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European Court of Auditors

12, rue Alcide De Gasperi, L-1615 Luxembourg

1.1.

Pursuant to Article 248 of the EC Treaty, the Court of Auditors provides the European Parliament and the Council with a Statement of Assurance concerning the reliability of the accounts and the legality and regularity of the underlying transactions (‘the DAS’). The Treaty also authorises the Court to supplement this statement with specific assessments of each major area of EU activity.

1.2.

The aim of the work on the reliability of the accounts of the European Communities is to obtain sufficient appropriate evidence to conclude on the extent to which revenue, expenditure, assets and liabilities have been properly recorded and that the annual accounts provide a true and fair view of the financial position as of 31 December 2008, and the results of their operations and cash flows for the year then ended (see paragraphs 1.4 to 1.18).

1.3.

The objective of the Court’s audit work on the regularity (7)of the transactions underlying the 2008 accounts is to gather sufficient appropriate evidence on which to base its opinion on whether they are in accordance with the applicable regulations or contractual provisions, and have been correctly calculated. See paragraphs 1.20 to 1.49 of this chapter for general issues and a summary of the results, and chapters 2 and 4 to 11 for details in the form of specific assessments.

1.4.

The Court's observations concern the annual accounts for the financial year 2008, drawn up by the Commission's Accounting Officer and approved by the Commission in compliance with Article 129 of the Financial Regulation of 25 June 2002 (8)and received by the Court on 29 July 2009 The accounts comprise the ‘consolidated financial statements’ - covering, in particular, the balance sheet setting out the assets and liabilities at the end of the year as well as the economic outturn account - and the ‘consolidated reports on the implementation of the budget’ - covering the revenue and expenditure for the year.

1.5.

The Commission's Accounting Officer provided the Court with a representation letter confirming that the consolidated accounts are complete and reliable (see however paragraph 1.9) and that most of the Commission’s local systems have been validated (see however paragraph 1.10).

1.6.

In its audit of the 2008 accounts the Court concentrated on the following elements:

1.7.

The measures introduced by the Commission’s Accounting Officer in 2007 (12)to improve the accounting control environment at the level of individual Directorates-General also had an impact in 2008 and have contributed to a strengthening of the financial reporting framework and accounting systems. However, certain weaknesses still exist which need to be addressed so as to ensure the quality of accounting data (see paragraphs 1.10 and 1.11).

1.7.

1.8.

Table 1.1 summarises and comments on the Commission’s response to the Court’s observations concerning the reliability of the 2007 accounts as well as the other points raised by the Court.

1.9.

The Commission’s Accounting Officer highlighted in his management representation letter that less than half of the institutions and agencies had provided information about the validation of their accounting systems in their own management representations.

1.10.

Many Directorates-General use their own local IT-systems for financial management purposes and for the creation of transactions which are sent to the central accounting system (ABAC) via an interface. Most of these systems have been validated (13)by the Commission's Accounting Officer. However, in his recommendations, the Commission’s Accounting Officer identifies a number of open cross-cutting issues (14), the nature and importance of which means that they could still represent a risk to the reliability of the accounts (15).

1.10.

1.11.

‘Cut-off’ refers to the relevant procedures for deciding to which financial year a transaction should be attributed. Such procedures have to be applied by the Commission services for all accrued charges (more than 100 billion euro). In the ten Directorates-General which it has examined (16), representing more than 90 % of the accrued charges, the Court has noted continuous improvements over the last three years. However, it has to be noted that some services use the cut-off during the closure procedure to adjust erroneous accounts instead of correcting the related individual error prone accounting entries (e.g. booking of wrong amounts, double or omitted bookings). This may lead to inaccuracies in the accounting data during the year (see paragraphs 1.13 to 1.15).

1.11.

1.12.

The Court's audit of the consolidated financial statements found them to be free of material misstatement. However, a number of issues were identified concerning particular elements which require further attention, as presented below.

1.13.

The Court’s audit of a representative statistical sample of 80 pre-financings registered in the accounting system identified a low level of error in terms of financial impact as regards this item of the balance sheet. However, the frequency of these findings underlines the need for further improvement of the accuracy of the basic accounting data at the level of the operational Directorates-General. The most common types of errors are:

1.13.

1.14.

Furthermore, additional audit work on the identification and validation of pre-financings revealed problems of completeness/accuracy for the balance sheet:

1.15.

The audit of a representative statistical sample of 80 invoices/cost statements from the population of accounts payable registered in the accounting system identified a low level of error in terms of financial impact as regards this balance sheet item. However, the frequency of accounting errors underlines the need for further improvement of the reliability of the basic accounting data at the level of the operational Directorates-General. Most of the errors concern the booking of invoices when received (prior to the eligibility checks) for incorrect amounts and the correction of wrong entries through cut-off adjustments.

1.15.

1.16.

Following a recommendation of the Court, more information concerning the recovery of undue payments has been presented in the notes to the financial statements. The Court’s audit shows that the Commission is reporting reliable figures on financial corrections as far as they result from its own audit activities. However, Member States often do not provide the Commission with complete and reliable information on the financial corrections they are carrying out themselves (see paragraph 6.30). As a result of the high proportion of ineligible expenditure repeatedly indicated in the Courts Annual Reports, the Court considers that, in the area of Structural Actions, complete and reliable accounting data on these correction mechanisms at the Member State level should be presented in the notes to the consolidated accounts.

1.16.

1.17.

Based on the examination of the certifying bodies work and the Commission’s analysis referring to this, the Court reiterates its doubt as regards the reliability of the receivables from Member States in the area of agriculture (EAGF debtors’ accounts) (18). The Commission underlined shortcomings with respect to the debtors’ accounts for one quarter of the paying agencies (19)and has proposed financial corrections (20)amounting to some 25,3 million euro. These corrections represent some 1,95 % of the 1 295 million euro that are to be recovered as at the end of financial year 2008. Whilst just below the 2 % level of materiality, they indicate that a risk of a material error at the overall level of the EAGF debtors’ accounts exists (see paragraph 5.56).

1.17.

The corrections of 25,3 million euro were proposed by the Commission based on its assessment of the information provided by the certification bodies in their reports, and its calculation of the most likely rates (and amounts) of error relating to debts in particular paying agencies. The same logic is used for debts as for the treatment (and possible correction) of errors arising from the detailed testing of Funds expenditure.

The financial errors found are recovered through the ordinary clearance of accounts procedure.

1.18.

In respect of Macro-economic financial assistance, Balance of Payments and Euratom loans, the Communities borrow funds on the capital markets and make them available ‘back-to-back’ to the intended beneficiaries. International accounting standards and EC accounting rule 11 require the differences between the offered and the market interest rates to be reflected in the accounts. However, this has not been shown. The reasons and the effects of this departure from the standards are not sufficiently disclosed in the explanatory notes to the Communities financial statements.

1.18.

As suggested by the Court, the Commission will disclose more explicit information in the notes to the EC annual accounts and will consider clarifying the accounting rule 11 to better reflect the specificities of these transactions.

1.19.

The Court concludes that the observations made do not have a material impact on the reliability of the accounts.

1.20.

The Court provides specific assessments within chapters 5 to 11 on groups of Activity Based Budgeting (ABB) policy areas (see Table 1.2 ). Chapter 4 covers revenue. Each specific assessment provides an introduction to the policy group, findings and conclusions on the regularity of transactions and the effectiveness of systems, and a follow-up of previous observations.

1.21.

The approach taken by the Court to audit the regularity of the transactions underlying the accounts comprises two main pillars: direct testing of transactions in order to ascertain how far they are regular; and an assessment of the effectiveness of supervisory and controls system in ensuring regularity. This is supplemented by evidence received from the relevant work of other auditors (where available) and analysis of management representations (21).

1.22.

Transaction testing is based on a representative statistical sample of receipts or payments taken from the population as a whole, normally the group of policy areas. This testing provides a statistical estimation of the extent to which the transactions in the population concerned are regular.

1.23.

In order to determine the sample sizes the Court uses an audit assurance model. This involves an assessment of the inherent risk that errors occur in transactions and the risk that the supervisory and control systems do not prevent or detect and correct such errors (control risk). In most cases, the Court must rely primarily on its direct testing as the systems do not provide adequate assurance about the regularity of transactions.

1.24.

Testing involves the detailed examination of the transactions selected to check if the claim or payment was correctly calculated and in compliance with the relevant rules and regulations governing the spending. When the transaction is incorrectly calculated, or does not meet a regulatory requirement or contractual provisions, it is considered to contain an error. Via its sample of accounting transactions recorded in the budgetary accounts, the Court traces the payment down to the level of the final recipient (e.g. farmer, organiser of training course, development aid project promoter) and tests compliance with the relevant conditions at each level, where appropriate.

