1.

This annual report presents the Court’s assessment of the European Development Funds (EDFs). Key information on the activities covered and the spending in 2013 is provided in Table 1 .

2.

The EDFs are the main instrument for providing European Union aid for development cooperation to the African, Caribbean and Pacific (ACP) States and overseas countries and territories (OCTs). The partnership agreement signed in Cotonou on 23 June 2000 for a period of 20 years (‘the Cotonou Agreement’) is the current framework for the European Union’s relations with ACP States and OCTs. Its main focus is on reducing and eventually eradicating poverty.

3.

The EDFs are funded by the Member States, governed by their own financial regulations and managed, by the European Commission, outside the framework of the EU general budget. The European Investment Bank (EIB) manages the investment facility, which is not covered by the Court's Statement of Assurance or the European Parliament's discharge procedure (1)  (2).

4.

The EDFs are managed almost entirely by the Commission’s Directorate-General for Development and Cooperation (EuropeAid), which also manages a wide range of expenditure from the EU budget (3)  (4).

5.

EDF interventions are implemented through projects and budget support (5) under three main arrangements. In 2013, 42 % of payments were made under centralised management, 32 % under decentralised management and 26 % under joint management (6).

6.

The expenditure covered in this report is made under a wide range of delivery methods, put into action in 79 countries. Rules and procedures are often complex, including those for tendering and the award of contracts. The Court has assessed the risk as inherently high.

7.

In two areas — budget support (7) and EU contributions to multi-donor projects carried out by international organisations (8) such as the United Nations (UN) — the nature of the instruments and of the payment conditions limit the extent to which transactions are prone to errors.

8.

Budget support contributes to a state’s general budget or its budget for a specific policy or objective. The Court examines whether the Commission has respected the specific conditions for making budget support payments to the partner country concerned and has verified that general eligibility conditions (such as progress in public sector financial management) have been complied with.

9.

However the Commission has considerable flexibility in deciding whether these general conditions have been met. The Court’s audit of regularity cannot go beyond the stage at which aid is paid to a partner country. The funds transferred are then merged with the recipient country’s budget resources. Any weaknesses in its financial management will not generate errors in the Court’s audit of regularity.

10.

The Commission’s contributions to multi-donor projects are pooled with those of other donors and are not earmarked for specific identifiable items of eligible expenditure. Under the so-called ‘notional approach’ the Commission assumes that underlying transactions are regular as long as the pooled amount includes sufficient eligible expenditure to cover the EU contribution. Should other donors follow the same approach and apply the same eligibility criteria for their contribution, there is a risk that overall spending does not meet the combined conditionality requirements of the Commission and the other donors.

10.

11.

EDF agreements are usually concluded for a commitment period of around five years, but payments can be made over a longer period. In 2013, payments were made from the 8th, 9th and 10th EDFs. The 8th EDF (1995-2000) amounts to 12  840 million euro and the 9th EDF (2000-2007) to 13  800 million euro.

12.

The 10th EDF (2008-2013) totals 22  682 million euro. Of this amount, 21  967 million euro are allocated to ACP countries and 285 million euro to OCTs. These sums include, respectively, 1  500 million euro and 30 million euro for the investment facility managed by the EIB for the ACP and OCT countries. Finally, 430 million euro are earmarked for the Commission’s expenditure on programming and implementing the EDF.

13.

In 2013, the total contributions from the Member States amounted to 3  200 million euro, of which 2  950 million euro for actions managed by the Commission.

14.

Table 2 shows the use, during 2013 and cumulatively, of EDF resources. As the funds of the 10th EDF shall no longer be committed beyond 31 December 2013 (9), the Commission managed to achieve higher results than planned in terms of commitments: global and individual commitments were respectively 29 % and 31 % above the initial forecast. As a consequence, payments were 7 % more than initially forecast and outstanding commitments increased by 8 % compared to 2012.

15.

The Financial Regulation applicable to the 10th EDF requires the Commission to report each year on the financial management of the EDFs (10). In the Court’s opinion, this report accurately presents relevant financial information.

I —

Pursuant to the provisions of article 287 of the Treaty on the functioning of the European Union (TFEU) and Article 141 of the Financial Regulation applicable to the 10th EDF, which also applies to previous EDFs, the Court has audited:

II —

In accordance with Articles 310 to 325 of the TFEU and the Financial Regulations applicable to the 8th, 9th and 10th EDFs, management is responsible for the preparation and presentation of the annual accounts of the EDFs on the basis of internationally accepted accounting standards for the public sector (12) and for the legality and regularity of the transactions underlying them. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error. 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 bears the ultimate responsibility for the legality and regularity of the transactions underlying the accounts of the EDFs (Article 317 of the TFEU).

