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Report
by the Comptroller
and Auditor General
Financial management of
the European Union budget
in 2014: a briefing for the
Committee of Public Accounts
HC 799
SESSION 2015-16
12 FEBRUARY 2016
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Our vision is to help the nation spend wisely.
Our public audit perspective helps Parliament hold
government to account and improve public services.
The National Audit Office scrutinises public spending for Parliament and is independent
of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB,
is an Officer of the House of Commons and leads the NAO, which employs some
810 people. The C&AG certifies the accounts of all government departments and
many other public sector bodies. He has statutory authority to examine and report
to Parliament on whether departments and the bodies they fund have used their
resources efficiently, effectively, and with economy. Our studies evaluate the value for
money of public spending, nationally and locally. Our recommendations and reports
on good practice help government improve public services, and our work led to
audited savings of £1.15 billion in 2014.
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Financial management of
the European Union budget
in 2014: a briefing for the
Committee of Public Accounts
Report by the Comptroller and Auditor General
Ordered by the House of Commons
to be printed on 11 February 2016
This report has been prepared under Section 6 of the
National Audit Act 1983 for presentation to the House of
Commons in accordance with Section 9 of the Act
Sir Amyas Morse KCB
Comptroller and Auditor General
National Audit Office
11 February 2016
HC 799 | £10.00
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This report provides an overview of the European Union
(EU) budget, the framework within which it is managed,
and associated oversight and accountability arrangements.
© National Audit Office 2016
The material featured in this document is subject to
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Contents
Key facts
4
Summary
5
Part One
The European Union budget 8
Part Two
The European Court of Auditors 19
Part Three
The EU budget and the UK 29
Appendix One
Bibliography 45
Appendix Two
EU institutions involved in budget-setting,
budget monitoring, audit and assurance,
or arbitration 47
Appendix Three
EU accountability cycle and EU budget
discharge process 49
Appendix Four
References to the United Kingdom
in the European Court of Auditors’
annual report, 2014 51
Appendix Five
Conclusions and recommendations
from the 2009 UK Committee of
Public Accounts report 54
Appendix Six
Special reports and landscape reviews
adopted by the European Court of
Auditors, 2014 to 2016 58
The National Audit Office study team
consisted of:
Mark Bisset and Helene Morpeth
under the direction of Peter Gray.
This report can be found on the
National Audit Office website at
www.nao.org.uk
For further information about the
National Audit Office please contact:
National Audit Office
Press Office
157–197 Buckingham Palace Road
Victoria
London
SW1W 9SP
Tel: 020 7798 7400
Enquiries: www.nao.org.uk/contact-us
Website: www.nao.org.uk
Twitter: @NAOorguk
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4
Key facts
Financial management of the European Union budget in 2014
Key facts
€143.9bn
EU revenue in 2014
(£116.0 billion)
2
1
€142.5bn
EU payments in 2014
(£114.8 billion)
£11.4 billion
(€14.1 billion)
£5.7 billion
(€7.1 billion)
Since 2007
UK gross contribution to the EU budget in 2014 (taking into
account the UK rebate
3
)
UK net contribution to the EU budget in 2014 (taking into account
the UK rebate, and public- and private-sector receipts)
the European Court of Auditors has given a true and fair opinion
on the accounts of the EU
the European Court of Auditors has given an adverse opinion on
the legality and regularity of EU payments
The European Court of Auditors’ estimated level of error in
EU payments during 2014, above its 2% materiality threshold
European Commission actions to reduce errors by simplifying
processes, increasing accountability and increasing flexibility
in how member states can spend public-sector receipts from
the EU budget
Since 1994
4.4%
120
1
2
3
All euro figures on this page are sourced from the European Commission.
All sterling figures are based on European Commission euro figures. We have calculated sterling figures using
HM Treasury’s annual average exchange rate for 2014 of £1 = €1.240977, rounded to 1 decimal place.