1.25.

Errors in transactions occur for a variety of reasons and take a number of different forms depending on the nature of the breach and specific rule or contractual requirement broken. They may relate to a condition for payment or to another compliance issue.

1.26.

The Court classifies errors in the following two ways:

1.27.

The Court expresses the frequency by which errors occur by presenting the proportion of the sample affected by errors (both quantifiable and non-quantifiable). This indicates how widespread errors are likely to be within the policy group as a whole (see 1.3 of part 1 of Annexes 1 in the different chapters).

1.28.

The Court estimates the financial impact of errors on the basis of an error rate. It is calculated from quantifiable errors only. The Court evaluates the estimated error rate against a materiality level of 2 % to determine - together with other evidence - if the payments of the expenditure area are free from material error (an ‘unqualified’ opinion), or affected by a material level of error (an ‘adverse’ opinion (22)). For the purpose of presenting the results the error rate is classified as falling into one of the following three ranges:

This information is provided in part 1 of Annexes 1 of Chapters 4 to 11, and summarised in Table 1.3 .

1.29.

Supervisory and control systems are established by the Commission, (and Member and beneficiary States in the case of shared or decentralised management), to manage the risks to the budget, including the regularity of transactions. Assessing the effectiveness of systems in ensuring regularity is therefore a key audit procedure, and particularly useful for identifying recommendations for improvement.

1.30.

Each policy group is governed by a multitude of individual systems, each of which takes a considerable time to test and assess. Each year the Court therefore normally selects a sample of systems to examine. The results of the systems assessments are presented in the form of a table called ‘Assessment of selected supervisory and control systems’ given in part 2 of Annexes 1 of chapters 4 to 11. Systems are classified as being ‘effective’ in mitigating the risk of error in transactions, ‘partially effective’ (when there are some weakness affecting operational effectiveness) or ‘not effective’ (when weaknesses are pervasive and thereby completely undermine operating effectiveness).

1.31.

In addition, the Court provides an overall assessment of supervisory controls systems (also presented in part 2 of Annexes 1 of chapters 4 to 11) which take into account both the assessment of selected systems, as well as the results of transaction testing.

1.32.

For Revenue and in the policy group Administrative and other expenditure, the supervisory and control systems, taken as a whole, are effective (see paragraphs 4.29 to 4.30 and 11.20 to 11.21) and the Court estimates that the errors have a financial impact of less than 2 % of the total amounts (see Table 1.3 ). In addition, the Court's assessment of the declarations by Directors-General and authorising officers by delegation confirmed that no reservations had to be presented (see paragraphs 2.3 to 2.4 and 2.9 and Table 2.1 ).

1.33.

For the policy group Agriculture and natural resources and for the policy group Education and Citizenship the Court estimates that the overall financial impact of errors is less than 2 % of the total expenditure for each respective policy group. However, the Court found that Rural development expenditure within policy group Agriculture and natural resources was affected by a level of error exceeding 2 % (see paragraph 5.62) and the Court’s testing suggests that the interim and final payments for policy group Education and Citizenship were affected by material error (see paragraph 9.31). For the policy group Economic and financial affairs the Court estimates the error rate to be slightly above 2 % of the total expenditure for this policy group. However, the Court found that payments made under the Sixth Framework programme for research and technological development account for a disproportionately large part of this overall error rate (see paragraphs 10.12 to 10.13).

1.33.

The Commission notes that for Education and Citizenship the Court has found quantifiable errors in 4 out of 21 interim and final payments examined. See also reply to paragraph 9.31.

For the policy group Economic and financial affairs, as FP6 represents only 8 % of the payments, the Commission considers that the overall transaction error rate in this policy area, taken as a whole, is free of material error. As far as FP6 payments are concerned the findings and conclusions of the Court in this chapter are similar to those in Chapter 7. See also replies to paragraphs 10.12 and 10.13.

1.34.

The Court concludes that the supervisory and control systems for the policy group Agriculture and natural resources are partially effective in ensuring the regularity of payments (see paragraph 5.63). Whereas the Court reiterates that IACS generally is an effective control system for limiting the risk of error or irregular expenditure (see paragraph 5.64), it has identified issues which need to be addressed in SPS and SAPS schemes (see paragraph 5.65) and in the area of Rural development (see paragraph 5.66). The Court concludes that the supervisory and control systems for the policy group Education and Citizenship are partially effective (see paragraph 9.32) (23). For the policy group Economic and financial affairs, the Court examined three supervisory and control systems. While two were assessed as effective, one was assessed as only partially effective (24)in ensuring the legality and regularity of payments (see paragraph 10.28).

1.34.

In 2008, for the Directorate-General for Education and Culture, the supervisory and control system put in place for the 2007-2013 period provides for a sound framework. Significant progress was made in its implementation through the analysis of ex-post declarations of assurance and intensified monitoring visits and audits.

As regards the policy group Economic and financial affairs, the Court’s findings and conclusions concerning FP6 are similar to those in Chapter 7 whilst the rest of the expenditure is free of material error. The Commission considers that the supervisory and control systems in place are cost-efficient, proportional and adequate as a whole (see replies to paragraphs 10.19 and 10.28).

1.35.

In the policy groups Cohesion (25), Research, energy and transport, External aid, development and enlargement and Economic and financial affairs, the Court concludes that the supervisory and control systems are partially effective, (see paragraphs 6.21, 6.23, 6.36, 7.41, 8.34 and 10.28 and Table 1.3 ). While for the policy groups Research, energy and transport, External aid, development and enlargement and Economic and financial affairs the Court’s estimated error rate is between 2 % - 5 % of the total expenditure, for the policy group Cohesion, the estimated error rate is above 5 % (see paragraphs 6.17, 6.35, 7.40 and 8.33 and Table 1.3 ). For the policy groups Cohesion and External aid, development and enlargement, the Court’s view is that the scope of the reservations expressed in the declarations by Directors-General and authorising officers by delegation should have been broader in order to reflect the significant deficiencies which still persist in these expenditure areas as manifest in the Court’s audit findings (see paragraphs 2.6 to 2.7 and 2.10 to 2.11 and Table 2.1 ). Cohesion remains the most problematic area and its estimated error rate stands well above those for the other policy areas.

1.35.

Considerable efforts have been made to improve the management of research policy within the limits of the applicable legal and financial framework. The Commission will continue the rigorous application of controls. The Commission will keep working to reduce the level of residual error in this policy group.

The reasonable assurance concerning the legality and regularity of the underlying transactions is given by Directors-Generals in the Annual Activity Reports. When a Director-General can base this reasonable assurance on the estimated error rate below the materiality threshold, as is the case for instance for the Directorate-General for Enlargement dealt with by the Court in policy group External aid, development and enlargement, no reservation has to be made.

For the area of External aid, Development and Enlargement, the Commission has designed its controls for this policy group to cover the full lifecycle of its multiannual projects so that it is able to prevent, or detect and correct most financial errors in the normal course of its controls. The mandatory financial audits foreseen under the Commission’s control system should allow the Commission to detect and correct these prefinancing errors — in a later accounting year — before final payments are made. The Commission’s ex-post controls confirm this low level of residual error.

See also reply to paragraph 8.34.

1.36.

Compared to previous years the following changes have been noted: a decrease in the estimated error rate for the policy groups Agriculture and natural resources (26)and Research, energy and transport (27). For the policy group Agriculture and natural resources, the Court estimates that the overall error rate is slightly below 2 % (see paragraph 5.13), whereas for the policy group Research, energy and transport it is still above 2 % (see paragraph 7.40). For the policy group Education and citizenship, the Court estimates that the errors have a financial impact of less than 2 %. The Court considers that this is largely due to the large share of advances, which are relatively less affected by errors than interim and final payments (see paragraphs 9.6 to 9.7 and 9.31). In the policy group Economic and financial affairs, the estimated overall error rate for the financial year 2008 is slightly above 2 % (in 2007 slightly below 2 %) due to the errors detected in FP6 spending which, however, accounts for only 8 % of the policy group’s expenditure see paragraph 10.27).

1.36.

1.37.

The Court emphasises that its audits show that complicated or unclear eligibility criteria or other complex legal requirements, particularly in the policy groups of Agriculture and natural resources, Cohesion, Research, energy and transport as well as Economic and financial affairs, contribute significantly to the risk of error (see paragraphs 5.17 to 5.26, 5.34 to 5.52, 6.18 to 6.20, 7.12 to 7.15 and 10.11 to 10.14).

