Speech by Vítor Caldeira, President of the European Court of Auditors

Presentation of the Annual Reports 2011

THE COMMITTEE ON BUDGETARY CONTROL OF

THE EUROPEAN PARLIAMENT

Brussels, 6-11-2012 — /europawire.eu/ — Chairman Theurer, honourable members,

It is an honour for me to present to your committee the Court’s annual report on the implementation of the 2011 EU budget.

Our conclusions on 2011 will not come as a surprise because the current arrangements from managing EU money have been in place for a number of years. The 2011 accounts present fairly the financial position of the European Union and the results of its operations and its cash flows for the year. Revenue and commitments for payments were free from material error. However, payments were affected by material error, with an estimated error rate of 3.9 % for the EU budget as a whole. The estimated level of error was similar to 2010 when it was 3.7 %.

This Annual Report’s message is consistent with previous years’, but this year it matters more than ever. With Europe’s public finances under severe pressure, there remains scope to spend EU money more efficiently and in a better targeted manner.

Put simply, the Court found too many cases of EU money not hitting the target or being used sub-optimally. The examples in the report include:

• subsidies for land claimed as “permanent pasture” when actually parts of it were densely forested;
• training specifically intended for employees in the electronics sector being given to employees from other sectors;
• costs reimbursed on a building claimed to be for agricultural purposes when it was not;
• over-claimed personnel costs on research projects;
• recipients of development aid not respecting the rule of origin when purchasing equipment; and
• public procurement procedures designed to ensure best value for money not being properly applied.

As these examples suggest, the Court found errors in payments related to many different expenditure programmes and schemes. The Court also found that, overall, the control systems examined were only partially effective. In other words, control systems were not realising their full potential to prevent or detect and correct errors.

In fact, the Court has concluded that only two areas – or “policy groups” – were free from material error in 2011. They were “External relations, aid and enlargement” and “Administrative expenditure and other expenditure”.

The other five policy groups were affected by material error, in particular those including the areas of rural development and regional policy. The ECA’s estimate of the error rate for spending in “Rural development, environment, fisheries and health”, the most error prone spending area, was 7.7%. And the estimated error rate for “Regional policy, energy and transport” also remained high at 6.0%.

It is here, in these areas, that we found the Member States are not doing their job as fully as they should. There needs to be a greater degree of commitment on the part of national authorities to the management and control of EU money. Because national authorities operate the first – and most important – line of defence in protecting the financial interests of EU citizens.

Many instances of control failure were identified by the Court. For example, in over 60% of the audited regional policy transactions affected by error, sufficient information was available for the Member State authorities to have detected and corrected at least some of these errors before claiming reimbursement from the Commission.

Similarly, in rural development, the Court found that on-the-spot checks had not always been carried out properly. The case I referred to earlier of a building incorrectly claimed to be for agricultural purposes provides an example of an error that was not corrected despite an on-the-spot check by the paying agency.

So, there is potential to reduce errors by applying the current systems more effectively. But there is also scope to improve them – and the expenditure schemes concerned.

The EU cannot afford to wait. There is an opportunity – and a need – to act now. The Member States should agree on better rules and then make sure they apply them.

For its part, the European Commission must also step up its supervision of the Member States. But it needs reliable information from them about how EU money is being spent as well as on the financial corrections and recoveries they make.

So far I have talked about the 80 per cent of EU funds managed by the Member States, but 20 per cent are directly managed by the Commission – including the vital area of Research. The Commission should be setting an example of best practice in its management of compliance with the conditions of EU grants.

However, the Court concluded that the area “Research and other internal policies” was affected by material error. We estimated the error rate in 2011 to be 3%.

Many of the types of error and control failures found in Research were similar to those in the areas of shared management. The main source of error was the over-declaration of costs by beneficiaries for projects funded by the research Framework Programmes.

Under the rules, such cost declarations must be accompanied by audit certificates from independent audit firms. In over 80% of the projects with positive audit certificates that it examined, the Court found errors.

The Court also found material error in interim and final payments in External relations, aid and enlargement, which is also largely under direct management by the Commission, and in payments made through the European Development funds.

Another way in which the Commission discharges its responsibility for implementation the EU budget is by reporting on financial management. This includes reporting on the regularity of transactions and performance achieved.

The Court notes that the amount the Commission’s directors general consider to be at risk of irregularity has risen from € 0.4 billion in 2010 to € 2.0 billion in 2011. This estimate reflects the recognition by the Commission of a high risk of error in rural development, cohesion and research.

However, the Court considers that the amount at risk may have been underestimated because the so-called “residual error rate”, on which it is based, was not yet, in 2011, a reliable indicator of the extent to which transactions remain affected by material error after control procedures have been applied.

As regards the Commission’s reporting on performance, the Court covers this topic in the Chapter of the Annual Report on “Getting results from the EU budget”.

The two main ways in which the Commission reports on performance are through the new evaluation report of the Union’s finances based on results achieved and in the annual activity reports of the Directorates-General.

As also stated in its opinion earlier this year, the Court considers that the first evaluation report published in February 2012 added little value and recommends that the European Parliament, Council and Commission explore how to make the evaluation report more useful in achieving better value from EU spending.

The Commission should also improve the quality of annual activity reports. Reviewing the annual activity reports of the directorates-general for Agriculture and Rural Development, Regional Policy, and Development and Cooperation, the Court found that performance indicators could be made more relevant to the achievement of policy objectives. Furthermore, none of the three directorates-general reported on economy and efficiency.

The chapter on “Getting results from the EU budget” also includes a number of lessons learned from the Court’s 2011 special reports relevant to improving reporting on performance. Amongst other things, the Court recommends that the Commission should:

• use good quality needs assessment to focus on the results and impacts it wants to achieve;
• define policy objectives that will help demonstrate European added value; and
• work with Member States to improve the quality and timeliness of the data they submit.

Chairman Theurer, honourable members,

EU financial management is not yet up to standard. Many of the problems we have identified in the past still remain, albeit to a lesser extent.

These problems matter more than ever. And now, with legislative proposals for the next financial framework under discussion, there is an opportunity to address their underlying causes. Since 2010, the Court has also called for simpler spending schemes with clearer objectives, easier to measure results, and more cost effective control arrangements.

Our annual report on 2011 also provides many specific recommendations, and so do the opinions we have issued on the proposals. The opinions also make observations about the new challenges for financial management and accountability that may arise.

As regards the proposals related to the Common Strategic Framework that will cover the most risk prone areas of spending, the Court draws attention to the need to strengthen the Commission’s supervisory role , improve financial correction mechanisms, and ensure adequate audit and control arrangements over financial instruments.

Chairman Theurer, honourable members,

Times are hard. Member States must agree better rules for how EU money is spent, and Members States and the Commission must enforce them properly. In this way, the EU budget could be used more efficiently and effectively to deliver greater added value for citizens. That is the message in our annual report that I have had the honour to present to you today.

At heart, it is a message about improving accountability for EU money. A goal all EU institutions must strive to achieve and the one that the Court has put at the centre of its strategy for the coming years.

Thank you for your kind attention.

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