I.

We have audited:

II.

In our opinion, the consolidated accounts of the European Union (EU) for the year ended 31 December 2017 present fairly, in all material respects, the EU’s financial position as at 31 December 2017, the results of its operations, its cash flows and the changes in its 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.

III.

In our opinion, the revenue underlying the accounts for the year ended 31 December 2017 is legal and regular in all material respects.

IV.

In our opinion, except for the effects of the matter described in the ‘Basis for qualified opinion on the legality and regularity of payments underlying the accounts’ paragraph, the payments underlying the accounts for the year ended 31 December 2017 are legal and regular in all material respects.

V.

We conducted our audit in accordance with the IFAC International Standards on Auditing (ISAs) and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions (ISSAIs). Our responsibilities under those standards are further described in the ‘Auditor’s responsibilities’ section of our report. We are independent, in accordance with the International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities under those standards and requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

VI.

The expenditure recorded in 2017 covering spending on a reimbursement basis (3) is materially affected by error. Our estimated level of error for payments made on a reimbursement basis is 3,7  %. Our overall estimated level of error (2,4  %) is still above our materiality threshold, but it is not pervasive. Payments made on an entitlement basis are not affected by a material level of error (4).

VII.

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the European Union’s consolidated accounts of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters.

VIII.

The European Fund for Strategic Investments (EFSI) is a joint initiative launched in 2015 (5) by the EU and the EIB Group, to encourage investment across the EU by increasing the risk-bearing capacity of the EIB Group. Under this initiative, the EU budget will provide a guarantee of up to 16 (6) billion euros to cover potential losses on EFSI operations for ’Infrastructure and Innovation Window (IIW)’ and ’Small and Medium-sized Enterprises Window (SMEW)’ investments (7).

IX.

We focused on this area in previous years because the set-up of the EFSI had given rise to a number of complex accounting issues resulting from the arrangements between the EU and the EIB. In November 2017, the Commission’s Accounting Officer consulted the Advisory Group of experts in relation to the appropriate accounting treatment of the SMEW equity operations guaranteed by the EU. In line with the advice received, and applying professional judgement, the Commission’s Accounting Officer decided that the Commission does not have control over the EFSI or share such control with the EIB (8). This implies for the 2017 EU consolidated annual accounts that the EU guarantee granted to the EIB Group is treated:

X.

We have assessed the accounting treatment of the EFSI guarantee for the equity portfolios. We consider that it does not affect the true and fair view given in the 2017 EU consolidated annual accounts.

XI.

The EU balance sheet includes a liability for pension and other employee benefits amounting to 73,1  billion euros at the end of 2017. This is one of the most significant liabilities in the balance sheet, accounting for almost a third of the total 2017 liabilities of 236,5  billion euros.

XII.

Most of this liability for pension and other employee benefits (64,0  billion euros) relates to the Pension Scheme of Officials and Other Servants of the European Union (PSEO). This pension liability covers the ‘defined benefit’ guaranteed by Article 83 of the Staff Regulations of Officials of the European Communities (the ‘Staff Regulations’) and Article 4(3) of the Treaty on the European Union (the ‘TEU’). The liability recorded in the accounts reflects the amount, which would have been included in a pension fund, had one been set up to pay existing retirement pension obligations (9). In addition to retirement pensions, it covers invalidity pensions and pensions paid to widows/orphans of EU staff. Under Article 83 of the Staff Regulations, the benefits paid under the pension scheme are charged to the EU budget. Member States jointly guarantee the payment of the benefits and officials contribute one third of the cost of financing the scheme.

XIII.

The PSEO is a mandatory occupational pension scheme for EU civil servants, under which contributions from staff and from the institutions and bodies that employ them are used to finance future pensions. It is designed, through adjustments to the rate of contribution to the scheme and to pensionable age, to be in actuarial balance by default. The number and variety of parameters used to calculate a long-term projection of pension costs underlines the actuarial nature of this calculation, which is performed by Eurostat on an annual basis.

XIV.

As part of our audit, we evaluated the actuarial assumptions and the resulting valuation for the pension liability. We checked the numerical data, the actuarial parameters and the calculation of the liability, as well as the presentation made in the consolidated balance sheet and the notes to the consolidated financial statements. As stated in note 2.9 to the consolidated financial statements, the Commission is continuing to work towards strengthening its processes for calculating the employee benefits liability, which we will keep under review.

XV.

At year-end 2017, the estimated value of incurred eligible expenses due to beneficiaries but not yet reported was 101 billion euros (year-end 2016: 102 billion euros). These amounts were recorded as accrued expenses (10).

XVI.

We examined the methodologies and control systems applied for year-end estimates in the main Directorates-General. We took samples of invoices and pre-financing payments and carried out work on these elements to address the risk of the accrual having been misstated. We sought additional clarification from the Commission’s accounting services on the general methodology.

XVII.

We can conclude that the estimate of the overall amount of accrued charges stated in the consolidated balance sheet is fair.

XVIII.

On 29 March 2017, the United Kingdom (UK) formally notified the European Council of its intention to leave the European Union (EU). On 22 May 2017, the negotiations started for the withdrawal agreement between the EU and the UK.

XIX.

Part Five (Financial Provisions) of the draft withdrawal agreement of 19 March 2018 concerning the financial settlement states that the UK will pay all its obligations under the current and previous Multiannual Financial Frameworks as if it were still a Member State.

XX.

Based on this, we conclude that the accounts as at 31 December 2017 correctly reflect the withdrawal process.

XXI.

Management is responsible for providing ‘other information’, a term which encompasses the Financial Statement Discussion and Analysis but not the consolidated accounts or our report thereon. Our opinion on the consolidated accounts does not cover this other information, and we do not express any form of assurance conclusion thereon. Our responsibility in connection with the audit of the consolidated accounts is to read the other information and consider whether it is materially inconsistent with the consolidated accounts or the knowledge we have obtained in the audit or otherwise appears to be materially misstated. If we conclude that there is a material misstatement of the other information, we are required to report this accordingly. We have nothing to report in this regard.

XXII.

In accordance with Articles 310 to 325 of the TFEU and with the Financial Regulation, management is responsible for preparing and presenting the EU’s consolidated accounts on the basis of internationally accepted accounting standards for the public sector, and for the legality and regularity of the underlying transactions. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error. Management is also responsible for ensuring that the activities, financial transactions and information reflected in the financial statements are in compliance with the authorities which govern them. The Commission is ultimately responsibility for the legality and regularity of the transactions underlying the EU’s accounts (Article 317 of the TFEU).

XXIII.

When preparing the consolidated accounts, management is responsible for assessing the EU’s ability to continue as a going concern, disclosing any relevant matters and using the going concern basis of accounting unless it either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so.

XXIV.

The Commission is responsible for overseeing the EU’s financial reporting process.

XXV.

According to the Financial Regulation (Title IX), the accounting officer of the Commission has to present for audit the consolidated accounts of the EU first as provisional accounts by 31 March of the following year and as final accounts by 31 July. The provisional accounts should already give a true and fair view of the financial position. It is therefore imperative that all items of the provisional accounts are presented as final calculations allowing us to perform our task in line with Title X of the Financial Regulation and in the given deadlines. Changes between provisional and final accounts would normally only result from our observations.

XXVI.

Our objectives are to obtain reasonable assurance as to whether the EU’s consolidated accounts are free from material misstatement and the underlying transactions are legal and regular and on the basis of our audit, to provide 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. Reasonable assurance is a high level of assurance, but it is not a guarantee that the audit has necessarily detected all instances of a material misstatement or non-compliance that may exist. These can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions taken by users on the basis of these consolidated accounts.

XXVII.

For revenue, our examination of VAT and GNI-based own resources takes as its starting point the macroeconomic aggregates from which these are calculated, and assesses the Commission's systems for processing these up to the point at which the Member States’ contributions 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 up to the point at which the amounts have been received by the Commission and recorded in the accounts.

XXVIII.

For expenditure, we examine payment transactions once 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 once the recipient of funds has provided evidence of their proper use and the Institution or body has accepted that evidence by clearing the advance payment, which might not happen until a subsequent year.

XXIX.

As part of an audit in accordance with ISAs and ISSAIs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

XXX.

We communicate with management regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including findings of any significant deficiencies in internal control.

XXXI.