1.37.

Nevertheless, the Commission has committed itself to make proposals to the Legislative Authority for further simplification where possible. It will consider the scope for introducing further simplification of eligibility rules in its 2010 proposal for the triennial revision of the Financial Regulation. It will also study principles for further simplification of sectorial legislation for the next round of basic acts, to come into force from 2014.

For Agriculture and natural resources, the results have improved thanks to the continuous efforts to simplify the legal requirements/eligibility criteria under both pillars of the CAP. See also the specific replies to paragraphs 5.17 to 5.26, 5.34 to 5.52.

In the area of cohesion, modifications have been made to the regulations for 2007-2013, incorporating simplifications resulting from a joint Commission-Member States experts group. The Commission has also issued in early 2009 a digest of eligibility rules. See also the Commission’s reply to paragraphs 1.41-1.42 and 6.37(a).

The 7th Framework Programme has been a step forward in simplification. As a result of the experience gained during the implementation of the programme, and if appropriate, the Commission may propose changes to its legal basis.

1.38.

In policy group External aid, development and enlargement as well as Economic and financial affairs the Commission jointly manages EU expenditure with international organisations (28)on the basis of agreements which also secure the audit rights of the Court. Nevertheless, the Court’s access to UN generated audit reports and supporting documents or verification visits related to the DAS 2008 were partly or fully denied (see paragraphs 8.13 and 10.10).

1.38.

See also reply to paragraph 8.13.

1.39.

The Court noted last year that, despite the positive developments in the Commission’s internal control framework, a substantial part of the transactions underlying the EU accounts remains subject to a material level of error (paragraph 1.42 of the Annual Report concerning the financial year 2007). In addition, the Court’s DAS audit highlights differences – sometimes significant – in the type, incidence and level of irregularity between, and within, policy groups. The following paragraphs seek to provide further insight into the assessment of how progress can be made towards an effective Community internal control framework (29).

1.40.

Despite the Union having a single general budget there are many differences in the way the money is spent. These include: the kind of management mode; types of beneficiaries; periodicity of the aid; ways of claiming and different types of control and recovery systems. These differences arise in order to address the circumstances of the budgetary area involved and the individual objectives of the aid, and in recognition of the cost and complexity of administering and controlling the schemes.

1.41.

The rules governing the way the money is spent are established to ensure that the aid achieves the policy objectives sought - ‘spending on the right things at the right time’. Some rules are common to all payment types whilst others depend on the type of spending. The type and complexity of the rules therefore may also be a function of the complexity of the policy objectives.

1.42.

The more onerous and complex are the rules, the greater is the risk that they will not be followed, so increasing the risk of errors occurring in transactions and policy objectives not being met. Concurrently, excessive fine-tuning in establishing very specific programme targets is bound to increase the cost in checking whether such targets have been met. Otherwise put: well designed rules and regulations which are clear to interpret and simple to apply, decrease the risk of error (paragraph 1.45 of the Annual Report concerning the financial year 2007).

1.41-1.42.

The Commission has committed itself to incorporating a description of the associated control arrangements in all relevant future legislative proposals.

Simplification is a major element of the Commission’s better regulation programme. The Member States are also required to simplify the eligibility criteria in their national programmes. However, a certain level of complexity is unavoidable and should be taken into account in future discussions on a tolerable level of risk.

See also reply to paragraph 2.35(b).

In the Cohesion area, the ESF regulation for 2007-2013 already provided for the possibility to declare indirect costs on a flat-rate basis. The possibility to use flat rates, lump sums and standard scales of unit costs for the 2007-2013 programmes was generalised for both the ERDF and ESF by amending the fund regulations in May 2009. Other simplifications were adopted in December 2008 and in May 2009. In July 2009, the Commission has also brought forward proposals for further simplifications to implementing Regulation (EC) No 1828/2006 and to the general Regulation (EC) No 1083/2006.

The Commission, as a result of the experience gained during the implementation of the programme, and if appropriate, may propose changes to its legal basis.

1.43.

An element of caution is appropriate. Simplifying rules merely in order to reduce the risk of irregularity might have some disadvantages if more generic rules were to result in less focused spending. Furthermore, ‘simplification’ could suggest, in some areas (see for example paragraphs 9.6 and 9.7), the relaxation of the conditions for receiving advances and an increase in the amounts that can be paid as such. However, such simplification should be supported by effective systems as otherwise irregular expenditure would only become apparent when the programmes are partially completed or completely closed, which happens later in the process. Notwithstanding these qualifications, simplification needs to remain an overriding objective.

1.43.

As far as the policy area Education and culture is concerned, the design of the new programmes for 2007-2013 simplified the rules and made extensive use of lump sum financing. This, together with the rigorous approval of the national management and control systems, should reduce the risk linked to final payments.

See also reply to paragraph 9.7.

1.44.

It has to be acknowledged that management of the EU budget has evolved piecemeal over time in response to the type of expenditure programmes which were introduced subsequently. The rules governing the spending as well as the management methods need to take into account the specificities of the various targets of budgetary spending. These targets, however, should not be overly detailed, resulting in an excessive administrative burden and regulations which are difficult to observe. This requires, on the part of the Commission, a judicious review of the underlying regulatory framework and management structure of specific expenditure programmes.

1.44.

In this respect, the Commission’s work on the tolerable risk of error needs to be considered, as it promotes a clear view on the risk which can be controlled in the light of eligibility conditions and the control environment and hence on the risk which it is not cost-effective to control. The Commission will be making concrete proposals to the Budgetary Authority on tolerable risk in the research, energy and transport, rural development, external aid and administrative expenditure in 2010.

See also reply to paragraph 1.41-1.42.

1.45.

In this context, the first and essential task must be to ensure that reliable and comprehensive information is compiled to allow a credible evaluation of the existing costs of controls (30).

1.45.

1.46.

Equally crucial must be a careful assessment as to whether the maximum benefit is being derived from the current level of expenditure on controls. If this were judged not to be the case; than the immediate goal should be to derive full advantage from the money which is already being spent and from the resources already deployed for such purpose (31).

1.46.

As a result of the Action Plan to improve supervision in the Structural Funds, the Commission has already taken ex-ante actions to improve control systems. It also points out that the 2 %-3 % reduction in the error rate through more effective ex-ante control (referred to for the ERDF in the illustrative case study presented in the ‘tolerable risk’ communication (COM(2008) 866) results from an assessment of errors identified by the Court in the DAS 2005 and is rather a measure of the ‘control risk’ (the risk that certain controls do not function effectively in some cases).

1.47.

Alongside necessary actions aiming to ensure effectiveness of systems, the indicated objective must be to determine the appropriate balance between the cost of controls and the benefits they bring (see recommendation by the Court in the Annual Report concerning the financial year 2007, paragraph 1.52).

1.47.

In line with the Court’s suggestion, the Commission will further examine the balance between the costs and benefits of control in preparing its proposals on tolerable risk beginning with the research, energy and transport, rural development, external aid and administrative expenditure fields in 2010.

1.48.

It would be desirable if, whenever expenditure programmes are being considered for approval, the risks associated with them and the costs of administration and control necessary to contain these risks to a cost effective level are set out. In this manner, the relevant decisions by Council and Parliament would be taken on a more informed basis, explicitly considering the risks and costs involved.

1.48.

1.49.

The Court underlines the importance of reflecting further on simplification and the costs and benefits of controls. This review should be done in good time before proposals for the new multiannual financial framework are prepared (32).

1.49.

See also reply to paragraph 1.37.

2.1.

This chapter examines the Commission’s progress in 2008 in addressing the weaknesses in its supervisory and control systems in order to ensure the regularity of transactions financed by the EU budget. In particular, it analyses the extent to which:

2.1.

The Commission is taking action to further improve its internal control system in the light of its own experience and to address issues raised by auditors. Actions taken in 2008 included the entry into force of the revised internal control standards for effective management as from 1 January 2008, the completion of the implementation stage of the Action Plan towards an Integrated Internal Control Framework and the improvement of the clarity and coherence of the Annual Activity Reports.

2.2.

The Court also examined the Annual Summaries (1)for Structural Actions and the European Fisheries Fund and for Agriculture to assess the added value they provide and how this was used by the Commission’s services (paragraphs 2.18 to 2.22).

2.3.

All the Directors-General stated that they had obtained reasonable assurance that the resources allocated to them had been used for the specified purposes and that the internal controls which they had introduced ensured the regularity of the underlying transactions, in 12 cases subject to reservations.

2.4.