In 2014 the UK received a rebate of €6.1 billion. Calculating the UK rebate is complex, but it is broadly equivalent
to 66% of the difference between the UK’s contribution to the EU budget, and its receipts from the EU budget.
The method for calculating the rebate is laid down in Council Decision 2007/436/EC, and in the supporting Council
of the European Union document
Method for the calculation of the UK correction.
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Financial management of the European Union budget in 2014
Summary
5
Summary
1
The European Union (EU) operates a financial management regime that determines
how it collects revenue in the form of contributions from member states, and how these
are subsequently managed and accounted for.
2
In 2014 the EU budget received €143.9 billion in contributions from 28 member
states and other sources,
1
and made €142.5 billion in payments.
2
The UK made a gross
contribution (post-rebate
3
) of €14.1 billion (£11.4 billion), and received EU public- and
private-sector receipts of €7.0 billion (£5.6 billion). It therefore made a net contribution of
€7.1 billion (£5.7 billion).
4
This was the third-largest net contribution to the EU budget.
3
On 10 November 2015 the European Court of Auditors (ECA) published the results
of its audit of the EU budget in 2014. These are the most up-to-date audited financial
results of the EU budget.
5
4
This briefing on financial management of the EU budget has been prepared for the
UK Committee of Public Accounts, drawing exclusively from published material. It includes:
•
•
•
an overview of the EU financial framework;
the opinions and findings of the ECA with respect to the EU budget in 2014; and
the use made of EU monies in the UK, including oversight arrangements and
information on the extent to which these monies have been managed in line with
EU requirements.
1
2
3
4
5
Member states contributed approximately €134 billion. Other sources contributed approximately €10 billion.
Member states received approximately €129 billion in payments from the EU budget.
In 2014 the UK received a rebate of €6.1 billion. Calculating the UK rebate is complex, but it is broadly equivalent
to 66% of the difference between the UK’s contribution to the EU budget, and its receipts from the EU budget.
The method for calculating the rebate is laid down in Council Decision 2007/436/EC, and in the supporting Council
of the European Union document
Method for the calculation of the UK correction.
Throughout this briefing, sterling figures have been calculated using HM Treasury’s annual average exchange rate for
2014 of £1 = €1.240977, and rounded to 1 decimal place.
The EU financial year is based on the calendar year of 1 January to 31 December, whereas the UK financial year runs
from 1 April to 31 March.
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Summary
Financial management of the European Union budget in 2014
Key points
The EU budget
•
The EU budget is agreed annually by the European Parliament and the Council
of the European Union (the Council), within the terms of a seven-year agreement
known as a multiannual financial framework (MFF). The current MFF covers the
period 2014 to 2020.
The current MFF allows the EU to make up to €960.0 billion in commitments
(legal pledges to finance specific activities), and €908.4 billion in payments
(money to be paid from the EU budget to beneficiaries). Respectively these are
3.4% and 3.7% less (in 2011 prices) than under the previous (2007–2013) MFF.
•
Audit results
•
•
The ECA concluded that the 2014 EU accounts were true and fair. They have
been true and fair since 2007.
The ECA reached an adverse opinion on the regularity and legality of EU
payments. The
estimated level of error for 2014 was 4.4%, above the ECA’s
materiality threshold of 2%. Errors relating to payments in 2014 mean that this
threshold has now been breached for the last 21 years. The ECA reported that
revenue
in 2014 was legal and regular.
The ECA’s estimated level of error represents money that was not used, or
administered, in accordance with EU regulations and national rules. In 2014,
the principal sources of errors included ineligible costs included in cost claims,
serious errors in public procurement, and incorrect declarations of area by
farmers. The ECA’s estimated level of error is not an estimate of fraud.
•
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Financial management of the European Union budget in 2014
Summary
7
Action to address errors
•
•
The UK Committee of Public Accounts recommended in 2005 and 2009 that
EU rules should be simplified to reduce errors.
