ includes multi-donor projects which in practice have many of the attributes of entitlement spending and are affected by lower levels of error.

1.23.

‘Competitiveness’ (chapter 5): the estimated level of error is 5,6 %, an increase on the equivalent results in 2013 (4,0 % (18)). Much of the expenditure is made on a cost reimbursement basis and the errors here essentially reflect different categories of ineligible cost (notably personnel costs, other direct costs, and indirect costs).

1.23.

1.24.

‘Cohesion’ (chapter 6): the estimated level of error is 5,7 %, an increase on the equivalent results in 2013 (5,3 % (18)). Almost all spending in this area takes the form of cost reimbursement. The main causes of error include serious infringements of public procurement rules (around half of the estimated level of error), followed by ineligible costs in expenditure declarations (over a quarter of the estimated level of error). Non-compliance with state aid rules and ineligible projects make up the balance of errors.

1.24.

1.25.

‘Natural resources’ (chapter 7): the estimated level of error is 3,6 %, a decrease on the equivalent results in 2013 (4,4 % (18)). European Agriculture Guarantee Fund (EAGF) accounts for more than three quarters of expenditure in this area and is less affected by error than rural development, where we have long found high levels of error, in particular in the spending organised on the basis of cost reimbursement. Overall, overstated claims from farmers of agricultural areas or animal numbers contributed around one-third of the estimated level of error. Errors related to ineligible beneficiaries, activities or expenditure were the second highest contributor (nearly one quarter of the estimated level of error). Cross-compliance infringements (one-sixth) and administrative errors (one-sixth) form the key remaining elements.

1.25.

See also replies in paragraphs 1.15 and 1.20, 7.15 to 7.19 and 7.25 to 7.29.

1.26.

‘Global Europe’ (chapter 8): the estimated level of error is 2,7 %, an increase on the equivalent results in 2013 (2,1 % (18)) (19). Ineligible costs reimbursed by the Commission account for more than half of the total. Payments made where works, services or supplies had not been delivered account for one quarter of the total. The remainder results from the absence of supporting documents (around one tenth of the estimated level of error), incorrect calculation of expenditure, and non-compliance with procurement rules.

1.26.

1.27.

‘Administration’ (chapter 9): the estimated level of error is 0,5 %, a decrease on the equivalent results in 2013 (1,1 % (18)). Most spending in this area is on the salaries, pensions and allowances paid by EU institutions and agencies. A small number of errors in allowances accounted for most of the error in this area, which is in total not material.

1.27.

1.28.

As explained in the General Introduction, we do not present a separate chapter for spending outside of MFF headings 1-2 and 4-5. The remaining spending, amounting to 2,1 billion euro (1,5 % of the spending covered by our audit) is therefore reported in this chapter (20). Of the total of 2,1 billion euro, 0,5 billion euro represents spending through and by ten agencies covered in our specific annual reports (21). The main errors identified in this area were the reimbursement of ineligible costs (see Box 1.1).

1.29.

The estimated level of error on shared management expenditure taken as a whole amounts to 4,6 % (2013: 4,9 % (22)) and on all other forms of operational expenditure (23) is 4,6 % (2013: 3,7 % (22)). The estimated level of error for administrative expenditure is 0,5 % (2013: 1,0 % (22)).

1.30.

Our examination of ‘errors and corrections’ seeks to throw light on the complex mechanisms for making and recording corrective action, as well as to explain the different ways these mechanisms can impact on our audit work. In some areas of spending the Commission will have new tools at its disposal when expenditure for new programming period comes on stream.

1.30.

1.31.

We seek to take account of corrective measures applied by the Member States and the Commission where these are made prior to payment or before our examination. We also take note of corrections made after notification of our audit, but are unable to reduce the estimate of error where the audit itself stimulates corrective action (24). We check the application of these corrections (which include recoveries from the beneficiaries and corrections at project level) and adjust the quantification of error whenever appropriate. However the impact of corrective measures varies significantly between different areas of spending, and between the different corrective measures.

1.31.

In the 2014 Synthesis Report (COM(2015) 279 final), the Commission estimated the future impact of corrective mechanisms to be 2,7 billion euro, which represents 1,9 % of payments made by the EU budget.