III —

The Court's responsibility is to provide, on the basis of its audit, the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions. The Court conducted its audit in accordance with the IFAC International Standards on Auditing and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions. These standards require that the Court plans and performs the audit to obtain reasonable assurance as to whether the annual accounts of the EDFs are free from material misstatement and the transactions underlying them are legal and regular.

IV —

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

V —

The Court considers that the audit evidence obtained is sufficient and appropriate to provide a basis for its opinions.

VI —

In the Court's opinion, the annual accounts of the 8th, 9th and 10th EDFs for the year ended 31 December 2013 present fairly, in all material respects, the financial position as at 31 December 2013, the results of their operations, their cash flows and the changes in net assets for the year then ended, in accordance with the EDF Financial Regulation and with internationally accepted accounting standards for the public sector.

VII —

In the Court's opinion, revenue underlying the accounts for the year ended 31 December 2013 is legal and regular in all material respects.

VIII —

In the Court's opinion, commitments underlying the accounts for the year ended 31 December 2013 are legal and regular in all material respects.

IX —

The Court concludes that the supervisory and control systems are partially effective in ensuring the legality and regularity of payments underlying the accounts. The Court’s estimate for the most likely error rate for expenditure transactions from the 8th, 9th and 10th EDFs is 3,4 %.

X —

In the Court’s opinion, because of the significance of the matters described in the basis for adverse opinion on the legality and regularity of payments underlying the accounts paragraph, the payments underlying the accounts for the year ended 31 December 2013 are materially affected by error.

16.

Annex 1.1 of chapter 1 of the 2013 annual report of the Court of Auditors on the implementation of the budget describes the Court’s overall approach and methodology. For the audit of the EDFs, the following specific points should be noted.

17.

The Court’s observations regarding the reliability of the EDF accounts concern the financial statements (13) and the report on the financial implementation of the 8th, 9th and 10th EDFs (14) approved by the Commission in compliance with the EDF Financial Regulation (15) and received, together with the accounting officer’s letter of representation, by the Court on 17 July 2014. The audit involved the testing of amounts and disclosures and the assessment of the accounting principles used, significant estimates made by the management and the overall presentation of the accounts.

18.

The audit of the regularity of transactions involved:

(a)

an examination of all contributions from Member States and a sample of other types of revenue transactions;

(b)

an examination of a sample of 30 commitments (16);

(c)

an examination of a sample of 165 transactions (17). The sample is designed to be representative of the entire range of payments within the EDFs. It consisted of 93 payments approved by 10 EU delegations (18) and 72 payments approved by the Commission headquarters (19);

(d)

where errors were detected, the relevant control systems were analysed to identify the specific system weaknesses involved;

(e)

an assessment of control systems examined at EuropeAid and EU delegations, covering:

(f)

a review of the annual activity report (AAR) by the Director-General of EuropeAid; and

(g)

a follow-up of previous Court recommendations.

19.

As indicated in paragraph 4, EuropeAid implements most of the external assistance instruments financed from the general budget and the EDFs. The Court’s observations concerning both the effectiveness of supervisory and control systems and the reliability of the AAR and the Director-General’s declaration for 2013 refer to EuropeAid’s entire area of responsibility.

20.

The economic outturn account includes as revenue interest on pre-financing (5,7 million euro) in respect of pre-financing payments to beneficiaries of more than 2 50  000 euro. For pre-financing payments over 7 50  000 euro, the Commission is required to recover interest on an annual basis (20). The Court found some improvement compared with 2012 as the number and value of recoveries increased (21). However, authorising officers by sub-delegation still do not comply systematically with this rule and the amount of interest revenue disclosed in the accounts is partly based on estimates. Furthermore, the interest earned on pre-financing between 2 50  000 and 7 50  000 euro is still not recognised as financial revenue in the financial statements because the Commission has not yet completed the development of the CRIS system.

21.

The Court’s audit of revenue transactions found them to be free from material error.

22.

The Court’s audit of commitments found them to be free from material error.

23.

Annex 1 contains a summary of the results of payment transaction testing. Out of the 165 payment transactions audited by the Court, 45 (27 %) were affected by error. On the basis of the 32 errors which it has quantified, the Court estimates the most likely error to be 3,4 % (22)  (23).

23.

24.

Of the 130 payment transactions audited by the Court, 42 (32 %) were affected by error, of which 30 (71 %) were quantifiable errors. Of the 30 payment transactions affected by quantifiable errors, 17 were final transactions authorised after all ex ante checks had been performed.

25.

As was the case in 2012 (24), errors were more frequently found in transactions relating to programme estimates, grants and contribution agreements between the Commission and international organisations than in other forms of support. Of the 72 transactions of this type audited, 32 (44 %) were affected by error.

26.