Of the matters discussed with the Commission and other audited entities, we determine which were of most significance in the audit of the consolidated accounts and are therefore the key audit matters for the current period. We describe these matters in our report unless law or regulation precludes public disclosure or, as happens extremely rarely, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh any public interest benefits.

1.1.

We are the European Union’s independent auditor. In accordance with the Treaty on the Functioning of the European Union (TFEU), we:

1.2.

The work we do for the statement of assurance (explained in Annex 1.1 ) fulfils the first and second of these objectives. In key EU spending areas (12), the work we do for the annual report also addresses the economy, efficiency and effectiveness of spending. We report on different aspects of the system put in place by the Commission to ensure that EU funds are well spent (13). Taken together, our audit work also provides a key input into our opinions on proposed legislation.

1.3.

This chapter of the annual report:

1.4.

EU spending is an important — but not the only — means of achieving policy objectives. Other important means include the use of legislation and the freedom for goods, services, capital and people to move throughout the EU. In 2017, EU spending amounted to 137,4 billion euros (14), representing 2,0  % of EU Member States’ total general government spending and 0,9  % of EU gross national income ( Box 1.1 ).

Source:

Member States GNI: 2017 annual accounts of the European Commission — Annex A — Revenue;

Member States general government expenditure: Eurostat — annual national accounts;

EU spending: European Commission — 2017 consolidated annual accounts of the European Union.

1.5.

EU funds are disbursed to beneficiaries either through single payments/annual instalments or through a series of payments within multiannual spending schemes. In 2017, payments from the EU budget totalled 137,4 billion euros, comprising 29,7 billion euros as pre-financing and 107,7 billion euros as single, interim or final payments. As Box 1.2 shows, the largest share of the EU budget went to ‘Natural resources’ (56,7 billion euros; 41 % of total) followed by ‘Cohesion’ (35,7 billion euros; 26 % of total) and ‘Competitiveness’ (21,4  billion euros; 15,6  % of total).

1.6.

Our observations concern the European Union’s consolidated accounts (15) (the ‘accounts’) for the financial year 2017. We received them, together with the accounting officer’s letter of representation, on 27 June 2018, before the final date for presentation allowed under the Financial Regulation (16). The accounts are accompanied by a ‘Financial Statement Discussion and Analysis’ (17). This analysis is not covered by our audit opinion. In accordance with the auditing standards, however, we have assessed its consistency with the information in the accounts.

1.7.

The accounts published by the Commission show that, at 31 December 2017, total liabilities amounted to 236,5  billion euros compared with 166,2  billion euros of total assets. The economic result for 2017 is 8,1  billion euros.

1.8.

Our audit found that the accounts were not affected by material misstatements. We present our observations on the financial and budgetary management of EU funds in Chapter 2.

1.9.

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole and in forming our opinion thereon, but we do not provide a separate opinion on these matters. In accordance with International Standard on Auditing 701 (18), we report on key audit matters in our statement of assurance.

1.10.

We examine EU revenue and expenditure to assess whether it is in compliance with applicable laws and regulations. We present our audit results for revenue in chapter 4 and for expenditure in chapters 5 to 10.

1.11.

To carry out our audit, we examined the transactions underlying the EU’s accounts. These comprised transfers of funds from the EU budget to final recipients of EU spending, contributions from Member States to the EU budget and revenue from other sources. We examine expenditure at the point when final recipients of EU funds have undertaken activities or incurred costs, and when the Commission has accepted the expenditure (‘accepted expenditure’). In practice, this means that our population of transactions covers interim and final payments. We did not examine pre-financed amounts unless they had been cleared in 2017.

1.12.

The European Parliament and Council made several changes to the 2014-2020 sectoral legislation for ‘Economic, social and territorial cohesion’ (see paragraphs 6.5 to 6.10) as compared to the rules applicable to the 2007-2013 period. Most importantly, Member State programme authorities must now submit an annual assurance package, including the accounts and covering expenditure certified to the Commission in the accounting year. The Commission accepts the accounts if, in the audit authorities’ opinion, the accounts are complete, accurate and true. It assesses the assurance package to ensure that the residual error rate remains below the materiality threshold of 2 % for each programme and applies financial corrections if necessary.

1.13.

The modifications to the sectoral legislation for ‘Economic, social and territorial cohesion’ have an impact on what the Commission considers as ‘accepted expenditure’ in this area. As a result, our audit population for this MFF heading differs from previous years and consists of final payments (including pre-financing which had been cleared) for the 2007-2013 period and expenditure covered by accounts accepted on an annual basis by the Commission, for the 2014-2020 period (see paragraphs 2 to 6 of Annex 1.1. and paragraphs 6.16-6.19). This means that we tested transactions for which all relevant corrective actions had been implemented at Member State level.

1.13.

1.14.

For MFF 1b, interim payments made in 2017 for the 2014-2020 period amounted to around 21 billion euros. We will include these interim and pre-financing payments in our population in a later year once the accounts have been accepted by the Commission and cleared through an annual decision.

(*)

For MFF1b, the 30,7 billion euros pre-financing amount includes interim payments for the 2007-2013 and 2014-2020 programming period amounting to 21,7 billion euros. In line with our approach for this area, these payments are not part of our audit population for the 2017 annual report.

1.15.

Box 1.3 shows the breakdown of our 2017 audit population into single, interim (where accepted by the Commission) and final payments, clearings of pre-financing and annual decisions to accept the accounts. For 2017, we audited transactions worth a total of 100,2 billion euros. This year ‘Natural resources’ makes up the largest share of our overall population (57 %), while in contrast to previous years the weight of MFF 1b ‘Cohesion’ is relatively small (around 8 %) ( Box 1.4 ).

1.16.

For the regularity of EU revenue and expenditure, our key findings were:

(a)

Revenue was free from material error. The revenue-related systems were effective overall, but the key internal traditional own resources (TOR) controls we assessed at the Commission and in certain Member States were partially effective (paragraph 4.21);

(b)

For expenditure, our overall audit evidence indicates that the level of error was material. We estimate the overall level of error in expenditure at 2,4  %, but material error was confined mainly to reimbursement-based expenditure representing around 47 % of the audited population. Our overall estimated level of error decreased on previous years ( Box 1.5 ).

(b)

The Commission notes with satisfaction that this year represents a further significant improvement in results.

1.17.

The evolution of our audit results makes the overall estimation of error no longer the sole basis for our statement of assurance. Our 2017 audit results confirm our findings from 2015 and 2016: namely, that the way expenditure is disbursed has an impact on the risk of error. In general, we found that entitlement-based expenditure (19) was free from material error, but reimbursement-based expenditure continued to be affected by material error ( Box 1.6 ).

1.17.

1.18.

We estimate the level of error for entitlement-based expenditure (excluding some rural development schemes) to be below our materiality threshold of 2 %, as it was in 2016. In entitlement-based expenditure, beneficiaries receive payment if they meet certain conditions. Such payments represent a lower risk of error if the conditions set are not overly complex. The payments concerned (Box 1.7) include student and research fellowships (MFF 1a — chapter 5), direct aid for farmers (MFF 2 — chapter 7) and budget support to third countries (MFF 4 — chapter 9). Administrative payments mainly consist of the salaries and pensions of EU civil servants (MFF 5 — chapter 10). Overall, entitlement-based expenditure represents around 53 % of our audit population.

1.19.

Where complex conditions are in place, we found an increased risk of error. This applies to reimbursement-based expenditure and to a small proportion of entitlement-based expenditure where complex conditions apply (some rural development schemes). This type of high-risk expenditure represents around 47 % of our audit population. We estimate the level of error in this type of expenditure at 3,7  % (2016: 4,8  %), which significantly exceeds the materiality threshold of 2 % ( Box 1.6 ).

1.20.

Reimbursement-based expenditure covers beneficiaries’ claims for eligible costs they have incurred. To this end, they must provide information demonstrating that they are engaged in an activity eligible for support and showing costs incurred for which they may claim reimbursement. In doing so, they have to follow complicated rules regarding what can be claimed (eligibility) and how costs can be properly incurred. This complexity leads to errors which affect our conclusion for MFF headings 1a ‘Competitiveness’ (paragraphs 5.31-5.32), 1b ‘Cohesion’ (paragraphs 6.73-6.76) and 2 ‘Natural resources’ (paragraphs 7.40-7.41).