For a breakdown of the figures per policy area see table 1 in the Synthesis Report.

The Commission underlines that all types of financial corrections and recoveries exclude expenditure in breach of law from reimbursement by the EU budget (see note 6 to the accounts).

1.32.

For 24 transactions sampled in 2014, the Commission and Member State authorities had applied corrective measures that directly affected the transaction concerned and were relevant for our calculations. These corrective measures reduced our estimated level of error by 1,1 percentage points (2013: 1,6 percentage points) equivalent to around 1,6 billion euro. Changes in the number of transactions affected and in the impact on our estimated level of error do not indicate that corrective action has become more or less effective: as these measures apply to a relatively small share of our sample, fluctuation from year to year is expected.

1.33.

The Commission uses the terms ‘financial corrections’ and ‘recoveries’ to cover a wide range of corrective measures, which apply both before and after it makes (or reimburses) expenditure.

1.33.

1.34.

Note 6.2.2 to the accounts gives a total for implemented corrective actions in 2014 of 3  285 million euro. In Graph 1.7 we show our classification of the amounts of corrections made at different stages in the spending cycle. A quarter of the total corrective actions implemented in 2014 represent corrections and recoveries ‘at source’ (before the Commission made the related payment) (25). A further quarter consists of the withdrawal and replacement of cohesion projects (either during implementation or at the closure of operational programmes).

(*)

Commission decisions (mostly conformity decisions in agriculture), corrections at closure leading to decommitments and recoveries from beneficiaries.

(**)

Reduction of reimbursed costs and introduction of new projects/costs during implementation of programmes and at closure.

(***)

Corrections before payment in shared management, non eligible amounts and credit notes in direct and indirect management (recorded as "recoveries" in Note 6).

1.35.

The corrective action discussed in this section of the annual report also covers the work of Member State authorities and recoveries by both national authorities and the Commission.

1.36.

All relevant sectoral regulations in shared management lay down rules on first-level checks or reductions of amounts claimed by final beneficiaries carried out by national authorities before any expenditure is certified. National authorities also sometimes agree to reduce or eliminate some continuing costs from declarations because of errors with a long term impact (such as continuing payments under a contract affected by a public procurement error). Such adjustments can have an identifiable impact on the level of reimbursement requested for individual projects, or the subsidy paid to individual farmers, enabling the correction to reduce our estimated level of error.

1.37.

In direct and indirect management, the ‘recoveries’ recorded by the Commission include deductions of ineligible amounts from cost claims prior to authorisation for payment. The eligibility of the amounts is established following desk reviews of available documentation, or based on the results of checks carried out (see also Graph 1.7 ). These too allow us to reduce our estimated level of error.

1.37.

1.38.

Conformity decisions (‘financial corrections’ in agriculture) are often made on a flat-rate basis. In general they relate to system weaknesses rather than errors at the level of the final beneficiaries. They seldom lead to recoveries from the farmers concerned. These corrective measures are an incentive for Member States to improve their management and control systems. They contribute to the legality and regularity of the transactions at the level of the final beneficiaries if they result in continuing improvements to claims accepted by paying agencies (see Boxes 1.2 and 1.3).

1.38.

They do not directly lead to recoveries from the farmers because the Commission does not directly pay the final beneficiaries but reimburses the payments by the Member States to the farmers. However, where such irregular payments are identifiable as a result of the conformity clearance procedure, the Commission would expect Member States to follow them up by recovery actions against the beneficiaries. Please see reply to Box 1.3.

1.39.

Paying agencies implement conformity decisions by reducing future claims for reimbursement by the Commission for payments to farmers. The Commission records the full amount paid to farmers as spending (i.e. the correction does not reduce the amount of recorded payments). Instead the accounts record the difference between payments made to farmers and the amounts reimbursed to paying agencies as assigned revenue, available to fund agricultural spending (26).

1.40.

In cohesion, ‘financial corrections’ are, for more than two thirds of the recorded total, cases where authorities in the Member States withdraw expenditure declared and replace it with new expenditure. In some cases of ‘withdrawal’ no specific projects are identified as withdrawn. Instead the Member States declare additional projects and thus effectively receive a lower rate of co-financing. Withdrawals are only effective as a corrective measure where the replacement expenditure is itself free of material error.

