Toespraak Weber, president van de Europese Rekenkamer (en)

ECA/06/32

Brussels, 7 November 2006

Speech by Mr Hubert Weber,

President of the European Court of Auditors

Presentation of the Annual Report concerning the financial year 2005

ECOFIN Council, Brussels, 7 November 2006

In the event of any divergence from the written text, the spoken text shall prevail.

Mr/Madam President,

Ministers,

Ladies and Gentlemen,

Thank you for inviting me once again to present to you the Court of Auditors’ Annual Report relative to the financial year 2005.

The Annual Report is the outcome of a significant investment of the Court’s resources over the previous 12 months. It is the culmination of detailed audit work at all levels of the administration of EU funds: at the Commission and other institutions, within Member and beneficiary State administrations and at a great many final beneficiaries and recipients of EU funds.

On 23 October I presented the Annual Report for the financial year 2005 to the European Parliament's Committee on Budgetary Control, and on 14 November I shall be presenting it to the European Parliament in plenary session.

In addition to this Annual Report and the Annual Report on the European Development Funds, this year the Court has published ten Special Reports setting out the results of our performance audit work covering a wide range of management issues. Although the results of these audits do not appear in the Annual Report for a number of years, they nonetheless represent a substantial part of the Court's work.

Before moving on to the Court's key audit findings concerning the financial year 2005, I should like to point out that the Court is mandated under the EU Treaty to deliver an annual Statement of Assurance. The Court performs this task on the basis of internationally accepted auditing standards and confirmed by acknowledged experts.

Now for the details:

The introduction of accruals-based accounting at the start of 2005 focused attention on the question of the reliability of the accounts. All in all, the Commission successfully implemented the new accounting system with notable rapidity, and it now offers additional key information that is significantly more advanced than was provided by the previous cash-based system. The Court found that, save for a few deficiencies, the consolidated statements gave a generally reliable picture of the financial situation of the European Communities as at 31 December 2005.

Regarding the legality and regularity of the underlying transactions, generally speaking the situation has not substantially changed since last year. In many expenditure areas there is still no adequate system of risk management. Consequently, in these areas there was insufficient basis for the Court to provide an unqualified opinion.

It should be noted in this connection that the underlying reason why most errors occur is that beneficiaries - farmers, local authorities, project managers - claim more than they are entitled to. Explanations range from simple neglect or error, through poor knowledge of the complex rules, to presumed attempts to defraud the EU budget. Although it is the responsibility of the Commission to administer the budget in such a way as to reduce the risk of irregularities through the correct implementation of preventive measures and controls, the onus is also specifically on the Member States to assume their responsibility in shared-management areas.

Therefore, I would now like to look in more detail at the Court's audit findings concerning the Common Agricultural Policy and structural measures, which are both shared-management activities.

Taken as a whole, payments under the Common Agricultural Policy are still materially affected by errors. As for 2004, the Court found the Integrated Administration and Control System (IACS) - which covers 56 % of all agricultural expenditure - to be effective when correctly applied. In practice this means the EU15 except for Greece. In the new Member States these systems, while already operational during the first full year of membership, were not yet fully effective.

For agricultural expenditure outside IACS - which includes significant areas of expenditure such as the olive oil scheme, rural development and export refunds - there remains a higher incidence of error due to the nature of the expenditure and inadequate control systems.

As regards structural measures, the message remains the same as last year: the Court found a material incidence of error in expenditure declarations - with some errors being systematic in nature - as well as failures in Member States' supervisory and control systems in all audited programmes. For example, for the current programming period the Court found material errors in the declared project expenditure of 60 out of 95 audited projects covering, among other things, infrastructure and training. These errors includedexpenditure not incurred, ineligible expenditure and non-compliance with the rules of public procurement. Similarly, the Court found control failures in all audited programmes, including the absence or inadequacy of day-to-day management checks, inadequate interim certification of expenditure and insufficient audit trails.

The Court has been providing a Statement of Assurance, and has had to deliver more or less the same message, for twelve years now. In the Court’s opinion, this situation needs to be tackled with a combination of measures:

Firstly, the rules governing expenditure should be simplified wherever possible. In particular, unnecessary complexity should be eliminated - by avoiding rules and requirements that do not contribute to meeting the objectives of the expenditure. For example, greater consideration could be given in spending programmes to flat-rate and lump-sum payments or simplified rules on procurement and grants.

Secondly, there should be an evaluation of the risk inherent in each mode of management, to be taken into account when establishing, implementing and controlling the schemes.

Thirdly, there is a need for a logical chain of effective internal controls based on common principles and standards, with the results freely available to all participants.

Lastly, an effective system of sanctions should be applied in all areas of the budget.

All these principles were set out in the Court’s Opinion No 2/2004 on the single audit model.

Many of the Court’s recommendations have been taken up by the Commission in its Action Plan towards an integrated internal control framework. The Court welcomes this initiative and will follow its progress closely and assess the impact of the measures that are taken.

Many of the measures proposed by the Commission engage the responsibility of the Member States. In this connection, when addressing the June 2006 meeting of the Ecofin Council I said among other things that, when correctly applied, IACS is a fully effective means of limiting the risk of irregular payments to an acceptable level. This shows the necessity and importance of cooperating at national level to produce effective control systems. Contrary to what has recently been claimed, conformity decisions do not serve to ensure the legality and regularity of payments at beneficiary level.

Conformity decisions are used to provide global corrections to control system weaknesses that are delayed by several years, and in most cases they have no financial implications for the recipients of aid. It is the Court's view that the system for recovering undue payments should extend in particular to the final beneficiaries. What is more, this observation applies equally to the Structural Funds.

It is a fundamental truth that there is an increasing awareness, among the various national administrations, of the need to strengthen their cooperation and thus further improve national internal control systems. By enhancing their audit activities, both the competent national administrations' internal audit services and the national authorities responsible for external audit can make a substantial contribution in this area. As well as efforts to improve the functioning of internal control systems covering the disbursement of EU funds, such a contribution should include proposals to simplify those systems.

The Court remains committed to continuing its close cooperation with the national audit bodies of the European Union. In practice, this entails operational support for the Court's on-the-spot audits, the exchange of professional information and knowledge, the joint development of practical and technical support material and joint audits. Intensive preparations are currently under way for the December 2006 meeting of the Contact Committee of Heads of the Supreme Audit Institutions of the European Union and the European Court of Auditors. In this connection, the Court is intending to propose a joint audit of national internal control systems in the context of the Structural Funds. Another joint audit activity that is currently being considered is a German Federal Court of Auditors initiative on the theme of financial corrections in Member States.

Over the next few years the management of the EU budget will face a number of major challenges, chief of which will be the start of a new financial perspective period with changes in spending schemes, the completion and closure of current spending programmes, the introduction of the single farm payment system and the need to consolidate the 2004 enlargement while welcoming two new Member States

Allow me to make a few concluding remarks:

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  Ensuring effective management and the corresponding adequate controls represents a significant challenge, particularly for a European Union that is expanding.
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  The Commission has made significant progress on improving its own organisation and accountability. The introduction of accruals-based accounting is a considerable achievement. The remaining weaknesses need to be eliminated to ensure that the financial statements are complete and accurate.
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  Systematic weaknesses affecting much of the payments budget, along with a sustained high incidence of errors, are a problem that has to be overcome. Further improvements to management and control are required, especially at Member State level.

As I explained to the Budgetary Control Committee, we should all be aiming for a European Union which manages its budget effectively based on unequivocal and appropriate rules. Ultimately, this can only benefit every citizen of the Union.

Thank you for your kind attention.