1.20.

The Omnibus proposal, in its drafting resulting from the political agreement between the Council and Parliament, significantly broadens the scope and applicability of simplified cost options and payments based on conditions. The Commission legislative proposal for 2021-2027 provides further possibilities for the use of simplified cost options and payments against conditions to further reduce complexity.

1.21.

Most reimbursement-based EU funds are spent on research projects (Competitiveness), training schemes (Cohesion), projects in regional and rural development (Cohesion and Rural development) and development projects (Global Europe). As shown in Box 1.8 , ‘European Agriculture Guarantee Fund (EAGF) market measures, rural development, environment, climate action and fisheries’ and ‘Competitiveness’ were the biggest contributors to our 2017 estimated level of error for reimbursement-based expenditure, followed by ‘Cohesion’ and ‘Global Europe’. This distribution is different from previous years. This is mainly due to the low volume of accepted expenditure in ‘Cohesion’.

1.22.

This year, we provide a specific assessment for four MFF headings: ‘Competitiveness’, ‘Cohesion’, ‘Natural resources’ and ‘Administrative expenditure’. We do not estimate levels of error for other areas of expenditure, including MFF headings 3 (chapter 8) and 4 (chapter 9). In total, expenditure covered by our statement of assurance in these areas amounted to 11,1 billion euros (11,1  % of the expenditure covered by our audit). Work performed in these areas continues to contribute to our overall conclusions on 2017.

1.23.

‘Competitiveness’ (chapter 5): expenditure is affected by material error. Around 90 % of expenditure is reimbursement-based, and the errors here essentially reflect different categories of ineligible costs (in particular personnel and other costs, ineligible projects and beneficiaries).

1.24.

‘Cohesion’ (chapter 6): Expenditure in this area is dominated by reimbursements. The main type of error detected by audit authorities was ineligible costs. For these errors, Member State authorities generally applied corrections in order to reduce the residual error rates for programmes to below the 2 % materiality threshold. However, we also found errors that audit authorities had not detected, including, in the case of one audit authority, ineligible recipients financed through financial instruments. Neither the Member State authorities nor the Commission applied any corrections for these errors. Based on errors that either audit authorities or we ourselves detected, and considering all relevant financial corrections, we estimate that the level of error is material.

1.24.

Simplification represents the most effective way of reducing the costs and burden of control and the risk of errors. Policy areas which are subject to sound management and control systems and less complex eligibility rules are also less error-prone (see Commission reply to paragraph 1.20).

1.25.

‘Natural resources’ (chapter 7): as a whole, this area is materially affected by error. However, direct payments from the EAGF account for around three quarters of expenditure in this area and are free from material error. Direct payments to farmers are entitlement-based and have benefited from simplified land eligibility rules and an effective ex-ante control system (IACS) that allows automated cross-checks between databases. We continue to find a persistently high level of error in the other spending areas (rural development, EAGF market measures, environment, climate action and fisheries). Expenditure in these areas is mostly disbursed through reimbursement of costs. Ineligible beneficiaries, activities, projects or expenditure contribute around two thirds of the estimated level of error for this MFF heading.

1.26.

‘Administration’ (chapter 10): this area is free from material error. Most expenditure in this area takes the form of salaries, pensions and allowances paid by EU institutions and bodies.

1.27.

This year, we focused more closely on the types of error found in reimbursement-based spending as this is the area in which material error persists. Box 1.9 provides a breakdown of the 2017 estimated level of error 3,7  % for reimbursement-based spending by error type. It also provides the comparable figures for the 2016 estimate (4,8  %) (20).

1.28.

Similarly to 2016, eligibility errors (i.e. ineligible costs in costs claims, non-respect of agri-environment-climate commitments (rural development) and ineligible projects/activities or beneficiaries) contribute most to the 2017 estimated level of error. However, their impact increased significantly compared with 2016 (2017: 93 %; 2016: 73 %). This was due to the fact that we found very few public procurement errors this year.

1.28.

The Commission considers that the non-respect of agri-environment climate commitments is not necessarily an eligibility issue. A proportionate sanction, that only in exceptional and limited numbers of cases can reach the 100 %, is applied. See also paragraph 7.19.

1.29.

In contrast to 2016, serious errors in public procurement contributed less than 1 % (2016: 18 %) to our estimated level of error. This can be explained by the relatively low level of expenditure accepted under the European Regional Development Fund and the Cohesion Fund (paragraph 6.18). Our previous audit results show that these funds are more prone to errors in public procurement procedures.

1.29.

1.30.

According to Article 317 of the TFEU, the Commission is ultimately responsible for implementing the EU budget and manages EU spending together with Member States (21). The Commission accounts for its actions in three reports which together form the ‘Integrated Financial Reporting Package’ (22):

1.31.

Under our 2018-2020 strategy, we set out to base our statement of assurance on an attestation approach, meaning that we intend to provide assurance on the Commission’s (management) statement. This builds on our experience of applying this approach since 1994 when auditing the reliability of the accounts. For the regularity of transactions underlying the accounts, we are working with the Commission to establish the conditions necessary to progress towards this approach. An important element is the timely availability of information for compilation and audit (23).

1.31.

1.32.

In the AMPR, the Commission presents its assessment of the amounts at risk. The amount at risk at payment represents the Commission’s estimate of the amount not paid according to the applicable rules at the moment of payment. This figure is closest to our estimated level of error.

1.32.

In addition, the overall amount at risk at closure for 2017 presented in the Annual Management and Performance Report is estimated to be less than 2 % of total relevant expenditure after taking into account estimated future corrections.

1.33.

As well as the amount at risk at payment, the Commission presents other regularity indicators. Box 1.10 shows how the amount at risk at payment ties in with these other indicators.

1.34.

Box 1.11 compares the Commission’s figures for the amount at risk at payment to the range of our estimate of error. The AMPR does not follow the same procedure as the EU consolidated accounts, of which we obtain a provisional version end of March. Therefore, we do not examine the information in the AMPR as such. The amount at risk at payment calculated by the Commission for 2017 and presented in the AMPR is at the lower end of our range at 1,7  % (compared to 2,1  %-2,6  % for 2016). Our estimated level of error is 2,4  % (2016: 3,1  %) in a range between 1,4  % and 3,4  %.

1.34.

1.35.

The Commission uses the declarations of assurance made by its directors-general in their annual activity reports (AARs) as the basis for its overall assessment of legality and regularity. Chapters 4 to 10 include a section on selected AARs, in which we assess whether they are consistent with our own findings.

1.35.

1.36.

The regularity indicators (figures disclosed in the AARs for amounts at risk at payment):

(a)

are broadly in line with our own findings for MFF heading 2 ‘Natural resources’ and MFF 5 ‘Administration’;

(b)

are below our estimated level of error for MFF 1a ‘Competitiveness for growth and jobs’ and MFF 1b ‘Cohesion’.

(b)

As regards MFF heading 1a ‘Competitiveness for growth and jobs’, the Commission considers that the information presented in the AARs in relation to regularity of underlying transactions has improved (see paragraphs 5.23-5.25).

1.37.

The amount at risk at closure, referred to in Box 1.10 , is influenced by estimated future corrections and recoveries that managers of EU funds expect to make. These are an important management tool which can reduce the impact of irregular expenditure on the EU budget.

1.37.

1.38.

The Commission uses corrections and recoveries applied in past years as a basis for estimating future corrections and recoveries. The amount at risk at closure reported in the AMPR is the amount at risk at payment (paragraph 1.32) minus the estimate for future corrections and recoveries. Box 1.12 shows the links between actual figures and future estimates for corrections and recoveries, as at the end of the reporting year.

1.38.

1.39.

To prepare an estimate of future corrections and recoveries, the Commission uses a historical average based on transactions over the previous years. The Commission considers this the best available indication of its corrective capacity. To ensure it is relevant for current programmes, DG BUDG requires the other DGs to adjust the historical average or to use another estimation method as appropriate (24).

1.39.

1.40.

While we noted an improvement for the 2017 financial year, historical data continued to be affected by classification and input errors or included elements not relevant for the calculation (25).

1.40.

The Commission has been continuously improving the reporting of the financial corrections and recoveries and the quality of the underlying data over recent years.

1.41.