The main types of quantifiable errors detected by the Court in payment transactions related to projects concerned:

(a)

absence of supporting documents to justify that eligible activity occurred (12 transactions);

(b)

non-compliance by the beneficiary with procurement rules (eight transactions) (23);

(b)

The Commission does not share the Court’s analysis of one quantifiable error. The Commission considers that the technical specifications as defined by the contracting authority, in accordance with its broad discretional power, a principle acknowledged by the Court of Justice, were not disproportionate and did not distort competition. This principle provides legal certainty for the contracting authorities without which any future procurement procedure could be compromised.

(c)

ineligible expenditure such as expenditure relating to activities not covered by the contract (five transactions), ineligible VAT (three transactions), expenditure incurred outside the implementation period (two transactions) or non-compliant with the rule of origin (one transaction);

(d)

expenditure not incurred by beneficiaries (seven transactions);

(e)

incorrect calculation of expenditure claimed (five transactions).

27.

Graph 1 provides an overview of the contribution of the different types of errors to the overall estimated error. Errors relating to non-compliance with procurement procedures by beneficiaries and the absence of supporting documents account for 70 % of the most likely error.

28.

Non-quantifiable errors concerned shortcomings in the procurement procedures followed (six transactions), insufficient supporting documents to justify the correctness of the amount paid (three transactions) and insufficient information to enable the Court to quantify the error relating to the eligibility of expenditure (three transactions).

29.

For the 35 budget support transactions tested, three (9 %) were affected by errors, of which two (67 %) were quantifiable errors.

29.

30.

The quantifiable errors detected by the Court in budget support transactions concerned the incorrect application of the scoring method for determining whether or not recipients had met the conditions for a performance-based variable tranche (one transaction) and an incorrect exchange rate used to convert a budget support disbursement to local currency (one transaction).

31.

The Court also identified one non-quantifiable error. The Commission had not required the recipient to provide evidence that the correct exchange rate was used to convert the disbursement to local currency.

32.

Annex 2 contains a summary of the results of EuropeAid’s systems examined by the Court.

33.

Given the high-risk environment (see paragraph 6), EuropeAid relies mainly on ex ante checks (checks by Commission staff, external supervisors or external auditors before project payments are made) in order to prevent or detect and correct irregular payments. As in previous years, the frequency of errors found by the Court, including some affecting final claims which had been subject to external audits and expenditure verifications, point to weaknesses in these ex ante checks.

34.

In May 2013, EuropeAid adopted an action plan to address weaknesses identified in the implementation of EuropeAid’s control system (25). The action plan addresses a number of recommendations made by the Court in its previous annual reports, as well as the issues identified by the 2012 and 2013 EuropeAid RER studies. It includes awareness-raising, training and provision of guidance on the main types of error and how to avoid them. It also sets out actions aimed at improving the quality of external audits (26), which are a key component of EuropeAid’s supervisory and control systems, and at reinforcing cooperation with international organisations as regards control of regularity (see paragraph 39).

35.

As indicated in the Court’s previous annual reports (27), there are shortcomings in EuropeAid’s management information system on the results and the follow-up of external audits, expenditure verifications and monitoring visits. These make it difficult for the Director-General to hold heads of unit or heads of EU delegations accountable for the timely follow-up and correction of the system weaknesses and errors identified. EuropeAid is developing new functions in the audit module of its CRIS information system to improve the follow-up of audit reports.

36.

EuropeAid is also developing a tool to help EU delegations to screen their portfolio of projects more effectively and prioritise visits to those in particular need of monitoring based on risk assessments.

37.

EuropeAid carried out its second RER study to measure the level of error which has evaded all management checks to prevent, detect and correct errors. The study consisted of an examination of a representative sample of transactions relating to contracts closed between September 2012 and August 2013 in order to estimate the most likely error in the population of closed contracts.

38.

The results of the 2013 RER study are presented in the AAR (28). The study estimates the RER at 3,35 %, i.e. above the 2 % materiality level set by the Commission. The main types of errors identified by the study are:

(a)

absence of satisfactory documentation demonstrating eligibility provided by beneficiary organisations (51,63 % of the RER);

(b)

errors which were estimated because insufficient evidence was available to check the regularity of transactions (17,82 % of the RER);

(c)

non-compliance with public procurement procedures (12,45 % of the RER);

(d)

unrecovered and uncorrected amounts (8,71 % of the RER);

(e)

other types of errors (9,39 %).

39.

Transactions implemented by international organisations account for a fifth of all transactions sampled but they account for 29,18 % of the residual error rate.

40.

As indicated by the Court in its 2012 annual report (29), the design of the RER methodology is overall appropriate. For this second study, refinements were made in the calculation of error rates on individual transactions and the treatment of transactions for which no information was readily available.

41.