Of the 41 main Directorates-General or services who issued a declaration in 2008, 12 contain one or more reservations, the majority of which refer to weaknesses concerning the regularity of the underlying transactions. The total number of reservations fell from 17 (2007) to 15 (2008). The most significant reservations in the context of the regularity of transactions are presented on the left-hand side of Table 2.1 .

2.4.

Furthermore, 3 long-standing reservations were lifted in 2008 (Directorate-General for Agriculture and Rural development's' on the implementation of the IACS in Greece, Directorate-General for Communication's on the absence of an ex-post control system and Directorate-General for Enterprise and Industry's on the financing of European standardisation bodies).

In other policy areas like the Cohesion Policy, the scope of the reservations has been reduced, taking into account the corrective measures already implemented by Member States.

2.5.

In policy group Agriculture and Natural Resources, the Director-General for Agriculture and rural development has lifted his longstanding reservation (six years) relating to the insufficient implementation of IACS in Greece as the relevant authorities have set up a new Land Parcel Identification System and the reservation for Rural Development has been defined in more detail following the verification and validation of control statistics by the Member State certification bodies. However, the Director-General provides no assurance that the action plan set up and implemented by Greece was effective for the 2007 claim procedure. Furthermore, in the Court’s opinion, the work done for the validation of control statistics by the Commission and the Certifying bodies in that Member State does not provide the high level of assurance required.

2.5.

2.6.

For policy group Cohesion, Directorates-General for Regional Policy and for Employment, Social Affairs and Equal Opportunities maintained reservations pertaining to weaknesses in management and control systems for the 2000-2006 period although the total number of Member States and operational programmes concerned as well as the financial quantification decreased significantly. A total of 99 operational programmes were affected in 2008, against 185 in 2007. The Directorates-General quantified the impact of these reservations at 201 million euro, (2007, 726 million euro) (2).

2.6.

The reduction of the financial impact of reservations is clearly explained in the respective AARs and confirms that the Commission took its responsibilities, in accordance with its commitment to strengthen its supervisory role. The quantified impact results from the vigorous efforts of the Commission for all programmes in 2008, including also the follow up of all reservations in the 2007 AARs, the conclusion of 14 national remedial action plans and the application of corrections of more than 1,5 billion euro, which resulted inreservations being lifted in many cases.

See also reply to paragraph 2.17.

2.7.

The reservations by the Directorates-General for policy groups Research, Energy and Transport and Economic and Financial Affairs are in line with the Court’s findings that the rate of residual error (after off-setting and corrections) in the cost claims for the 6th Framework Programme (FP6) remain above materiality.

2.7.

See also reply to paragraph 7.17.

2.8.

For policy group Education and Citizenship, the Director-General for DG Communication reported on the achievements in strengthening control systems, yet highlights that 9,4 % of the transactions checked were affected by error, albeit of low impact

2.8.

2.9.

The Court’s analysis shown on the right-hand side of Table 2.1 shows that the annual activity reports concur with the Court’s DAS conclusions for administrative expenditure and economic and financial affairs only. In other words, for these policy areas the Court’s or the Commission’s audits revealed no significant weaknesses which have not been included in the declarations of the Directors-General. For policy area Agriculture and Natural resources the annual activity report of the Director-General for Agriculture and rural development is closer to the conclusions of the relevant DAS specific assessment than in previous years.

2.9.

2.10.

In the case of the cohesion policy group, the Court notes, as for 2007, that the scope and scale of the reservations understate the gravity of the problems of irregularity in this area of the budget (see paragraph 6.35).

2.10.

The Commission will ensure that appropriate follow-up and corrective actions are taken for all the cases identified by the Court, as it did in previous years.

2.11.

In the policy group External Aid, Development and Enlargement the Court has found a material level of error (see paragraph 8.39) and that the supervisory and control systems are only partially effective in ensuring the regularity of payments (see paragraph 8.44). These findings are not adequately reflected by the Directors-General in their declarations. This is now the fourth consecutive year that the Court has made this particular observation (3).

2.11.

However as part of its ongoing efforts to improve the overall internal control system and in conjunction with the Commission’s work on tolerable risk of error, EuropeAid will launch a review of its control strategy in 2010.

2.12.

By adopting the Synthesis Report the Commission assumes its political responsibility for the operational implementation of the EU budget through its Directors-General (4). The report provides a retrospective assessment of the financial management during the whole mandate period of the outgoing Commission.

2.13.

The Commission considers that for 2008 the ‘control procedures put in place give the necessary guarantees concerning the legality and regularity of the underlying transactions for which the Commission takes overall responsibility pursuant to Article 274 of the EC Treaty.’

2.14.

The Commission refers to the outcome of an annual peer review exercise carried out in early 2009 that indicates that there is scope for further improving the quality of the Annual Activity Reports, one of the most crucial governance tools. The Commission expects that these improvements will be reflected from the 2009 AARs onwards.

2.14.

2.15.

The Synthesis Report provides some explanations of the Commission’s approach to reservations. The Commission states that a reservation is systematically made for significant deficiencies unless there is reliable audit evidence that an action plan is in place and is working. However, the Court finds that the Commission should give greater attention to the need to derive more robust indications that the corrective measures contemplated within the action plans have been or are likely to be effective, and that in several cases the scope of the reservations should be greater (see the examples discussed in paragraphs 2.5, 2.10 and 2.11 and Table 2.1 ).

2.15.

When Directors General express a reservation they are required to set out an action plan to address the identified weaknesses. The action taken is then reported and assessed in the subsequent Annual Activity Report. If there is sufficient evidence that the actions are having a measurable impact on the weaknesses, then the reservation may be lifted. Decisions to make or lift reservations are one of the key points discussed in the ‘peer reviews’, although the final decision is taken by the responsible Delegated Authorising Officer.

For the case of IACS in Greece, see reply to paragraph 2.5.

For the area of Cohesion Policy, see reply to paragraph 2.6.

The Commission also refers to its replies to paragraphs 2.10 and 2.11.

2.16.

The Court notes that the Commission acknowledges the need for further actions to resolve identified issues in other areas. These actions are to address inter-alia such concerns as

(a)

The evaluation of the effectiveness of internal controls;

(b)

The concentration of resources on improving the control structure in place for the management of expenditure in the 2007-2013 financial framework and on remedying weaknesses in the previous one; and

(b)

(c)

Complete and reliable reporting on the correction of errors at the level of the Member States.

(c)

2.17.

For Cohesion policy the Commission reports that it took more formal decisions to suspend interim payments (10 in 2008 against 1 in 2007) and applied much larger financial corrections (1 587 million in 2008 against 396 million in 2007). However, in respect of its action plan to strengthen its supervisory role under the shared management of Cohesion, the Commission acknowledges that ‘further time is needed before the impact of the actions can be measured by a reduction of the error rate’.

2.17.

More generally, the Commission has put in place a multiannual control system based on prevention or detection and correction. The Commission’s best estimate of financial corrections and recoveries decided in 2008 totalled 2,967 billion euro for all policy areas, thus demonstrating a particular effort on the detection and correction aspects of its control system (see section 6 ‘recovery of undue payments’ of the notes to the annual accounts for the year 2008).

2.18.

In its Annual Report 2007 the Court found that annual summaries, in their first year of existence, did not provide a reliable assessment of the functioning and effectiveness of the supervisory and control systems and recommended that the Commission take steps to improve the information provided (5).

2.18.

In agriculture, all Member States with only one paying agency must provide a statement of assurance from the director of the paying agency and a certificate from the certification body which by definition constitute the annual summary referred to in the Financial Regulation and the Inter-Institutional Agreement. In addition, annual summaries, also called synthesis reports, are drawn up by those Member States with more than one paying agency.

2.19.

The Court analysed the 2008 Annual Summaries to determine whether the requirements of the Financial Regulation had been respected and whether Member States had provided supplementary information.

2.20.

Not all Member States complied with the requirements as set out in the Financial Regulation nor did they follow the Commission’s guidelines (6). However, compared to last year, the quality of the analysis included in all annual summaries has improved.

2.20.

The Directorate-General for Agriculture and Rural Development has noted in its 2008 annual activity report that Member States have complied with their legal obligations and generally followed the guideline established by the Commission services. Compared to last year, the quality of analysis included in all annual summaries has improved, but in some cases the assessment of certain basic elements should still be improved further. The Commission has therefore raised this point with the Member States and has subsequently revised one of the guidelines.

2.21.

Annual summaries are an element of internal control and the Court has encouraged the Commission to add value to the process by identifying common problems, possible solutions or best practices and using this information in its supervisory role (7). The Commission has similarly encouraged the Member States to do likewise.