The ECA has recommended improvements in control systems at member state
and EU levels, and further simplification of the rules, to reduce errors and enhance
the results achieved from EU spending.
In 2014 the European Commission (the Commission) and member states took
corrective action to reduce the occurrence of errors by applying corrective measures
in cases of irregular expenditure. If such corrections had not been applied, the ECA’s
overall estimated level of error would have been 5.5% rather than 4.4%.
The Commission has an action plan to pursue simplification, increase accountability
and improve flexibility, as well as focus on results achieved from EU spending.
A mid-term review of the current MFF is scheduled for the end of 2016.
This will enable EU institutions to reassess priorities for the remaining years
of the current MFF.
•
•
•
The EU budget and the UK
•
In 2014 the UK made a net contribution to the EU budget of £5.7 billion. It received
public-sector receipts worth £4.6 billion. £3.2 billion of public-sector receipts
contributed to the EU’s objective
Sustainable growth: natural resources,
which
includes support for rural development, and environmental measures. In addition,
£1.4 billion of public-sector receipts to the UK contributed to the EU’s objective of
Smart and inclusive growth:
promoting competitiveness to increase growth and jobs,
and also supporting economic, social and territorial cohesion. Public-sector receipts
do not include EU grant receipts secured by UK organisations through competitions.
In common with all EU member states, the UK has adopted a structure
whereby specific organisations manage, pay, certify, and audit the
EU monies the UK receives.
•
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Part One
Financial management of the European Union budget in 2014
Part One
The European Union budget
1.1
This part provides an overview of the European Union (EU) budget, the framework
within which it is managed, and associated oversight and accountability arrangements.
An overview of the EU financial framework
1.2
The EU budget is set annually by the EU institutions within the terms of a seven-year
agreement known as a multiannual financial framework (MFF). The current MFF was
agreed by the Council of the European Union (the Council) and European Parliament in
November 2013 and covers the period 2014 to 2020. The principal institutions of the EU
and their roles in establishing a new budget are set out in Appendix Two.
1.3
When negotiating the budget, the EU institutions have to respect annual limits known
as ‘ceilings’. These ceilings set limits for both commitment appropriations (legal pledges
to finance specific activities) and payment appropriations (money to be paid from the EU
budget to beneficiaries), for each of the seven years.
1.4
The current (2014–2020) MFF divides the EU budget into six areas of expenditure
(‘policy areas/budget headings’) corresponding to the different areas of expenditure.
The six headings and their corresponding commitment appropriations are described in
Figure 1.
The MFF provides flexibility to allow the European Commission (the Commission)
to react to unforeseen circumstances, for example to respond to the migration crisis.
1.5
A mid-term review of the current MFF is scheduled to take place by the end of
2016 to enable the Council, the European Parliament and the Commission to reassess
priorities for the remaining years of the MFF.
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Financial management of the European Union budget in 2014
Part One
9
Figure 1
EU policy area/budget heading, objective or purpose, and commitment appropriations
for the 2014–2020 multiannual financial framework
EU policy area/budget heading
Objective or purpose
Commitment
appropriations
(€bn)
1
Smart and inclusive growth
Supports research and innovation; education
and training; trans-European energy,
telecommunications and energy networks;
social policy; enterprise development.
Supports regional policy intended
to help the least developed EU
countries and regions catch up with
others, encouraging competitiveness
and inter-regional cooperation.
Supports rural development and
environmental measures.
Supports justice and home affairs; border
protection; immigration and asylum; public
health; consumer protection; culture; youth;
information and dialogue with citizens.
Supports international development
and humanitarian assistance activities
outside the EU.
Funds administrative expenditure of
European institutions, pensions and
European schools (schools primarily for the
children of staff in EU institutions).