Most Commission DGs adjusted their estimates. We found that the 2017 estimates were better than in previous years. However, some DGs still did not sufficiently disclose in their AARs the main underlying assumptions for estimating future corrections and recoveries.

1.41.

1.42.

The Commission and, for programmes under shared management, Member State authorities, can protect the EU budget from irregular spending by either preventing it from occurring or offsetting its impact. Prevention is the first line of defence against errors. If preventive mechanisms do not successfully prevent all errors from occurring, the Commission has to take corrective action to offset their impact.

1.43.

The Commission’s key preventive mechanisms include interrupting and suspending payments, as well as carrying out ex-ante checks leading to the rejection of ineligible amounts before the Commission accepts expenditure and makes payments. The Commission's main corrective mechanisms include ex-post checks on amounts it has accepted and paid out. In shared management, these lead to financial corrections and in direct and indirect management, they result in recoveries from final recipients.

1.44.

We found that the Commission reports amounts resulting from both its preventive and corrective mechanisms under a single heading ‘Financial corrections and recoveries’ in the Financial Statement Discussion and Analysis (FSDA) of the EU annual accounts. This makes it difficult for the reader to distinguish between the impact of preventive and corrective actions.

1.44 and 1.45.

1.45.

However, the Commission does have the necessary details to differentiate between the two categories. In our annual reports for 2014, 2015 and 2016 we used data the Commission provided to us to differentiate between amounts resulting from preventive and corrective mechanisms.

1.46.

The 2017 FSDA reports total implemented ‘financial corrections and recoveries’of 2,8 billion euros. As in previous years, this figure includes, together with the amounts resulting from corrective mechanisms, the following results of preventive actions:

1.46.

1.47.

We report cases of suspected fraud to the European Anti-Fraud Office (OLAF), whether we identify them during our audit (including our work on performance) or on the basis of information provided directly to us by third parties. We cannot comment on individual cases or on OLAF’s response to these. In 2017:

1.48.

In 2017, the suspected fraud cases arising from our work which we transferred to OLAF most frequently concerned the artificial creation of the necessary conditions for EU financing, the declaration of costs not meeting the eligibility criteria and procurement irregularities.

1.49.

As at 31 December 2017, seven of the 13 cases arising from audit work reported to OLAF in 2017 had already resulted in the opening of an investigation and one was still under consideration. OLAF decided to dismiss the five other cases on the grounds that they could be better dealt with by another authority or EU institution, body, office or agency, that there was insufficient evidence of fraud, or for proportionality reasons.

1.50.

As regards the six cases arising from information provided by third parties and forwarded by us, two had resulted in investigation and the other four were dismissed on the grounds that they could be better dealt with by another authority or EU institution, body, office or agency, or that there was insufficient evidence of fraud.

1.51.

Between 2010 and 2017, OLAF recommended recoveries totalling 294,7  million euros in cases which we referred to it. Where OLAF closed a case without recommending further action, its most common conclusion was that there was no evidence of fraud or irregularity affecting the EU’s financial or other interests.

1.52.

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

1.53.

We conclude that the accounts were not affected by material misstatements.

1.54.

As for the regularity of transactions, we conclude that revenue was free from material error. For payments, our audit results show continuous improvements over the last few years. Similarly to last year, we conclude that entitlement-based expenditure is free from material error. A material level of error is confined to reimbursement-based expenditure, which this year accounted for 47 % of our audit population. On this basis, we conclude that error is not pervasive.

2.1.

This chapter presents the results of our review of key EU budgetary and financial management issues. It also identifies some risks and challenges for future budgets and builds, in parts, on views in a number of special reports and briefing papers.

2.2.

As part of the welcome reflection on the future of the EU, in June 2017 the Commission presented a ‘Reflection paper on the future of EU finances’, which highlighted options for future financing. (1) We contributed to the ongoing debate by publishing two briefing papers (2). On 2 May 2018, the Commission presented a proposal for a new Multiannual Financial Framework (MFF) starting in 2021 (3).

2.3.

In 2017, the EU committed 158,7  billion euros (99,3  %) of the total commitment appropriations of 159,8  billion euros available in the adopted budget (4). Taking into account the special instruments, amounts committed exceeded the MFF ceiling by 3,1  billion euros (see Box 2.1 ).

Note:

The MFF ceiling is the maximum annual amount that can be used under the current MFF Regulation. However, commitment appropriations and their use are allowed to exceed the ceiling by the value of special instruments (see Article 3(2) of the MFF Regulation).

Source:

Consolidated annual accounts of the European Union — Financial year 2017, Budgetary implementation reports and explanatory notes — notes 4.1 — 4.3 and the 2017 technical adjustment.

2.4.

As in 2016, total payments in 2017 were much lower than anticipated. They were 18,2  billion euros below the ceiling set in the MFF (see Box 2.1 ). In anticipation of lower payments, the budgetary authority set the initial 2017 budget at 134,5  billion euros, 8,4  billion euros below the MFF ceiling for payment appropriations of 142,9  billion euros (5). Due to slow implementation in the first eight months of the year, the Commission proposed amending budget 06/2017 which reduced payment appropriations by 7,7  billion euros (see Annex 2.1 ). This, and the update on the revenue side (mainly fines), reduced Member States' contributions by 9,8 billion euros for 2017, but could lead to correspondingly higher calls in years 2018-2020. Significantly higher payment needs towards the end of the current MFF may lead to pressure on the ceilings for payment appropriations.

2.4.

2.5.

The low level of payments was mainly due to lower than anticipated claims being submitted by the Member States for the multiannual programmes of the 2014-2020 European Structural and Investment (ESI) funds. For analysis of the reasons stated by the Commission and Member States, see paragraphs 2.15-2.16.

2.5.

2.6.

The almost full use of the amount available for commitment and the low level of payments (see paragraphs 2.4–2.5) increased outstanding budgetary commitments to a new record of 267,3  billion euros (2016: 238,8  billion euros). This is 72,9 billion euros higher than the outstanding budgetary commitments in 2010 (194,4 billion euros), the fourth year of the previous MFF (see Box 2.2 ). Given that the 2014-2020 MFF is similar in size to the 2007-13 MFF, the increase is substantial. The Commission considered the 2016 and 2017 increases to be part of the normal cycle of implementation for the ESI funds (6)  (7).

2.7.

Our projections (8) indicate that outstanding budgetary commitments will rise even higher by the end of the MFF in 2020 (see Box 2.2) .

2.8.

In 2018-2020, the risk that available payment appropriations will be insufficient to settle all payment claims will increase significantly (see paragraphs 2.12 and 2.47). A more accurate payment forecast for the future years would help to manage this risk.

2.8.

The Commission underlines that the precision of the mid-term forecast depends partly on the forecasts presented by the Member States for the shared managed programmes. Furthermore, the level of the payment appropriations effectively granted in any annual budget procedure depends on the decision of the budgetary authorities.

Source:

For 2007-2017: Consolidated annual accounts of the European Union. For projections by the European Court of Auditors for 2018-2020: MFF Regulation and 2017 technical adjustment.

2.9.

Following the mid-term review of the MFF (9), the budgetary authority amended the MFF Regulation (10), in particular to increase the Global Margin for Payments (GMP) (11), and make changes to four special instruments  (12).

2.10.

The maximum GMP available for use in 2018-2020 will be 36,5  billion euros, 5,9  billion euros higher than before (see Box 2.3 ). This is a substantial amount that could help to reduce any future payments backlog (see paragraph 2.47). The value of the GMP amounts to the difference between payments made and the MFF payment ceilings (13). By the end of 2017, the amounts accumulated for the GMP had reached around 33,5  billion euros (14).

Source:

European Court of Auditors based on the MFF Regulation.

2.11.

Special instruments have been enhanced in two ways. Firstly, the amounts available for the Emergency Aid Reserve and for the Flexibility Instrument have been increased (see Annex 2.2 ). Secondly, it has been made possible, from 2017 onwards, to transfer to the Flexibility Instrument amounts lapsing from the European Globalisation Adjustment Fund and the European Union Solidarity Fund.

2.12.

Despite the increase in the flexibility of the budget to address possible challenges, the risk exists that it will still not be enough. Furthermore, as we have previously reported, the issue of whether or not special instruments should be counted within the ceilings for payment appropriations (15) has not been resolved yet. This uncertainty adds to the risk of a payments backlog (see paragraph 2.47).

2.12.