2.21.

The Commission also refers to its reply in paragraph 2.18.

2.22.

The Court’s analysis showed that for 2008 a number of Member States (8)submitted elements or analyses which added value to the Annual Summaries, by seeking to identify and comment on systemic deficiencies or cross-cutting issues. The Directors-General for Cohesion have used the data in the annual summaries as an input into their own assessment of the national systems.

2.22.

For the cohesion area, seven Member States have included in the Annual Summaries the statement of assurance proposed in the Commission's guidelines. The Commission will analyse those declarations and statements which have been provided to date, with the aim of defining the key elements which can add value to the Annual Summaries. The results of this analysis will be taken into account for the update of the guidance note.

For agriculture and rural development, assurance on the accounts and on the legality and regularity of the underlying transactions is provided by the statement of assurance of the director of the paying agency. This statement is subject to an audit by and an opinion from the certification body, thereby enhancing the assurance. The synthesis report (drawn up by those Member States with more than one paying agency) provides added value by summarising this assurance at national level.

2.23.

In October 2007 the Commission adopted a Communication revising the Internal Control Standards (ICS) and underlying framework (9). It set out 16 revised internal control standards for effective management to replace the original set of 24 standards as from 1 January 2008.

2.24.

In respect of 16 Directorates-General, the Court examined the ICSs related to ensuring the regularity of transactions and found a high level of implementation similar to previous years (10).

2.24.

2.25.

The revision of the ICSs was accompanied by the requirement for Directors-General to demonstrate the effective implementation of certain prioritised standards (11). Most Directors-General chose to do so for 2008 for ICS 7-11 which largely cover the area devoted to ‘Operations and Control Activities’ (12). By contrast, the standards relating to the areas of ‘Planning and Risk Management Processes’ (ICS 5 and 6), have been selected by only a small number of Directorates-General (13)despite their importance. The Commission has, however, been unable to demonstrate that the supervisory and control systems are sufficiently effective in mitigating the risk of error in the following policy areas/groups: rural development in Agriculture and Natural Resources (paragraph 5.63), Cohesion (paragraph 6.36), Research, Energy and Transport (paragraph 7.41) and External Aid, Development and Enlargement (paragraph 8.34).

2.25.

Thirteen Directorates-General (one third) chose to prioritise one or both of the Planning and Risk Management standards, including some major spending Directorates-General. The Commission considers that this is an appropriate reflection of the importance of these standards to the Directorates-General concerned.

For Agriculture and Natural Resources as a whole, the estimated value of the overall error is slightly below the materiality threshold of 2 %. Over the years, a trend shows that, in general, the supervisory and control systems have improved in this policy area and are now effective, although improvements are still needed in the area of rural development.

Through the implementation of the Action Plan to strengthen the Commission's supervisory role in the management of structural actions, the Commission has made significant progress in improving the supervisory systems and mitigating the risk of error. It has also undertaken additional actions, such as simplifying the rules for declaration of costs in the Cohesion Policy area through the introduction of flat rates, lump sums and standard scales of unit costs, and through strengthening the control framework for the 2007-2013 period. The Commission considers that the impact of such actions on the error rate can only be assessed over a longer period of time and will report in early 2010 on the first impact on 2007-2013 payments.

The Commission also refers to its reply in paragraph 2.17.

Considerable efforts have been made already to improve the management of Research, Energy and Transport policy within the limits of the applicable legal and financial framework. The Commission will continue the rigorous application of controls (see also reply to paragraph 7.42).

For the area of External aid, Development and Enlargement, the Commission has designed its controls for this policy group to cover the full lifecycle of its multi-annual projects so that it is able to prevent, or detect and correct most financial errors in the normal course of its controls. The mandatory financial audits foreseen under the Commission's control system should allow the Commission to detect and correct these prefinancing errors — in a later accounting year — before final payments are made. The Commission’s ex-post controls confirm this low level of residual error.

2.26.

The Action Plan of 2006 sought to address specific gaps in the Commission’s internal control framework (14). The Commission’s Communication of February 2009 (15)provides an updated assessment of the results of the Action Plan based on indicators.

2.27.

The Court’s analysis of this Communication (see Table 2.2 ) shows that the Commission has implemented all of the 14 sub-actions identified as outstanding in the Court’s previous Annual Report (16)and has thereby completed the implementation of the Action Plan.

2.28.

The Commission provides a series of indicators and descriptors to measure and assess the impact of the Action Plan (17). The Court’s analysis (see Table 2.2 ) shows that most of these measure only output and Commission activity by (sub-) action rather than effectiveness. Although factually accurate, it is not possible to determine on their basis if the Action Plan has had a measurable impact on the supervisory and control systems and ultimately on the regularity of transactions.

2.28.

Furthermore, the Commission considers that the action plans of the last few years have created a common understanding among Member State authorities or external bodies on the measures needed to prevent errors in EU programmes. This is a very important impact, and it will constitute the foundation for future action and cooperation.

2.29.

For 2008, the Court has identified further progress in the Commission’s supervisory and control systems, in particular, the impact of the relevant reservations on the assurance given in the Directors-General declarations (paragraphs 2.5 to 2.8).

2.29.

2.30.

The Court’s audits however identified for some annual activity reports and declarations continuing weaknesses in the scope and scale of reservations and in the assessment and functioning of the supervisory and control systems (paragraphs 2.9 to 2.11).

2.30.

The Commission welcomes the improvements noted in table 2.1 and reiterates its commitment to achieving further progress in this area. The Commission is currently assessing the factors affecting the quality of the Annual Activity Reports and will promote measures to further improve their quality.

See replies to paragraphs 2.9, 2.10 and 2.11.

2.31.

The Commission has made progress on managing the Annual Summaries such that they provide additional assurance and are used to add value to the declarations made by the Directors-General. However, not all Member States complied fully with the Financial Regulation (paragraphs 2.20 and 2.22).

2.31.

The Commission has also taken appropriate steps to follow up all cases of non-compliance with the regulatory requirements and has achieved to have Member States adding more value to their Annual Summaries compared to the previous year.

2.32.

The Commission is able to demonstrate the almost full implementation of the revised internal control standards (see paragraph 2.24), and has implemented the sub-actions in its action plan towards an integrated internal control framework (paragraph 2.27).

2.33.

However, the Court notes that the Commission is not able to demonstrate that its actions to improve supervisory and control systems have been effective in mitigating the risk of error in some areas of the budget (see paragraph 1.33).

2.33.

The Commission also refers to its replies in paragraphs 2.17 and 2.25.

2.34.

Improving supervisory and control systems must be seen as an ongoing process where the relevant measures will take time before they can be deemed to be effective. This means that past recommendations made by the Court remain valid (18).

2.34.

2.35.

Particular and additional attention needs to be primarily directed at those expenditure areas where the Court continues to report a high level of error. This must include:

(a)

assessing the cost and value of controls in policies;

(a)

(b)

favouring simplification in the conception of future policy proposals;

(b)

The Commission refers to the Court's own conclusion in paragraph 1.39 that there may be tension between simplification and ensuring that aid achieves policy objectives. It notes in this regard that very focused policy objectives sometimes require complex rules in order to ensure that the objectives are achieved.

For Cohesion Policy the Funds regulations have been modified in May 2009 to allow the use of flat rates, lump sums and standard scales of unit costs already for the 2007-2013 programmes. The Commission has strongly encouraged Member States to apply these simplified costs options. In July 2009 it has presented further proposals for simplification of the 2007-2013 regulatory Framework.

(c)

continue improving the mechanism through which financial corrections, withdrawals or recoveries are intended to correct errors incurred, as well as taking the necessary steps such that this impact can be demonstrated in practice.

(c)

The correction of systematic errors is expected to gather pace in 2009 for the research area.

2.36.

In those policy areas where there are legal requirements for annual submissions from the Member States, the Commission should ensure that maximum benefit is derived from such submissions. For example, annual summaries and ex-ante declarations. Due attention should also be given to voluntary initiatives by the Member States (in the form of National Declarations) or by Supreme Audit Institutions to obtain additional insight into all matters that could be relevant in ensuring the legality and regularity of expenditure under the EU budget.

2.36.

3.1.

This chapter analyses issues arising from the implementation of the EU general budget in 2008. It covers in particular the rate of budgetary implementation, the implementation of EU programmes, in particular EU cohesion policies expenditure, the amending budgets and the level of outstanding budgetary commitments.

3.2.