125.6
13
As a proportion of
total commitment
appropriations
(%)
1a
Competitiveness for growth
and jobs
1b
Economic, social and
territorial cohesion
325.2
34
2
Sustainable growth:
natural resources
Security and citizenship
373.2
39
3
15.7
2
4
Global Europe
58.7
6
5
Administration
61.6
6
Total commitment
appropriations
960.0
100
Notes
1 Commitment appropriations are given in 2011 prices, as this is when negotiations for the 2014–2020 multiannual financial framework commenced.
2
3
The commitment appropriations presented in this figure reflect the position as at December 2013. Delays finalising expenditure plans in 2014 mean that
these commitment appropriations have since been amended.
The table does not include budget heading 6:
Compensation.
This heading has €27 million commitment appropriations (0.003% of total commitment
appropriations), and is to fund temporary payments to ensure Croatia does not contribute more to the EU budget than it receives from it, in its first year
following accession (Croatia joined on 1 July 2013).
Source: European Commission
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10
Part One
Financial management of the European Union budget in 2014
EU expenditure
1.6
The current MFF allows the EU to make up to €960.0 billion in commitments and
€908.4 billion in payments over seven years. Respectively, this is 3.4% and 3.7% less
(in 2011 prices) than under the previous (2007–2013) MFF period.
1.7
The current MFF marks a shift in EU priorities towards boosting growth and
creating jobs as part of the
Europe 2020
strategy
(Figure 2).
6
Expenditure heading 1a:
Competitiveness for growth and jobs,
which includes, for example, research and
innovation, increased by 37% compared to the previous MFF. Heading 2:
Sustainable
growth: natural resources,
and heading 1b:
Economic, social and territorial cohesion
remain the EU’s biggest budget items (respectively 38.9% and 33.9%); however, their
combined budgets have reduced by 19.7%. Heading 5:
Administration
commitments
have increased by 8%.
Figure 2
Comparison of current (2014–2020) and previous (2007–2013)
EU multiannual financial frameworks (MFFs), in 2011 prices
Commitment appropriations
for policy area/budget heading
Current MFF
Previous MFF
Comparison:
current versus
previous
(€bn)
(%)
(€bn)
1
Smart and inclusive growth
1a
Competitiveness for growth
and jobs
1b
Economic, social and
territorial cohesion
2
3
4
5
Sustainable growth:
natural resources
Security and citizenship
Global Europe
Administration
125.6
325.2
373.2
15.7
58.7
61.6
960.0
1
908.4
(€bn)
91.5
354.8
420.7
12.4
56.8
57.1
994.2
2
942.8
+34.1
-29.7
-47.5
+3.3
+1.9
+4.5
-34.2
-34.4
+37.3
-8.4
-11.3
+26.8
+3.3
+8.0
-3.4
-3.7
Total commitment
appropriations
Total payment appropriations
Notes
1 This does not include commitment appropriations of €27 million in respect of budget heading 6:
Compensation.
This is to fund temporary payments to ensure Croatia does not contribute more to the EU budget than it receives
from it in its first year following accession (Croatia joined on 1 July 2013).
2
3
4
This does not include commitment appropriations of €0.9 billion in respect of budget heading 6:
Compensation.
This was to fund preparations for the accession of Croatia.
Figures are given in 2011 prices, as this is when negotiations for the 2014–2020 multiannual financial
framework commenced.
Figures may not sum exactly due to rounding.
Source: European Council and Council of the European Union
6
Europe 2020
is the EU’s ten-year jobs and growth strategy, launched in 2010.
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Financial management of the European Union budget in 2014
Part One
11
Allocation of EU expenditure
1.8
The EU budget is used to finance a number of funds, which are allocated to
member states. The seven principal funds and their associated objectives are described
in
Figure 3.
These seven funds account for nearly 80% of the EU budget, and are
managed in partnership between the Commission and member states under a system
referred to as ‘shared management’.