In its proposal for the MFF Regulation for the 2021-27 period, the Commission has proposed to solve this problem (see Article 2(2) of the 2021-2027 MFF Regulation (COM(2018)322 of 2.5.2018).

The Commission maintains furthermore that the risk of payment backlog in this MFF is very limited. The Commission refers to its reply under paragraph 2.8.

2.13.

For some Member States, outstanding commitments of the European Structural and Investment funds (ESI funds) represent a considerable percentage of their general government expenditure. This can be seen in Box 2.4 , together with the amount of payments made to each Member State in 2017 and their outstanding commitments at the end of 2017.

2.13.

The Commission refers to its reply under paragraph 2.14 of ECA's 2016 annual report.

Source:

European Court of Auditors based on information from the Commission. Eurostat data on general government expenditure for 2017: April 2018.

2.14.

Absorption (16) has been particularly slow. In 2017, the fourth year of the MFF, Member States absorbed an average of 16,4  % (2010: 22,1  %) of the amounts allocated to them. Box 2.5 provides a comparison of each Member State’s absorption in 2017 (17) with their absorption in 2010 (18).

2.14.

Source:

European Court of Auditors based on information from the Commission.

2.15.

The Commission found that the delays were mainly due to the later closure of the previous MFF, the late adoption of legal acts and difficulties in adapting to and implementing substantial changes introduced in the current MFF (19).

2.15.

2.16.

We conducted a survey of six Member States (20) with the lowest levels of absorption by the end of 2017. Their replies largely confirmed the Commission’s main reasons (see Box 2.6) .

2.17.

In our 2016 annual report, we already pointed out that Member States may face challenges in identifying sufficient high-quality projects. Our audit work has confirmed there is a trade-off for Member States between absorbing funds quickly and coming up with high-quality projects, which takes time (21).

2.18.

We have published two special reports that are relevant here: one on the arrangements for the closure of 2007-2013 MFF programmes and one on the effectiveness of the Commission’s support for Member States in absorbing funds (22). We found, among other things, that the late adoption of the legal framework had created delays that had a knock-on effect during implementation, and that the overlap between MFF periods had added to the delays. To help avoid absorption problems in the next MFF, the timely adoption of legal acts and a high level of stability in the legal framework governing the ESI funds will be crucial.

2.18.

2.19.

The increased overlap between MFF periods creates additional burden on Member States’ administration, leading to additional delays.

2.19.

2.20.

Member States submitted their final claims for structural funds (23) of the 2007-2013 MFF by the end of March 2017 (24).

2.21.

At the end of 2017, outstanding commitments on structural funds amounted to 11,7  billion euros or 3,4  % of the total amounts allocated for the 2007-2013 MFF (see  Box 2.7 ).

2.21.

As at end May 2018, the total amount of outstanding commitments for ERDF and CF is 8,1 billion euros and for ESF 1,9 billion euros. The Commission expects to be able to close the vast majority of the outstanding commitments in 2018 and 2019, as mentioned in the Annual Activity reports of DG REGIO and DG EMPL.

Source:

European Court of Auditors based on information from the Commission.

2.22.

De-commitments from the structural funds were 4,4  billion euros (1,3  %) of the total allocated for the 2007-2013 MFF) (see Box 2.8 ). They represent a very small share of total commitments (25).

Note:

The individual figures show the total at closure and for N+2/N+3.

Source:

European Court of Auditors based on information from the Commission.

2.23.

EU Trust Funds and the Facility for Refugees in Turkey differ from the Commission’s standard mechanisms for delivering aid. They use multiple financing sources and various distribution channels, which adds to complexity. EU Trust Funds are managed outside the EU budget, whereas the Facility for Refugees in Turkey is managed within it. Below is an overview of these mechanisms. Another new vehicle for providing aid to non-EU countries is the European Fund for Sustainable Development (EFSD) (see paragraphs 2.40-2.41).

2.23.

The Facility is a coordination mechanism that facilitates, rather than complicates. It is not a new instrument. The facility allows for the swift, effective and efficient mobilisation of EU assistance to refugees in Turkey and ensures the optimal use of EU and EU Member State resources, as a humanitarian and development assistance in a comprehensive and coordinated manner.

2.24.

EU Trust Funds are separate legal arrangements with a distinct financial structure in which several donors jointly finance an action based on commonly agreed objectives. The Commission has created four EU Trust Funds to date: the Bêkou Fund, the Madad Fund, the Africa Fund and the Colombia Fund (26) (see Box 2.9 ).

Note:

Differences in the sum of pledges are due to rounding.

Source:

European Court of Auditors based on information from the Commission, Article 187 of the Financial Regulation and the Constitutive Agreements establishing the Trust Funds.

2.25.

We examined the set-up and management of the first EU Trust Fund managed by the Commission — the Bêkou Fund (27). Among other things, we noted that the Fund had attracted aid, but few additional donors.

2.25.

2.26.

The Financial Regulation lays down strict requirements to justify the creation of Trust Funds, such as EU added value, better management, better control of risks, better control of disbursements and additionality (see Box 2.9 ). In our 2016 annual report, we pointed out that funding arrangements should not be more complex than necessary to meet EU policy objectives and guarantee accountability, transparency and auditability (28).

2.26.

2.27.

The Facility for Refugees in Turkey was established in January 2016 to help Turkey deal with the massive flow of refugees (see Box 2.10 ).

(a)

Commission Decision of 24 November 2015 on the coordination of the actions of the Union and of the Member States through a coordination mechanism — the Refugee Facility for Turkey.

(b)

Commission Decision of 10 February 2016 on the Facility for Refugees in Turkey amending Commission Decision C(2015) 9500 of 24 November 2015.

(c)

Second Annual Report on the Facility for Refugees in Turkey (COM(2018) 91 final of 14.3.2018).

Box 2.10

2.28.

EU budget support for various financial instruments has increased substantially (see Box 2.11 ).

2.29.

In 2017, Financial Instruments under Shared Management (FISMs) for the 2007-2013 MFF were in the process of being closed as part of the closure of their corresponding operational programmes.

2.30.

According to the Commission (29), FISMs were paid 11,3 billion euros from the structural funds. An additional 5,1 billion euros came from national co-financing (see Box 2.12 ).

Source:

Report ‘Summary of data on the progress made in financing and implementing financial engineering instruments reported by the managing authorities in accordance with Article 67(2)(j) of Council Regulation (EC) No 1083/2006 — 2007-2013 programming period; situation as at 31 March 2017 (at closure)’.

2.31.

According to the data Member States provided to the Commission, 93 % of the total amount paid to FISMs (15,2  billion euros) was disbursed to final recipients. However, the Commission estimates that the actual disbursement rate to final recipients may be up to seven percentage points lower, due to the possibly incorrect inclusion of repayments on loans that were used again (30), and of interest from treasury management or ‘overbooking’. These over-reported amounts total up to 0,9  billion euros. These, along with the 1,2 billion euros remaining in specific funds, are subject to the closure procedures for the operational programmes, and may have to be returned to the EU budget after deducting management costs and fees. Furthermore, out of 981 specific funds, there are still 45 which, at closure, have either not yet made any investments or have failed to report on them. Therefore, the ‘summary of data’ report does not provide a full and accurate (31) picture.

2.31.

Closure procedures for operational programmes are ongoing, and the Commission will take corrective action where appropriate. Decisions on amounts to be returned to the EU budget are taken at the level of operational programmes and not at the level of specific financial instruments, which are only one form of support in an operational programme.

2.32.

The resources available in the 2007-2013 FISMs after use (32) belong to the Member States (the managing authorities have estimated this amount at 8,5  billion euros, attributable to the structural funds). Member States should use them for the same purposes as originally intended.

2.33.

We published a special report (33) on the implementation of the 2007-2013 FISMs. Among other things, the report found that the funds in Member States had experienced difficulties disbursing their endowments, they had attracted only limited private capital and their reporting had been late. We also recommended that the Commission take appropriate measures to ensure that Member States maintain the revolving nature of the funds (i.e. continue to allow the same funds to be used in multiple cycles).

2.33.

Furthermore, the Commission indicated in the ECA Special report 19/2016 that the goal of attracting private capital should not be overemphasised in particular for sectors exposed to major market failures and that the managing authorities are obliged to ensure and present to the Commission proper measures to comply with the legal requirements in relation to the legacy resources.