The budgetary appropriations adopted for 2008 (voted budget and amending budgets) together with the carryover from 2007 totalled 132,3 billion euro in commitments and 117 billion euro in payments, an increase of 4,7 % and 1,7 % respectively compared to the final budget in 2007 (1). Overall, the total budgetary commitment appropriations of the year were 2,2 billion euro below the financial framework ceiling, while payment appropriations remained below by 14,0 billion euro (see Diagrams III and IV in Annex I ).

3.3

The 10 amending budgets voted during the year resulted in an overall 1,4 billion euro increase in appropriations for commitments and a 4,6 billion euro decrease in appropriations for payments. The decrease is mostly a reaction to lower than expected spending in the areas of Cohesion Policies (4,5 billion euro) and External Relations (0,3 billion euro). Reducing appropriations for payments through amending budgets represents good financial management by adjusting to changes and reducing the budgetary surplus (2)(allowing, in particular, own resources to be returned to Member States earlier).

3.4.

The Commission produces a series of documents containing inter alia the following information on the implementation of the budget of the European Communities (3):

3.5.

Concerning the 2000-2006 Structural Funds programmes, the implementation of payment appropriations for 2008 turned out to be considerably higher than expected. Instead of the estimated 16,3 billion euro, the payments amounted to 24,0 billion euros. The initial estimation was based on the assumption that the amounts of payment claims in 2008 would slow-down, because the n+2 deadline (6)did not apply and no new commitments occurred since 2006. However, the expected slow-down did not occur.

3.6.

The presentation by the Member States for approval by the Commission of the compliance statements, a prerequisite to the reimbursements from the Cohesion programmes of 2007-2013, has been slow (see paragraph 6.26). This led to the execution of payment appropriations being significantly lower than expected (12,6 billion euro). Almost all payments in 2008 for the new programming period represented initial advances.

3.6.

In some cases Member States had not submitted interim payment claims, even when the compliance assessment documents had already been approved. This indicates that there has been slow implementation of many programmes on the ground.

3.7.

On 26 November 2008 the Commission outlined the structure for a European Economic Recovery Plan as a common European response to the current financial and economic crisis (7).

3.8.

As part of the EU's contribution to this stimulus, the Plan proposed accelerating payments under the Structural Funds. It was proposed to simplify criteria for European Regional Development Fund (ERDF) and European Social Fund support, re-programme spending and step up advance payments from early 2009. This gave Member States earlier access to up to 1,8 billion euro of advance payments from the European Social Fund in order to reinforce active labour market policies, refocus support on the most vulnerable and step up action to boost skills. It was also planned to bring forward a further 4,5 billion euro of advance payments from the ERDF for cohesion funding. To improve energy interconnections and broadband infrastructure, the Commission intends to mobilise a further 5,00 billion euro for the period 2009-2010. This package covers a total of 3,98 billion euro for investments in carbon capture and storage, offshore wind projects and energy interconnections, and 1,02 billion euro to extend and upgrade high speed internet in rural communities as well as to respond to new challenges in the agro environmental field. The budgetary implications of the Recovery Plan will only be perceptible from 2009 onwards.

3.9.

Outstanding budgetary commitments (i.e. unused commitments carried forward to meet future spending), mainly on multiannual programmes, increased by 16,4 billion euro (11,8 %) to 155,0 billion euro. Referring exclusively to policy areas financed through differentiated appropriations (8), the amount of outstanding commitments totalled 153,8 billion euro, which is the equivalent of 1,8 years worth of commitments or 2,3 years of payments at the 2008 spending rate in the respective policy areas. However, almost 80 % of the outstanding commitments are from 2007 and 2008 and therefore related to the 2007-2013 financial framework. The structure of the accumulated ‘RALs’ shows the impact of the efforts to settle outstanding commitments by payments prior to the application of the automatic decommitment rule which is applicable in the field of both Structural Funds and Cohesion Fund (‘n+2’-rule/‘n+3’-rule).

3.9.

3.10.

Outstanding budgetary commitments arise as a direct consequence of differentiated expenditure, where expenditure programmes take a number of years to be completed and commitments are made a number of years before the corresponding payments. As commitments are liquidated by payments, the long term effect of commitments significantly exceeding payments results in a build up of outstanding commitments, with the situation being rolled forward each year.

3.11.

The highest proportion of outstanding commitments is related to the cohesion area (see Graph 3.1 ). In this field, outstanding commitments amounted to 103 billion euro (9)(around 66 % of the total amount), representing 2,2 years worth of commitments or 2,9 years worth of payments at the 2008 spending rate. The vast majority of outstanding commitments in this area (73,8 billion euro) refers to the current period 2007-2013. The outstanding commitments related to the financial framework 2000-2006 amount to 29,3 billion euro.

3.11.

3.12.

Around 13,4 % of the total unused commitments (20,9 billion euro) concerned the Cohesion Fund, despite the fact that it represents only around 6,2 % of total authorised commitment appropriations for 2008. This is an increase of 2,8 billion euro or about 15,5 % compared to 2007. The high level of outstanding budgetary commitments regarding the Cohesion Fund represents 1,4 years worth of commitments or 4,9 years worth of payments at the 2008 spending rate.

3.12.

In addition, for Cohesion Fund projects there are no automatic decommitments in the period 2000-2006, contrary to the other Structural Funds.

For the 2007-2013 period, the Cohesion Fund is programmed along with the ERDF, and automatic decommitment rules apply to both funds. This will reduce outstanding commitments for the Cohesion Fund in the future.

3.13.

The spending rates in 2008 remained at a high level. In the case of the Cohesion policy area initial payments appropriations were reduced by 4,5 billion euro by amending budgets due to a delay in the implementation of the new 2007-2013 programmes.

3.13.

3.14.

Member States improved their expenditure forecast in the area of Structural Funds reducing the over-estimation rate.

3.14.

3.15.

Outstanding budgetary commitments on differentiated expenditure remain at a very high level exceeding the total budgetary commitment appropriations for 2008. However, most outstanding budgetary commitments are now from 2007 and 2008 and therefore related to the current financial framework. The Court recommends that the Commission encourages Member States to transmit the remaining compliance assessment documents of the Management and Control Systems as soon as possible and in sufficient quality in order to avoid further delays regarding the interim payments and a further increase of outstanding budgetary commitments.

3.15.

The Commission has taken steps in 2008 and 2009 to achieve progress in the compliance assessment procedure through transmission of reminder letters, contacts and meetings with Member States. The regulatory provisions relating to the reimbursement of pre-financing in the absence of an application for payments within 24 months, as well as the application of the automatic decommitment rule, will also impose pressure on Member States. See also reply to 3.6.

As at 30 June 2009, the total number of reports received and approved represent 93 % and 58 % of the 2007-2013 appropriations, respectively.

4.1.

This chapter presents the Court’s specific assessment of Revenue. The revenue side of the budget of the European Union consists of own resources and other revenue. As shown in Table 4.1 own resources constitute by far the main source of financing of budgetary expenditure (89,4 %).

4.2.

On 26 January 2009 the Council adopted amended rules (1)implementing the new Decision on the system of the European Communities’ own resources (2007/436/EC, Euratom) (2), which came retroactively into effect from 1 January 2007 on 1 March 2009. As the ratification procedure had not been completed by the end of 2008, the necessary recalculations of the 2007 and 2008 Member States’ VAT and GNI-based contributions were made in 2009.

4.3.

The Court selected a representative statistical sample of 60 recovery orders taken from the Commission’s records of receipts of all revenue and examined the regularity of transactions at the Commission level (see Annex 4.1 ). The audit included a follow-up of certain previous findings (see Annex 4.2 ). Additional audit work carried out by the Court is described in paragraphs 4.4 to 4.8.

4.4.

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

4.5.

The Court carried out an assessment of supervisory and control systems in three Member States (3)and reviewed their accounting systems for traditional own resources. The auditors checked a random sample of 30 import declarations in each of these three Member States.

4.6.

The Court assessed the supervisory and control systems at the Commission, including the latter’s inspections in Member States. It examined the accounts for traditional own resources and analysed the flow of duties in order to obtain reasonable assurance that the amounts recorded were complete and correct. The supervisory role of ACOR (4)was also assessed.

4.7.

The VAT- and GNI-based own resources are contributions resulting from the application of uniform rates to Member States’ notionally harmonised VAT assessment bases or to the Member States’ GNI, calculated in accordance with Community rules. These two own resources are based on macroeconomic statistics, for which the underlying data cannot be audited directly. For this reason the audit took as its starting point the receipt by the Commission of the macroeconomic aggregates prepared by the Member States, and then assessed the Commission's systems for processing the data until they are included in the final accounts. The audit thus covered the drawing up of the annual budget and the correctness of the contributions by Member States.