1.9
Except for the European Agricultural Guarantee Fund (EAGF), almost all EU
funds must be co-financed by the beneficiary. Co-financing requirements vary as a
proportion of project costs and can come from national or local funders, including the
private sector. Co-financing must comply with eligibility requirements of relevant EU and
national-level rules.
Figure 3
EU policy areas, funds and fund objective or purpose
EU policy area
1
Smart and inclusive growth
Fund
European Regional
Development Fund
European Social Fund
Shortened to
ERDF
Objective or purpose
Strengthens economic and social cohesion in the EU
by correcting imbalances between its regions.
Improves employment and education opportunities
across the EU, and improve the situation of the most
vulnerable at risk of poverty.
Reduces economic and social disparities and promote
sustainable development.
Provides extra support to young people under 25 living
in regions where youth unemployment was more than
25% in 2012.
Ensures fishing and aquaculture are environmentally,
economically and socially sustainable.
Finances direct payments to farmers, and finances
measures to regulate agricultural markets.
Helps rural areas meet economic, environmental and
social challenges: sustainability of rural communities,
environmental protection and food security.
ESF
Cohesion Fund
CF
Youth Employment Initiative
YEI
2
Sustainable growth:
natural resources
European Maritime and
Fisheries Fund
European Agricultural
Guarantee Fund
European Agricultural Fund
for Rural Development
EMFF
EAGF
EAFRD
Source: European Commission
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Part One
Financial management of the European Union budget in 2014
1.10
The remaining 20% of the EU budget is managed directly or indirectly by the
Commission. Directly managed funds include grants secured through competition.
Member states, public or private organisations are required to bid for funding – there is
no allocated share for member states. Examples of these competitive funds include:
•
•
•
nearly €80 billion for
Horizon 2020,
to enhance EU competitiveness;
€30.4 billion for
Connecting Europe,
to support trans-European networks and
infrastructure in the areas of transport, telecommunications and energy; and
€2.3 billion for
Competitiveness of Enterprises and SMEs
(small and medium-sized
enterprises), to support the competitiveness, growth and sustainability of
enterprises, in particular SMEs.
1.11
Directly managed funds also include the Commission’s own administration costs.
Indirectly managed funds include the administration costs of other EU institutions, and
also heading 4:
Global Europe.
1.12
All EU budget expenditure should focus on EU added value: objectives that can
be achieved better through spending at EU level rather than at the level of the individual
member states.
Financing the EU budget
1.13
The EU budget is financed almost exclusively by contributions from member states
through a system of ‘own resources’.
7
Member states make contributions based on their:
•
•
•
gross national income (approximately 70% of member states’ contribution to
the budget);
customs duties and sugar levies (approximately 11%); and
VAT receipts (approximately 12%).
1.14
The UK receives an abatement, or rebate, on its contribution through a mechanism
designed to correct contributions by certain member states deemed excessive as
compared to their national wealth.
8
The cost of the UK rebate is divided among the
other EU member states. The UK contribution to the EU budget is considered further
in Part Three.
The EU budget in 2014
1.15
The EU budget in 2014 received €143.9 billion in contributions from 28 member
states and other sources. It provided for payments of €142.5 billion (see
Figure 4).
7
8
Approximately 92% of EU revenue comes from member states’ contributions. The remaining amount is from other
sources, including fines on companies breaching EU competition law. The own resources decision is agreed
unanimously by all member states. In the UK this requires an Act of Parliament.
See footnote 3.
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Financial management of the European Union budget in 2014
Part One
13
Figure 4
EU expenditure in 2014
Total EU expenditure in 2014 was
€142.5
billion
Sustainable growth: natural resources
56.6
Economic, social and territorial cohesion
54.4
Competitiveness for growth and jobs
13.3
Administration
8.8
Global Europe
7.2
Security and citizenship
Other (compensation and special instruments)
1.7
0.5
0
10
20
30
40
50
60
€ billion
Source: European Court of Auditors
Managing the EU budget
1.16
Once the budget is adopted, it is managed directly by the Commission and other
EU institutions, indirectly by other international organisations or third countries, or
implementation is shared between the Commission and member states (see
Figure 5
overleaf). The Commission has a common set of rules that determine how the EU
budget can be spent;
9
however, the Commission retains overall accountability for the
implementation of the budget.