1.40.

1.41.

Where replacement is not possible, corrections lead to a loss of EU funds for the Member State concerned (27).This may occur where Member States are unable to present sufficient eligible expenditure and where replacement is no longer possible (28) or allowed (29) and is relatively uncommon. The Commission expects that changes to legislation will make net corrections more common in the future.

1.41.

Furthermore, the Commission considers that under shared management, all financial corrections and recoveries have a negative impact on national budgets regardless of their method of implementation. In order not to lose EU funding, the Member State must replace ineligible expenditure by additional eligible operations.

This means that the Member State bears, with its national budget, the financial consequences of the loss of EU co-financing of expenditure considered ineligible unless it recovers the amounts from individual beneficiaries.

1.42.

Boxes 1.2 to 1.4 illustrate differing types and impacts of corrective measures:

1.43.

Note 6 to the accounts largely represents voluntary disclosure of information that is not required by accounting standards. A significant part of this information is not drawn from accounting systems. The note describes but does not always quantify the varying impact of the different corrective adjustments on the EU budget.

1.43.

1.44.

The Commission's capacity to improve the quality of spending is not simply a function of the amounts involved but of their impact. Rigorous assessment of the impact of corrective measures requires better information on the type of error corrected and the way the corrections were made (34). When the relevant Commission directorates-general assess the impact of their corrective measures, they make the required adjustments to figures drawn from Note 6 (see paragraph 1.55).

1.44.

1.45.

Each Commission directorate general produces an annual activity report. This report includes:

1.46.

The synthesis report summarises this information, and provides a statement that in adopting it the Commission takes overall political responsibility for its management of EU budget.

1.47.

This section presents results of our analysis of annual activity reports of the directorates general, and the Commission’s synthesis report (35). It focuses on consistency and appropriateness of the Commission’s estimates of:

1.48.

When directors-general are unable to give assurance on a significant segment of spending, they issue a reservation (see Box 1.5). Directors-general should do so where:

—

three new reservations made by the directors-general of Directorate-General for Communications, Networks, Content and Technology (DG CONNECT) (37), Directorate-General for European Neighbourhood Policy and Enlargement Negotiations (DG NEAR) (38)  (39) and the Head of Service for Foreign Policy Instruments (FPI) (40);

—

one recurrent reservation having been split into two (41); and

—

one reservation having been lifted (42).

1.49.

The European Parliament’s 2013 discharge resolution (44) called upon the Commission ‘to further clarify the calculation of the amount at risk’ by ‘explaining the estimated impact of corrective mechanisms on this figure’.

1.50.

Responding to the request of the discharge authority, in 2014 the Commission further developed internal guidance (45) on presenting information in annual activity reports. It requested directors-general to present an ‘average detected error rate’ (46). The application of this error rate to the total payments of the year results in the calculation of the ‘amount at risk’ (47). The synthesis report presents this figure alongside the estimate of future corrective capacity of ex-post Commission checks.

1.50.

1.51.

In the 2014 synthesis report the Commission presents the ‘amount at risk’ as a range from 3,7 to 5 billion euro. This represents between 2,6 % and 3,5 % of the 2014 payments covered by the synthesis report (48). These figures show that overall expenditure is affected by a material level of error.

1.51.

1.52.

The 2014 synthesis report provides a forecast of the aggregate amount of estimated future corrections (or corrective capacity). Based upon recorded corrections over the last six years (49), the Commission estimates that it will, in the future years, ‘identify and correct errors for a total of approximately 2,7 billion euro’ (50).

1.52.

1.53.

For more than three quarters of 2014 expenditure (MFF headings 1b and 2), directorates-general base their estimates of amounts at risk on data provided by national authorities. However the Commission states in the synthesis report that ‘the reliability of Member States’ control reports remains a challenge’ (51). As a result directorates-general apply significant adjustments to the error rates reported (52). Such adjustments are necessary, but the Commission does not present a summary of its own work (on which it bases the adjustment).