4.8.

The audit also assessed the Commission’s supervisory and control systems which are intended to provide assurance that these resources are correctly calculated and collected, as well as the roles of the ACOR and GNI (5)Committees. Furthermore the Court examined the supervisory and control systems of the National Statistical Institutes (NSI) for the compilation of National Accounts in four Member States (6).

4.9.

The GNI-based resource is used to balance the budget. Any understatement of GNI for a particular Member State - while not affecting the overall GNI-based own resource - has the effect of increasing the contributions from the other Member States, until the problem is identified and corrected.

4.10.

Traditional own resources are established and collected by the Member States. Three quarters of these amounts are paid to the Community, the remaining quarter being retained to cover collection costs. Each Member State sends to the Commission a monthly statement of established duties (the ‘A’ account statement) and a quarterly statement of those established duties which are not included therein (the ‘B’ account) (7).

4.11.

The Court found that overall the Member States’ statements sent to the Commission were free from material error.

4.12.

The Court's audit found the calculation of Member States’ contributions and their payment to be free from material error.

4.13.

On-the-spot audits carried out by the Court confirmed that overall the audited supervisory and control systems for customs and for traditional own resources accounting were functioning well.

4.14.

However, as in previous years the Court’s audit highlighted problems affecting amounts included in the B accounts which, while not sufficiently material to affect the overall conclusion, should be remedied:

4.14.

—

delayed establishment and recovery of duties, even though the customs authorities (8)were already aware of the amounts due and the identity of the debtors, and

—

—

lack of national instructions (9)to estimate the amount of debts whose recovery is unlikely.

—

4.15.

Moreover, in a previous Annual Report (10)the Court noted that the frequency of physical checks on imports was very low. The Commission replied that this is compensated by later ‘audit-based checks’. However, the Court has criticised the frequency of such audits based on post-clearance checks in several Member States (11).

4.15.

For 2009 the Commission has selected Member States’ control strategies for traditional own resources as a general inspection theme. In the course of these inspections it is examining the control strategy established, the use of risk analysis in the formulation of the control programmes, the implementation of the control programmes and the quality of the post-clearance controls carried out.

4.16.

In 2008 the Supreme Audit Institution (SAI) of one of these Member States published a report (12)which had similar findings to those of the Court and was critical of the system for the control of dutiable imports in that Member State. In particular it highlighted:

4.16.

The Commission welcomes the national audit services’ action, in particular in the area of traditional own resources. During its inspections the Commission consults, where available, national audit reports in order to complete its assessment.

—

that, whilst the customs authority had performed well in facilitating trade, it has yet to develop the necessary expertise and resource in the execution of documentary checks that it carries out;

—

a decreasing number, and the inconsistent quality, of audits based on post-clearance checks, even though the number of errors found therein is increasing;

—

the need to develop targets and standards for the frequency and quality of these audits to ensure fiscal control and regime integrity.

4.17

Reservations are a device for the Commission to keep doubtful elements in the VAT statements submitted by Member States open for correction after the statutory time-limit of four years. In 2008, 41 reservations were placed and 15 lifted, increasing the number of reservations in place to 163 at the end of the year (see Table 4.2 ). 34 of these relate to years prior to 2000. Of the 15 reservations lifted in 2008 none related to the three oldest years 1989, 1993 and 1995. The Commission still has no effective means of ensuring that Member States provide adequate and timely information which would enable it to lift outstanding VAT-based own resources reservations.

4.17.

4.18.

DG Taxud is responsible for ensuring the correct application of the VAT directives and should monitor the transposition and the conformity of the national implementing measures put in place by Member States. In 2008 two VAT directives (13)came into effect. However DG Taxud did not monitor all the national transposition measures concerning these two directives. An incorrect or incomplete transposition could affect the amount of VAT received and thus the amount paid in own resources. It could also distort the running of the Single market.

4.18.

As far as the two VAT directives, which came into effect in 2008, are concerned, the first (14)gives the possibility, not an obligation, for the Member States to adopt national provisions derogating from the normal rules contained in the VAT Directive in order to tackle tax fraud or tax avoidance. These measures have to be communicated to the VAT Committee and will have, if adopted, a positive impact on the VAT own resources. The other one (15)does not introduce material changes in the existing legislation and its substantive amendments are listed exhaustively in Art. 412 and were accordingly followed up in the Member States concerned.

4.19.

When the Commission considers that a Member State is not fulfilling its obligations under the VAT Directive it may bring the matter before the Court of Justice (16). In 2008 there were three such cases (17), one of which could lead to a reduction in VAT-based own resources. In this case over four years passed from the recording of the case in the single register of potential infringements to the sending of the letter of referral to the Court of Justice by the Commission in 2008, and over 20 months lapsed between this registration of the complaint and the sending the letter of formal notice (18).

4.19.

The legal context in Member States is often detailed and complicated, requiring substantial analysis. The Commission pays particular attention to the preparation of cases on the interpretation of indirect taxation legislation.

Furthermore the Commission has changed its procedures last year, to allow for more frequent decision-taking in order to reduce the delays which occurred when Member State notifications were received shortly before the next procedural step was due to be taken, allowing for cases to progress as soon as the analysis of the new information has been completed. Where a potential impact on traditional own resources is identified, the Commission takes appropriate measures by making reservations.

4.20.

The Commission presented the sixth Article 12 report (19)in November 2008, despite it being due at the end of 2007. The principal objective of this report is to enable the Commission, together with the Member State concerned, to consider whether any improvements can be made to enhance the effectiveness of the procedures applied for registering taxable persons and determining and collecting VAT, as well as the VAT control systems.

4.20.

4.21.

The sixth report critically assessed the value of previous reports. It concluded that the budgetary authority had not responded to nor debated any of the issues raised in the previous reports, and the Commission could find little or no evidence of recommendations leading directly to any changes in Member States. VAT collected is the starting point for assessing the amount to be paid by Member States in VAT-based own resources.

4.22.

Following the Member States’ 2008 notification of GNI data to the Commission the GNI Committee considered that, taking due account of the existing reservations (20), the data of EU-15 Member States were adequate for use for own resource purposes. The GNI Committee was not able to form an opinion on the data in respect of EU-12 Member States which are either open or covered by reservations, because the analysis of the GNI inventories (21)is still ongoing (see paragraphs 4.25 and 4.26).

4.23.

The Court examined key components of the supervisory and control systems underlying the process of compilation of GNI data notified in 2008 in four Member States and found weaknesses in the documentation of the procedures for the production of this data, that checks on the quality of statistics were not systematically documented and/or that the evaluation of the systems underlying statistical production was not always carried out.

4.23.

4.24.

The Court maintains its opinion (22)that the differences in the supervisory and control systems in the NSI could weaken the comparability, reliability and exhaustiveness of National Accounts.

4.24.

The Commission has taken account of the remarks of the Court on supervisory and control systems. In particular, the GNI Committee has discussed supervisory and control systems since 2006. Specific questions 3 and 4 on the description and the evaluation of supervisory and control systems were introduced in the updated Commission’s GNI Inventory Assessment Questionnaire (GIAQ-document GNIC/081 of April 2007). A more detailed description of Member States’ procedures is required in the revised GNI Inventory Guidelines (GNIC/053 rev. 2). The Commission will continue to promote share of best practices between countries in this domain, in particular by organising a seminar in December 2009.

4.25.

General reservations (23)existed at the end of 2008 on GNI data of EU-15 Member States in respect of the period 2002 to 2004, pending the analysis of the updated GNI inventories. General reservations for EU-10 Member States were set in June 2008 on GNI data covering years 2004 to 2006.

4.26.

At the beginning of 2008 there were 25 open specific (24)GNI reservations relating to the period 1995 to 2001. During 2008 the Commission lifted 15 reservations leaving a balance of 10 (25)at the year end.

4.26.

4.27.

In its on-the-spot examination of the documentation provided by NSI the Court found that, for two reservations lifted by the Commission in 2008, not all the information was available to support the modifications made to the calculation of GNI-based own resources. In one case the expert’s assessment used in the estimate of a national accounts component was not documented, and in the other the data provided to the Commission was not fully supported by underlying statistics, thereby preventing a complete audit trail. As in 2007 (26), the Court found that the Commission’s work to enable reservations to be lifted involved neither desk checks to corroborate the accuracy of the information provided by Member States through comparison with other sources, nor on-the-spot checks to corroborate the amended National Accounts aggregates.

4.27.

4.28.