9
European Commission,
Financial Regulation applicable to the general budget of the Union and its rules of application,
March 2014.
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Figure 5
Organisations involved in the implementation of the EU budget, and corresponding accountability flows
Domain of member states’ accountability
Domain of shared accountability
between the EU and member
states; however, the Commission
retains overall accountability
Domain of European Union accountability
EU budget
implemented
by
European
Commission
Member
states’
parliaments
European
Parliament
Member states’
administrations
is shared with
directly by
indirectly by
14
Part One
Financial management of the European Union budget in 2014
European Union delegations
Executive and decentralised
agencies of the European Union
International organisations
Third countries
European Investment Bank and
European Investment Fund
Funding flow
Accountability flow
Notes
1 Estimated levels of error in both domains was 4.6%. Estimated level of error in domain of EU accountability does not include the estimated level of error relating to
heading 5:
Administration
of 0.5% (see figure 8).
Source: European Commission and European Court of Auditors
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Financial management of the European Union budget in 2014
Part One
15
1.17
For the 80% of EU expenditure administered through shared management
arrangements with national, regional and local authorities within member states,
the Commission is responsible for:
•
negotiating and approving EU partnership agreements proposed by member
states, and allocating resources (partnership agreements should incorporate
a focus on performance);
10
supervising the arrangements governing the management and control frameworks
of EU programmes; and
protecting the EU budget by making financial corrections and imposing recoveries,
where necessary.
•
•
Member states are responsible for:
•
•
managing EU programmes, and a simplification of rules;
11
executing payments to beneficiaries and taking all necessary measures (legislative,
regulatory and administrative) to ensure payments are legal and regular, and to
detect and correct irregularities; and
setting up management and control systems that comply with EU requirements.
•
Protecting the EU budget from financial irregularity and fraud
1.18
The Commission supervises member states’ management of EU programmes.
If a member state fails to meet certain procedural and other requirements, it must
make efforts to rectify these through a financial recovery, or the Commission may make
a financial correction (see paragraph 3.22). The process of identifying and rectifying
errors can take a considerable time, and it can be several years before corrections are
implemented. This is because corrections and recoveries normally result from inspections
and audits, sometimes as part of the formal closure of a multi-year programme.
Fraud and irregularity and the work of OLAF
1.19
The role of the European Anti-Fraud Office (OLAF – from the French
Office de Lutte
Anti-Fraude)
is to fight fraud, corruption, and other illegal activity that affects the financial
interests of the EU. It is administratively part of the Commission, but is autonomous in its
investigative role. OLAF reports annually on the number and value of irregularities and
suspected frauds notified by member states, and on the results of its investigations.
10 Partnership Agreements are drawn up by member states and approved by the Commission following negotiation. They
set out how the European Structural and Investment Funds (ESIF) will be used by the member states. ESIF comprises:
the Cohesion Fund (CF), the European Regional Development Fund (ERDF), the European Social Fund (ESF), the Youth
Employment Initiative (YEI), the European Maritime and Fisheries Fund (EMFF) and the European Agricultural Fund for
Rural Development (EAFRD).
11 EU regulations: Common Provision Regulation (EU 1303/2013), governing the ESIF: Horizontal Regulation (EU 1306/2013),
governing the financing, management and monitoring of the European Agricultural Guarantee Fund and the European
Agricultural Fund for Rural Development.
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1.20
It is important to distinguish between fraud and irregularity. An irregular transaction
is one that has not complied with all of the regulations that govern EU revenue and
payments. Fraud is an irregularity that is committed intentionally and constitutes a
criminal act.