1.53.

Every Annual Activity Report concerned includes a) a description of the process of scrutiny and validation or adjustment of the information reported by the Member States, b) a summary table outlining the effects of the adjustment per Member State and, c) as from this year, detailed data on each operating programme or paying agency for all DGs concerned.

1.54.

In direct and indirect management, most directors-general applied the new methodology. However, for the purpose of the synthesis report, the Commission increased the estimated amount at risk for DG DEVCO by around 60 million euro (53).

1.54.

1.55.

DG BUDG provided directors-general with the average amount of recoveries and financial corrections for their services since 2009 on the basis of information recorded in Note 6 of the accounts (see paragraphs 1.8 and 1.44). Several directors-general adjusted these numbers to take account of consistency issues affecting the raw data. The key adjustments made were as follows:

1.55.

1.56.

Several DGs’ estimate of future corrections exceeds the estimated amount at risk (55). In the area of cohesion policy, the Commission states, that this is mostly due to the fact that the corrective capacity is based on six-year average, while the amount at risk refers to the estimated level of error assessed in 2014, which is lower than in previous years.

1.57.

A significant innovation in the last major revision of the Financial Regulation adopted in October 2012 was the introduction of a requirement for the Commission to evaluate areas of persistently high levels of error. While according to internal instructions (56) this should take place after three years, in the synthesis report the Commission announces that it does not plan to undertake such reviews until it is able to determine the effects of the new management and control systems of the 2014-2020 programming period on the level of error (57).

1.58.

We send cases of suspected fraud identified in our audit to the European Anti-Fraud Office (OLAF) for analysis and possible investigation. We cannot comment on individual cases or on OLAF’s response to these. However, during the 2014 audit:

—

we assessed the legality and regularity of some 1  200 transactions;

—

we found 22 instances of suspected fraud (2013: 14) which we forwarded to OLAF (58);

—

the most frequent instances of suspected fraud concerned declaration of costs not meeting the eligibility criteria, followed by conflicts of interest and other irregularities in procurement and the artificial creation of conditions to receive subsidy.

1.59.

The key function of this chapter is to support the audit opinions presented in the statement of assurance.

1.60.

Our audit results show considerable consistency with those of previous years.

1.61.

Our results, as set out in Graph 1.6 , show a strong relationship between expenditure type and levels of error. This analysis both responds to requests from stakeholders for more information on differing risk profiles, and aims to assist the Commission in taking action to deal with areas of persistently high levels of errors.

1.62.

Corrective measures recorded in Note 6 to the accounts include some important instruments for excluding irregular expenditure and providing incentives for improvement of control systems. Whenever possible, relevant corrective action is taken into account in our evaluation of individual transactions and this reduced our estimated level of error for 2014.

1.63.

In the synthesis report the Commission recognised that the overall expenditure is affected by a material level of error.

1.64.

The Commission has taken steps to begin to improve its analysis of the impact of corrective action. In doing so, it has reduced, but not eliminated the risk that the impact of corrective actions is overstated or of limited relevance. There is further scope for improvement in the Commission’s assessment of the impact of corrective action.

1.64.

1.65.

Achieving consistency in presentation of amounts at risk and corrective capacity represents a major challenge. There are a wide variety of systems, both within the Commission and the Member States providing information on amounts at risk and corrective capacity. Achieving consistency between these systems is not an easy task. The new guidance issued by the Commission (see paragraph 1.50) led to some improvements in the presentation of its estimation of the likely level of error, but did not remove the risk that estimates of error are significantly underestimated, nor (to a lesser extent) that corrective capacity is overstated. The adjustments introduced by numerous DGs (see page 12 of the synthesis report) should provide the Commission with a basis for further improving information systems.

1.65.

Moreover, the adjustments result from the application of quality checks by the Commission. As stated in the Synthesis Report, the Commission considered that this was the best available indication to estimate the future corrective capacity.

(See reply to paragraph 1.53).

1.66.

The Commission has not yet undertaken the analysis of areas of persistently high levels of error. We consider it important that such an analysis be undertaken before, or as part of the mid-term review of the 2014-2020 MFF.

1.66.