2.34.

Out of the total resources the ESI funds committed from operational programmes under the 2014-2020 MFF, 30 % was paid into FISMs. Of this amount, 38 % (1,2 billion euros) was committed to final recipients from the FISMs. By the start of 2017, after three years of the current MFF, less than 10 % of the total ESI funding available through FISM had so far reached recipients to finance productive investments and activities (see Box 2.13 ).

2.34.

At 31 December 2016, 32 % of the amounts paid to financial instruments were actually disbursed to final recipients.

Source:

European Commission ‘Financial Instruments under the European Structural and Investment Funds, situation as at 31 December 2016’, December 2017.

2.35.

The current MFF requires more comprehensive reporting from Member States. However, the last available report on FISMs for the 2014-2020 MFF is the report as at the end of 2016, which was published in December 2017. Although this is in line with existing requirements, the gap between the end of the period and the corresponding report remains long.

2.35.

2.36.

The budgetary authority increased the EFSI guarantee from 16 billion euros to 26 billion euros (34) and the target investment volume from 315 billion euros to 500 billion euros. The EFSI Guarantee Fund increased by 1,1  billion euros (35), from 8,0  billion euros to 9,1  billion euros, as a result of transfers and reflows. This increase led to a significant reduction of the provisioning rate from 50 % to 35 %.

2.37.

At the end of 2017, the EFSI Guarantee Fund consisted of assets of 3,5  billion euros (2016: 1,0  billion euros). In addition, 2,6  billion euros had been committed from the EU budget but not yet paid (36). The remaining 3,0  billion euros will be gradually paid in by 2022 (37). By the end of 2017, no payments had been made from the EFSI Guarantee Fund.

2.38.

By the end of 2017, the EIB Group had signed 36,7  billion euros worth of contracts (2016: 21,3  billion euros) (38). Box 2.14 shows its distribution of this amount by Member State.

Source:

EIB Report ‘European Fund for Strategic Investments — IIW and SMEW — Schedule II of the EFSI Agreement — Year-end Operational Report — Reporting date: 31 December 2017’.

2.39.

We note that 64 % of the total value of EFSI contracts the EIB Group had signed by the end of 2017 was concentrated in six Member States. We are currently examining whether the EFSI is on-track to reach its policy objective of supporting additional investment in Europe.

2.39.

2.40.

The budgetary authority established the EFSD in September 2017 (39). The EFSD will follow similar principles to the EFSI.

2.41.

The EFSD Regulation allows the Commission to conclude EFSD Guarantee agreements also with non-EU bodies as eligible counterparts, such as international organisations and bodies governed by private law in a Member State or partner country (40). The eligible counterparts can approve financing and investment operations and make calls on the EFSD Guarantee supported by the EU budget. Unlike the EFSI, where the EIB is effectively the sole intermediary, the EFSD allows other international organisations and private sector bodies to transmit the benefits of the EU Guarantee and eventually to call on the guarantee. Thus, as yet the EFSD represents the most far-reaching example, in terms of the range of partners, of the delegation of powers to assume liabilities on behalf of the EU budget.

2.41.

2.42.

The EU budget is exposed to an accumulation of legal obligations to make payments at a future date, subject to various conditions. Among these obligations, there are contingent liabilities in form of guarantees that may need funding if a future event occurs (41) (see Box 2.15 ).

(1)

See notes 2.4.1 and 4.1.1 to the 2017 EU accounts.

(2)

See notes 2.11.1 and 4.1.2 to the 2017 EU accounts.

(3)

See notes 2.4.1 and 4.1.3 to the 2017 EU accounts.

(4)

At 31.12.2017, no legal commitments had been signed for the EFSD Guarantee or the additional EFSI Guarantee.

Source:

2017 EU accounts.

2.43.

When presenting proposals that include the creation or addition of sizeable contingent liabilities, the Commission prepares an analysis of the particular contingent liability in question. It does not accompany this with an overview of all contingent liabilities supported by the EU budget and analysis of stress test scenarios so that decision-makers can appreciate the overall impact.

2.43.

2.44.

The Commission proposed in the new Financial Regulation  (42) to pool all provisions in a common provisioning fund. The amount included in this fund will be determined based on an effective provisioning rate, which will be a percentage of each of the individual rates used until now. This should provide more flexibility in terms of treasury management. However, the funds set aside may not be sufficient if multiple financial risks materialise at the same time.

2.44.

2.45.

Furthermore, the EU staff pension liability has increased from 67,2  billion euros in 2016 to 73,1  billion euros in 2017 (43). It is the biggest long-term item on the EU balance sheet (44). This liability exists because the EU does not set aside an amount each year to fund future pension payments. The Member States jointly guarantee the pension liability (45). They undertake to pay the amounts due for pensions each year. This amount is included in the EU budget.

2.46.

Based on our analysis, we identified several risks and challenges with implications for future EU budgets. There remains a risk of an abnormal payments backlog until 2020. The issue of outstanding commitments from the current MFF needs to be tackled with adequate payment appropriations in the next MFF. Additional challenges for the EU budget arise from the announced withdrawal of the United Kingdom from the EU in 2019 and the need for improved accountability in light of the current reflection on the future of the EU budget.

2.46.

The Commission refers to its replies under paragraphs 2.8 and 2.12.

2.47.

Payments should gradually increase between 2018 and 2020, as payment claims are likely to rise substantially. In our view, there remains a risk of an abnormal payments backlog developing, as happened in 2013-2015. One mitigating factor is the flexibility created by the GMP (see paragraphs 2.6-2.10). However, the risk will increase if special instruments are counted within the payment appropriations ceiling (see paragraph 2.12).

2.47.

2.48.

Payment appropriations in the next MFF will need to cover outstanding commitments from the 2014-2020 MFF and new programmes of the next MFF. Another possibility is to reduce commitment appropriations for programmes under the next MFF (46). The Council Decision on own resources requires the Commission and the budgetary authority to maintain an orderly balance between commitment and payment appropriations (47).

2.48.

The Commission also proposes to increase the own resources ceilings in the Own Resources decision up to 1,29  % of EU27 GNI. This is necessary to accommodate the integration of European Development Fund and payments needs on new priorities. It will also provide for a sufficient margin between the payments and the own resources ceiling to ensure the Union is able to fulfil its financial obligations under any circumstances.

2.49.

By the end of 2017, the Commission had not yet produced a comprehensive, long-term projection that fully complies with the Interinstitutional Agreement (48). Although the Commission presented a forecast on 16 October 2017, its scope was limited to existing commitments as estimated until the end of 2020. A more comprehensive, longer-term projection would help to take better-informed decisions for the next MFF (49).

2.49.

The Commission also presented a forecast of payment appropriations after 2020 in compliance with point 9 of the Interinstitutional Agreement of 2 December 2013.

These reports were necessarily limited to commitments up to 2020 as the Commission could not forecast future commitments before it tabled its proposal on the next Multiannual Financial Framework, which was made in May 2018.

For future years, Article 247(1) of the new Financial Regulation sets out an obligation for the Commission to communicate annually to the European Parliament and the Council an integrated set of financial and accountability reports, including a long term forecast of future inflows and outflows covering the next 5 years. This report will analyse the impact of commitments of a given Multiannual Financial Framework.

2.50.

The provisions relating to the financial settlement have been stipulated in a draft agreement on the UK’s departure (50). Based on the draft agreement, the United Kingdom would honour its commitments until 2020 as if it were a Member State. After 2020, it would honour liabilities assumed until the end of 2020. For contingent liabilities related to financial operations, the UK’s responsibility would cover such operations decided or approved up to the withdrawal date.

2.51.

We have previously noted accountability gaps in the management of and reporting on the EU budget (51). The Commission’s reflection paper on the future of EU finances proposed accountability as one of the four principles of reform (52), with a view to a better understanding of the budget, more democratic control, transparency and good management. Our briefing paper made two proposals (53): to develop principles of accountability and transparency and to establish audit mandates for all existing and future EU-related bodies (54).

2.51.

As an example, the new and fully integrated ‘InvestEU’ Fund will bring centrally managed financial instruments supporting strategic investment throughout the EU together under a single programme.

Concerning the other proposal of ECA’s on establishing audit mandates for all existing and future EU-related bodies, the Commission does not wish to comment on issues concerning other Institutions and which are outside its remit. The Commission welcomes the ECA's contribution to the debate on EU accountability and public audit arrangements.