By the end of 2008 the Commission had received updated or new GNI inventories (27)and carried out control visits in 16 Member States. In six cases direct verification on GNI aggregates was performed. However, in the absence of approved internal guidelines on how to implement this control approach, such as the criteria for selecting the GNI components to be so verified, there is a risk that the direct verification was not applied in a consistent manner in those Member States. Furthermore the Commission had not yet assessed the supervisory and control systems in the NSI for the compilation of National Accounts.

4.28.

4.29.

Based on its audit work the Court concludes that:

for the year ended 31 December 2008 were free from material error.

4.30.

Based on its audit work, the Court concludes that the supervisory and control systems are effective in ensuring the regularity of Revenue (see Annex 4.1 ). However the Court draws attention to the weaknesses which, while not being material to the effectiveness of the systems as a whole, require action as set out below.

4.31.

The Court’s audits continue to reveal problems with the use of the B accounts and therefore the Court recommends that the Commission continues its efforts to ensure their correct use and its surveillance of the establishment and recovery of duties (paragraph 4.14).

4.31.

4.32.

In view of the deficiencies in control strategy observed in previous Annual Reports, the Court recommends that the Commission takes these findings into consideration for its inspections in Member States. In particular it should foster an appropriate balance between physical checks at import and the post-clearance audits of operators. These should be of sufficient frequency and quality to protect the financial interests of the Community (paragraphs 4.15 and 4.16).

4.32.

4.33.

The Commission still has no effective means of ensuring that Member States provide adequate and timely information which would enable it to lift outstanding VAT-based own resources reservations. The Court recommends that the Commission continues its efforts (28)in order to reach a solution in agreement with the Member States concerned, so that these reservations can be lifted as soon as possible and the necessary corrections to the Member States’ VAT bases made (paragraph 4.17).

4.33.

4.34.

In the context of the Article 12 report, the Court recommends that the Commission should include in its control visits the reliability of the assertions in the information provided by the Member States. This report would thus help ensure the full amount of VAT due is actually collected. VAT collected is the starting point for assessing the amount to be paid by Member States in VAT-based own resources (paragraph 4.21). This is all the more pertinent in view of the jurisprudence of European Court of Justice case No C-132/06 (29).

4.34.

4.35.

The Commission lifted 15 specific reservations in 2008 without either desk checks to corroborate the accuracy of the information sent by Member States or on-the-spot control visits to carry out direct verification (paragraph 4.27). In the Court’s view this is not always sufficient to provide reasonable assurance on the accuracy of the amended data.

4.35.

4.36.

The Court recommends that the Commission draws up and applies specific rules for carrying out the examination of GNI inventories (paragraph 4.28) including the use of direct verification and taking into account the risks underlying the compilation of National Accounts, an assessment of supervisory and control systems in the NSI and the cost-benefit principle.

4.36.

5.1.

This chapter presents the Court’s specific assessment of policy group Agriculture and Natural Resources, which comprises the following policy areas: 05 — Agriculture and rural development; 07 — Environment; 11 — Fisheries and Maritime Affairs; and 17 — Health and Consumer Protection. Detailed information on the activities covered, the spending for the year and type of management involved is provided in Table 5.1 .

5.2.

Under the Treaty, the Commission has overall responsibility for implementing the EU budget. Virtually all agricultural and rural development expenditure is carried out under shared management whereby implementation tasks are delegated to Member States. For the other areas, budgetary appropriations are spent under the direct management of the Commission with the exception of the European Fisheries Fund which is under shared management on the basis of multi-annual programmes.

5.3.

The Community budget finances the common agricultural policy expenditure mainly through two Funds (1): the European Agricultural Guarantee Fund (hereinafter ‘EAGF’), for the financing of market measures and direct aids, and the European Agricultural Fund for Rural Development (hereinafter ‘EAFRD’), for the financing of rural development programmes.

5.4.

The main measures financed by EAGF are:

5.5.

Only farmers are eligible for EU direct aid. A farmer is defined as a natural or legal person who exercises an agricultural activity. An agricultural activity is defined to mean production, rearing or growing of agricultural products including harvesting, milking, breeding animals and keeping animals for farming purposes or maintaining land in good agricultural and environmental condition (GAEC).

5.6.

EU legislation provides that Member States shall define minimum requirements for GAEC on the basis of the framework set by EU legislation. As regards grassland the standards set by the EU legislation require a minimum livestock stocking rates and/or appropriate regimes for ensuring a minimum level of maintenance and avoiding the deterioration of habitats.

5.6.

5.7.

The requirement to keep land in GAEC is established in the context of cross-compliance which applies to both SPS and SAPS. Where GAEC requirements are not complied with the direct aid shall be reduced or cancelled under cross-compliance (7).

5.8.

The European Agricultural Fund for Rural Development (EAFRD) finances Rural Development expenditure which covers a large number of measures such as agri-environmental schemes, compensatory amounts for farming in less-favoured areas, investments in farms, and infrastructure in rural areas (10 527 million euro).

5.9.

Environment, Fisheries and Maritime Affairs as well as Health and Consumer Protection are managed by the Commission under specific control systems. They cover measures in favour of public health, the environment, animal welfare, consumer protection, international fisheries agreements and the European Fisheries Fund (1 658 million euro).

5.10.

In order to obtain reasonable assurance as to the regularity of the transactions underlying the EU accounts, the Court tested a single, representative, statistical sample of 204 transactions covering the whole of the expenditure dealt with in this chapter (see paragraph 5.1) and assessed the supervisory and control systems. A description of the DAS audit scope and methodology is provided in Chapter 1.

5.11.

As regards supervisory and control systems, the Court examined the reliability of the systems applicable to EAGF claims in selected paying agencies in four Member States applying the Single Area Payment Scheme (SAPS) — Bulgaria, Estonia, Poland, Romania — and in four Member States applying the Single Payment Scheme (SPS): Belgium (Region Walloon), Spain (Catalonia), Slovenia and the United Kingdom (Scotland). It should be noted that for Bulgaria and Romania 2008 was the first full agricultural year of application. For Rural Development expenditure, the Court tested the supervisory and control systems in the Czech Republic, Ireland, Greece, Spain, Italy, Hungary and Portugal. The Court also audited supervisory and control systems for the European Fisheries Fund.

5.12.

In addition, the Court reviewed 62 of the certification bodies’ certificates and reports related to 57 paying agencies (8). For a further eight paying agencies with qualified certificates, the grounds for this were examined.

5.13.

Based on the results of its audit work, the Court concludes that for the payments for the year ended 31 December 2008 for the policy group taken as a whole the estimated value of the overall error rate is slightly below the materiality threshold of 2 %. Rural Development expenditure is still affected by a higher level of errors than EAGF, although the estimated error level is lower than in previous years.

5.13.

5.14.

Out of 204 transactions examined, 66 (32 %) were affected by error. 45 (48 %) of the errors were quantifiable affecting notably eligibility and accuracy. The result of the sample based transaction testing is provided in Annex 5.1 . The Court’s classification of errors is explained in chapter 1. Examples of the different types of errors found are given below.

5.15.

The Annual Activity Report of the Director General for Agriculture contains reservations in respect of the expenditure under the SAPARD Programme in Bulgaria and Romania and for Rural Development measures under Axis 2 (improving the environment and the countryside) (9). The Annual Activity Report of the Director General for Fisheries and Maritime Affairs (DG MARE) also contains a reservation for expenditure under the common fisheries policy (10).

5.16.

In the EAGF, out of 151 transactions sampled, 42 (28 %) were affected by errors. 30 (54 %) of the errors were quantifiable. With regard to EAFRD operations, out of 42 transactions sampled, 17 (40 %) were affected by errors. 11 (55 %) of the errors were quantifiable. However, these errors are relatively small in financial terms.

5.17.

In its audit of EAGF, the Court found eligibility  (11)errors of SAPS payments to beneficiaries not meeting the farmer definition as they had not carried out any agricultural activity nor maintained the land in GAEC (see paragraph 5.46).

5.17.

5.18.

In the EAFRD, concerning eligibility, the Court found cases of non-respect of specific conditions attached to the aid for agri-environmental and forestry measures; and ineligible areas claimed under agri-environmental measures.

5.18.

5.19.

In terms of accuracy  (13)errors in EAGF, the majority of errors found by the Court relate to over-declarations of area claimed, leading to overpayment.

5.20.

In EAFRD, in terms of accuracy, the Court found errors of incorrect calculation of eligible costs and of the amount payable; over-declarations of area claimed; and non-respect of the minimum amount per hectare foreseen by Community rules.

5.20.