The AAR indicates (30) that the RER methodology ‘results in an accurate assessment of the volume of errors not detected by the overall control system’ and that ‘the result of the overall error evaluation was then expressed as an actual level of error with a 95 % confidence level’. This is not a fully accurate presentation of the RER study results:

(a)

the RER methodology reflects valid cost-effectiveness considerations, notably as regards the degree of reliance placed upon previous audit or verification reports and the extent of substantive testing performed. This involves a limitation of scope which should be disclosed to allow for a correct understanding of the RER study results;

(a)

In order to promote an efficient and cost effective study, the RER methodology foresees reliance on previous control work, including: financial and technical audits, the DAS, verifications, evaluations and technical supervisors’ reports.

(b)

on the basis of the 2013 RER study, 3,35 % is indeed the estimated most likely error rate, but the 95 % confidence level means that the error rate lies between lower and upper error limits, which are however not disclosed.

(b)

The disclosure of the upper and lower error limits in the 2013 AAR has not been explicitly foreseen by the instructions given by the Central Commission Services.

42.

In its 2011 annual report (31), the Court indicated that the Commission reorganisation that took place in 2011 had a major impact on the activity of the Internal Audit Capability (IAC) (32). In its reply to the Court’s 2011 annual report, the Commission committed itself to assessing the capacity of the IAC and would consider strengthening it if necessary (33). This has not been done and there was no significant improvement in the functioning of the IAC in 2013.

42.

43.

In his declaration of assurance, the Director-General makes a reservation concerning the legality and regularity of transactions, since the amount considered at risk (228,55 million euro) represents more than 2 % of payments made by EuropeAid in 2013. However, the Director-General also states that the control procedures in place give the necessary guarantees concerning the legality and regularity of the underlying transactions. The Court considers that this is not a logical conclusion because controls systems are not effective when they fail to prevent, detect and correct material error.

43.

44.

The reservation relates to the legality and regularity of the whole expenditure managed by EuropeAid. A reservation is appropriate when control weaknesses relate to defined areas of revenue or expenditure (34), but not when they affect the operation of the control system as a whole and the financial impact exceeds the materiality threshold for the whole budget under the Director-General’s responsibility. However, the Commission’s standing instructions for 2013 AARs do not clearly address such a situation.

45.

Based on its audit work, the Court concludes that the EDFs’ accounts for the financial year ending 31 December 2013 present fairly, in all material respects, the financial position of the EDFs as of 31 December 2013, and the results of their operations and cash flows for the year then ended, in accordance with the provisions of the EDF Financial Regulation and the accounting rules adopted by the accounting officer.

46.

The Court concludes that, for the financial year ending 31 December 2013:

47.

The examined systems of EuropeAid are assessed as partially effective (see paragraphs 19 and 32 to 38) (35). However, in May 2013 EuropeAid adopted an action plan to address the main weaknesses identified.

47.

48.

Annex 3 shows the result of the Court’s review of progress in addressing recommendations made in previous annual reports. In the 2010 and 2011 annual reports, the Court presented 14 recommendations. Out of these recommendations, EuropeAid fully implemented three recommendations, while four were implemented in most respects, five were implemented in some respects and two were not implemented.

49.

As regards the recommendations not implemented, EuropeAid has not made compulsory the guidelines on risk analysis for the preparation of annual audit plans and has not assessed the IAC’s capacity to perform its task effectively.

49.

50.

As regards the recommendations implemented in some respects only, EuropeAid is taking action:

(a)

EuropeAid participated in a working group headed by DG Budget to review the cost-effectiveness of its overall control architecture. In the 2013 AAR, for the first time, it provided data on estimated control costs and benefits. While this shows that EuropeAid paid due attention to the need to monitor the efficiency of its supervisory and control systems, the Court found some weaknesses as regards the quantification of benefits, which affect the reliability of cost/benefit ratios.

(a)

Guidance on possible approaches to calculate or estimate benefits and costs of the most common internal control systems in the Commission has been proposed, in combination with the related Internal Control Templates.

(b)

EuropeAid is developing tools and guidance for EU delegations to better prioritise their monitoring visits to projects and assess the quality of audit reports.

(c)

EuropeAid is developing new functions in the audit module of its CRIS information system to improve the follow-up of audit reports (see paragraph 35).

51.

Following this review and the findings and conclusions for 2013, the Court recommends that EuropeAid:

—

Recommendation 1: ensures that all authorising officers by sub-delegation recover interest generated by pre-financing over 7 50  000 euro annually;

—

Recommendation 2: by the end of 2014, completes the development of the CRIS system to allow interest on pre-financing of between 2 50  000 and 7 50  000 euro to be recognised as financial revenue;

—

Recommendation 3: revises the quantification of benefits of controls implemented;

—

Recommendation 4: reports in the AAR on progress in the implementation of the action plan to address weaknesses in the control system; and

—

Recommendation 5: discloses in the AAR the scope of the RER study and the estimated lower and upper error limits.