2.52.

Amounts committed (including special instruments) slightly exceeded the limit set in the MFF. For the second consecutive year, however, payments were far below the anticipated levels, which in turn reduced the contributions requested from Member States. The low level of payments was mainly due to delays in the implementation of the ESI funds (see paragraphs 2.3-2.5).

2.53.

As a result outstanding budgetary commitments exceeded last year’s record and are likely to rise even higher by the end of the current MFF. This significantly increases the risk that insufficient payment appropriations will be available for the final years of the MFF (see paragraphs 2.6-2.8).

2.53.

2.54.

The EU budget was made more flexible by increasing the Global Margin for Payments (GMP) and the amounts available for two special instruments, and by enhancing transfer possibilities between special instruments. The issue of whether or not to include special instruments within the payment appropriations ceiling remains unresolved (see paragraphs 2.9-2.12).

2.54.

2.55.

By end of 2017, the overall average absorption rate for the 2014-2020 MFF was even lower than in the corresponding year of the previous MFF (2010: 22 %). This was mainly due to the later closure of the previous MFF, the late adoption of legal acts, difficulties in implementing the new requirements for the current MFF, the change in the de-commitment rules from N+2 to N+3, and the administrative burden linked to overlaps between MFF periods. We highlighted the possible impact on project quality and the importance of a sufficiently stable legal framework (see paragraphs 2.13-2.19).

2.55.

At the same time, the Commission has on several occasions stressed the importance of a timely adoption of the legal acts also by the co-legislators.

The Commission refers to its replies under paragraphs 2.14 and 2.18.

2.56.

In 2017, structural funds under the 2007-2013 MFF were in the process of being closed. The majority of Member States have absorbed most of the resources allocated to them (see paragraphs 2.20-2.22).

2.57.

Aid to non-EU countries makes increased use of alternative financing models which increase the complexity of existing financial structures (see paragraphs 2.23-2.27).

2.57.

2.58.

EU funding for financial instruments has increased substantially. The closure of FISMs for the 2007-2013 MFF revealed problems in the Member States' reporting. While reporting has been made more comprehensive under the 2014-2020 MFF requirements, the gap between the end of the reporting period and the corresponding report remains long (see paragraphs 2.28-2.39).

2.58.

The timeframe of the reporting between managing authorities and the reporting of the Commission reflects the shared management context.

2.59.

The European Fund for Sustainable Development (EFSD) was created. Its governance model allows a broader range of partners to assume liabilities on behalf of the EU budget (see paragraphs 2.40-2.41).

2.59.

See Commission reply under paragraph 2.41.

2.60.

The EU budget’s financial exposure continues to be significant, mainly in relation to outstanding commitments, the EU staff pension liability and other legal commitments as well as contingent liabilities in form of guarantees (see paragraphs 2.42-2.45).

2.61.

It remains unclear whether adequate payment appropriations will be available to cover all the claims submitted for payment. The Commission has not yet produced a comprehensive, long-term projection to aid decision-making for the next MFF (see paragraphs 2.47-2.49).

2.61.

2.62.

We recommend that the Commission:

—

Recommendation 1: provide accurate and complete information on the closure of FISMs for the 2007-2013 MFF, including the final amounts returned to the EU budget and amounts belonging to Member States.

Target implementation date: by mid-2019.

—

Recommendation 2: when presenting legislative proposals that include the creation or addition of sizeable contingent liabilities, accompany these with an overview of the total value of contingent liabilities supported by the budget, together with an analysis of stress test scenarios and their possible impact on the budget.

Target implementation date: by mid-2019.

—

Recommendation 3: invite the European Parliament and Council, in the context of the debate on the MFF post-2020, to provide for mechanisms to better manage the risk of payment backlogs, given the high level of outstanding commitments in the current and previous MFFs.

Target implementation date: by the start of the post-2020 period.

3.1.

Each year, in this chapter, we analyse a number of aspects relating to performance: the results achieved by the EU budget, which is implemented by the Commission in cooperation with the Member States (1). This year we have looked specifically at:

3.1.

3.2.

Last year, we reviewed how the Commission’s approach to performance reporting compared with good practice. As it is important for an organisation to have good procedures for performance reporting and to improve them continuously, it is important to use the information generated from performance reporting to manage activities, optimise results and make adjustments to management systems and to strategic planning processes, etc. The way in which this information is used influences the organisation's long-term success in implementing performance management.

3.3.

According to the Commission, performance management is an ongoing systematic approach to improving the effectiveness, efficiency and results of operations through better planning, regular monitoring and evidence-based decision-making (2). The Commission’s ‘EU Budget Focused on Results’ initiative, which was launched in 2015, includes different work streams and objectives, one of which is to support decision-making with meaningful performance information (3). The better regulation guidelines (4), which were launched in 2015 and updated in July 2017, stipulate that all available evidence should be used as a basis for designing EU policies and laws that achieve their objectives in an open, transparent and cost-efficient manner.

3.4.

To assess if the Commission adequately uses performance information for decision-making, we took the following steps.

3.5.

Our review covered the use of performance information at the Commission in relation to spending programmes and the development, implementation and evaluation of policies. We excluded the following aspects from the scope of our audit.

(i)

The use of performance information in relation to the Commission’s administrative management of staff and other resources, in order to focus on the delivery of results for policies and programmes.

(ii)

The use of performance information by the budgetary authority  (7); the OECD (8) and other researchers (9) had already carried out work in this area.

3.6.

In national budgeting, it is usual to reallocate resources each year, or even more frequently. In the EU context, though, the situation is different. In its mid-term review of the 2014-2020 multiannual financial framework (MFF) (10), the Commission noted that it was essential to strike a balance between medium-term predictability and the flexibility to respond to unforeseen circumstances. In the 2014-2020 multiannual financial framework, about 80 % of the EU budget is pre-allocated; this, according to the Commission, ‘limits the budget’s responsiveness to evolving needs’.

3.7.

The EU budget is mainly an investment budget. Annual ceilings are set for the various budget headings included in the seven-year multiannual financial framework, and amounts are pre-allocated to Member States. While there already are some performance-linked flexibility mechanisms set out in the relevant sectorial legislation, such as the performance reserve and ex-ante conditionalities, these have limitations (11). Although non-performing activities can be replaced by better ones in the same area and Member State, there is only limited space for adjusting spending priorities between budget headings. The most important ‘window of opportunity’ for allocating funds by taking into account performance information is the drafting and negotiation of a new multiannual financial framework regulation and the accompanying sectoral programmes.

3.8.

Multiannual financial framework mid-term reviews present another opportunity for taking performance information into account. The last such review (12) resulted in a re-allocation of 12 798  million euros, representing 1,18  % of the total multiannual financial framework commitment appropriations for the 2014-2020 period: a relatively limited proportion. The main driver for these reallocations of funds was to address the refugee crisis and other security threats, as well as investment gaps resulting from the financial and economic crisis, rather than performance.

3.8.

3.9.

Measuring the EU budget’s and the Commission’s contributions to high-level objectives is complex, because several political strategic frameworks apply in parallel (13) (see Box 3.1 ):

3.9.

The Multiannual Financial Framework is one of the tools for implementing the Union’s priorities. The current Multiannual Financial Framework was designed to contribute to the Europe 2020 strategy and provides strong support for other emerging priorities (14).

3.10.

In addition, other goals are defined in various sectoral policy documents in accordance with the EU’s competences stemming from the Treaty on the functioning of the EU. The EU is also committed to implementing the Sustainable Development Goals defined by the United Nations. The EU aims to report each year on the progress it has made towards achieving those goals.

3.11.

We examined how the DGs dealt with the co-existence of various strategies. Two approaches were prevalent.

3.12.

The multiplicity of strategies leads stakeholders to consider them as separate approaches, as for instance shown by the Commission’s evaluation of the EU Youth Strategy (16).

3.12.

3.13.

Our survey included questions on ‘goal clarity’. With these questions, we aimed to find out how well Commission managers understood the mission and goals of their DGs and of the Commission in general (see Box 3.2 ). Overall, survey replies were positive and indicated a high level of understanding. However, managers in two of the six DGs we interviewed made reference to the complexity of interactions between the different EU strategic frameworks, and between the goals of these frameworks and those set at the level of the DGs.

3.14.

The Commission DGs collect performance information in various formats and from diverse sources, thereby generating a wealth of performance-relevant information. In addition to reporting, the Commission uses performance information to keep track of its ongoing activities, in particular to assess whether the targets of spending programmes have been reached, and as an input for the ‘Better Regulation’ process which supports the preparation of legislative proposals.

3.15.

The choice of what information to use depends on the type of decision to be made. Box 3.3 below gives an overview of the main decision-making processes involving the use of performance information.

3.16.

Several Commission DGs have recently implemented new instruments and processes for using performance data. Often, they have introduced new IT applications which generate tailor-made and up-to-date reports to facilitate decision-making. The development of these new tools is evidence of the Commission’s commitment to progress in better managing performance data (17). The following examples illustrate the range of new developments.

(i)

DG AGRI’s new Rural Development Information System 2 is an IT system which assists in managing the workflow of programmes, including programme evaluation. Reports can be generated to compare the implementation of EU programmes in Member States with the EU average.

(ii)

DG DEVCO is in the process of developing a new IT tool that will include modules for monitoring and reporting results and for supporting action appraisal and financing decision processes. The system should link projects to strategic planning.

(iii)

DG EAC’s Erasmus+ dashboard is an IT system used by all Erasmus+ national agencies across Europe. It provides real-time performance information from all 57 agencies, including feedback on the results of Erasmus+ via a survey tool which measures participant satisfaction. These features enable DG EAC to obtain rapid feedback on any programme developments and react to them quickly.

(iii)

The dashboard also contains real-time performance data on indirectly managed grant procedures, in line with a grant performance management framework defined in 2017 across all EAC programmes.

3.17.

In last year's annual report (18), we identified areas of good practice in public performance reporting by governments and international organisations around the world. We suggested that the Commission should consider implementing these good practices itself. We recommended that the Commission should improve its performance reporting by making it more streamlined, balanced, user-friendly and accessible. We also recommended that the Commission should assess the quality of the presented information. The Commission reacted to these recommendations by reflecting them in the instructions for its 2017 AAR.

3.18.

Our survey this year focused on the performance information available to managers (see Box 3.4 ). The survey results indicated that performance measurement systems needed further development. In particular, they confirmed that the timeliness of performance information was an issue (19). The Commission’s central departments have devised extensive instructions, templates, training and exchanges for preparing performance reports (for example, instructions were issued in November 2017 for the 2017 annual activity reports). Nevertheless, the survey results also showed that DGs wished to receive additional guidance on preparing reports. We also noted that the respondents who replied more negatively to these questions typically used performance information less frequently.

3.18.

To the extent possible, the Commission takes account of this in its planning. For example, all Commission Directorates-General plan their evaluation activities with a (minimum) five-year rolling programme, to provide timely performance information for their reporting. The plan needs to be annually updated.

Regarding the guidance on preparing reports, the central services of the Commission provide extensive guidance on all the preparation of all major performance reports produced by the DGs, taking into account the progress made over the years. This includes the Annual Activity Reports for Commission services and the Programme Statements accompanying the draft budget. Guidance is also provided for evaluations in the Better Regulation Guidelines and toolbox. Other types of reviews are also described. Guidance is also provided centrally to design appropriate performance reporting systems, with the aim of collecting data efficiently for monitoring programme implementation and results, effectively, and in a timely manner. Formal guidance is complemented with training sessions and exchanges of best practices between services.

3.19.

56 % of the respondents to our survey said that they used performance information for decision-making either often or very often. The four most frequent uses of performance information were for developing strategies, improving decisions, assessing whether targets were met, and taking corrective action where necessary (20).

3.20.

It is difficult for managers to use performance information to assess how programmes and policies contribute to high-level objectives. Also, managers do not have sole responsibility for performance. This is because the co-legislators and other stakeholders, Member States in particular, play a major role in achieving results and making an impact. In previous years, we have observed (21) that many programme and policy objectives are taken directly from policy or legislative documents, and are thus set at too high a level to be useful as management instruments. We also issued recommendations (22) that the Commission should tackle this. The Commission acknowledged that it was difficult to create links between the abundant information available on projects at the operational level and the high-level policies and decision-making at political level.

3.20.

Objectives and indicators contained in financial programmes are the product of the legislative process. They relate to the performance of programmes, not of the Commission services. The Commission has made proposals to strengthen the performance frameworks in financial programmes as part of the proposals for the future Multiannual Financial Framework.

Concerning Horizon 2020, see the reply of the Commission to the Recommendation 1 in the 2015 ECA’s annual report.

Concerning the Commission’s ability to monitor and report against Europe 2020, see the reply of the Commission to paragraph 3.97 in the 2014 ECA annual report.

The link between objectives and related indicators in a wider policy perspective is presented in the Programme Statements.

3.21.

Every year, the Commission uses three core reporting tools — the annual activity reports (AARs), programme statements (PSs), and the annual management and performance report (AMPR) — to give an account of its operational performance and the performance of EU programmes and policies. As illustrated in Box 3.5 below, a number of planning documents are the basis for the reporting in these three core reports (23).

3.21.

3.22.

The three reports cover the EU's entire budget, and all of its policy activities. Box 3.6 gives a summary of the reports’ intended audience and use.

3.22.

3.23.

Core performance reports are intended more as reporting tools than as instruments for Commission DGs to manage their own performance, or the performance of the Commission as a whole. This is because the reports are not detailed or comprehensive enough; they are only drawn up once a year; and they are mainly intended for readers external to the DG.

3.23.

The Annual Activity Report is a management report of the Directors-General and Heads of Services to the College of Commissioners. It is the main instrument of management accountability within the Commission and is detailed and comprehensive. It includes reporting on all indicators chosen by the Commission services in their strategic plans for the 2016-2020 period, as key for measuring the performance of the Commission services and their contribution to the political priorities of the Juncker Commission.

The Annual Activity Report is therefore intended both for an external audience and as a source of management information for Commission managers. The Commission also notes that many key indicators are updated and reported more regularly, for example those relating to the Europe 2020 headline targets. Commission services are encouraged to monitor progress towards their objectives regularly, including for example in the context of mid-year reviews of their management plans.

3.24.

There are, however, some instances where core performance reports (and particularly annual activity reports) have a use for managing performance.

3.24.

3.25.

The annual activity reports are publicly accessible documents, but the Commission has not assessed how successfully they target citizens. However, the number of individuals visiting the Europa website (27) suggests that citizen interest is low.

3.25.

3.26.

One of the main purposes of using performance information is to measure progress towards meeting targets in order to take corrective action and, ultimately, to achieve results. Knowing that poor performance will have consequences should be a motivation for managers to use performance information. Our survey of managers included a question about what happens, in the respondents' experience, if performance targets, in relation to spending programmes or policies, are met (see Box 3.7 ) or not met (see Box 3.8 ). The survey results indicate that poor performance does not lead to corrective action: in all cases: one fifth of respondents stated that no changes were made when targets were not met. The development of action plans is the most frequent type of decision taken. Next most frequent is further analysis, either in the form of enhanced monitoring or of an additional evaluation. However, such measures do not in themselves correct the identified issues. We observed that not meeting a target was more likely to have consequences in DGs where performance information was used frequently.

3.26.

As the ECA points out, more than 70 % of respondents indicated that if targets are not met, action plans are developed and more intense monitoring is carried out and more than 60 % of respondents replied that evaluation is carried out if targets are not met.

The Commission also notes that in relation to the management of the EU budget, the Commission faces a number of constraints flowing from the Multiannual Financial Framework and the decisions taken by the budgetary authority on the annual budget.

3.27.

In the interests of transparency and accountability, stakeholders must be able to see in the core performance reports how the Commission uses the performance information available to it (28). In its performance reports, the Commission aims to present a coherent ‘performance story’ (29) on progress made towards achieving results. These stories are more credible if they are based on substantive evidence. They need to explain not only what decisions were made, but also how those decisions reflected available performance information.

3.27.

3.28.

The Commission’s central departments provide instructions to the DGs for preparing strategic plans, management plans and annual activity reports. While the instructions require the DGs to present performance information when reporting on their activities, DGs are not required to explain how the information was used to improve those activities.

3.28.

3.29.

DGs mention that they use performance information in their reports but without providing further explanations.