1.21
Member states are required to notify the Commission of irregularities, including
those that may be fraudulent. In 2014, member states reported 16,473 irregularities to
the Commission made up of:
•
•
14,824 irregularities not reported as fraudulent, involving €2.7 billion; and
1,649 irregularities reported as fraudulent (suspected and established)
involving €538.2 million.
1.22
If OLAF recommends that EU monies should be recovered, it is up to competent
authorities in member states to decide on the action to be taken: OLAF does not
have the power to prosecute.
12
In 2014, OLAF recommended financial recoveries
totalling €901 million. This was unusually high due to the conclusion of some significant
investigations relating to European Structural and Investment Funds (ESIF), external
aid and customs. Customs represented the single largest recommended recovery at
€132.2 million (15% of the total recommended for recovery in 2014). As a result of OLAF
investigations, €206 million was recovered for the EU budget in 2014. The average duration
for investigations concluded during 2014, or ongoing at the end of 2014, was 21 months.
1.23
Between January 2007 and December 2014, OLAF made 16 recommendations to
UK competent authorities to recover EU monies. Eleven of these recommendations were
dismissed. The remaining 5 recommendations led to an indictment (representing an
indictment rate of 31%, compared with the EU member state average of 53%).
The EU budget discharge procedure
1.24
The annual budget cycle is closed when the European Parliament ‘discharges’ the
Commission from its responsibility for the fiscal year in question. The Council makes a
discharge recommendation to the European Parliament, which is the opportunity for
member states to express their views on the implementation of the budget. However,
only the European Parliament has authority to grant, refuse, or postpone discharge
(see Appendix Three).
1.25
The European Parliament’s discharge decision is informed by:
•
•
•
•
the EU accounts;
reports from the European Court of Auditors (ECA), in particular its annual report;
the recommendation of the Council; and
the Commission’s responses to questions posed by the European Parliament
(answering specific questions and providing further information requested).
12 In the UK, this includes the prosecuting authorities.
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17
1.26
The UK, together with the Netherlands and Sweden, has for the last four years
voted against the Council’s recommendation to the European Parliament to discharge
the EU budget. Since 2010, these three countries have issued a joint statement to
the European Parliament strongly regretting the adverse opinion on the legality and
regularity of payments. In their most recent joint statement (February 2015, referring to
the 2013 financial year) these three countries recommended that the Commission and
member states should:
•
•
identify more opportunities to simplify the complex rules and regulatory framework
governing the EU budget; and
give priority to improving the assessment and monitoring of EU programmes to
ensure they achieve the desired outcomes and represent added value.
1.27
In its resolution discharging the Commission from the implementation of the
2013 EU budget, the European Parliament recommended that member states should
continuously improve their management and control systems in order to achieve better
financial management, and a reduction in error rates.
1.28
The problems associated with complex EU programmes have been evident
for some years. Simplification was a theme advocated by the UK Committee of
Public Accounts in its reports on financial management in the EU in both 2005 and
2009 (Figure
6
overleaf). In 2005 and 2009 the Committee highlighted the inherent
complexity of the rules governing EU expenditure as a major factor leading to error,
but this complexity has persisted, as have the resultant errors. The conclusions
and recommendations issued by the Committee in its 2009 report, together with
developments to date, are set out in Appendix Five.
1.29
The discharge procedure for the 2014 budget is in progress, and is expected
to conclude in April 2016.
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Figure 6
Timeline of audit opinions from the European Court of Auditors and commentary from the National Audit Office
and UK Committee of Public Accounts on the issue of error rates in EU expenditure, from 2000 to 2014
Clear opinion on the reliability of the accounts
Clear opinion on the legality and regularity of transactions underlying the accounts in respect of:
•
revenue
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
•
payments
2000
2001
2002
2003
2004
Published 2008
Published 2009
…
simplify
the rules governing…
expenditure whilst
defining closely the
intended outcomes
Published 2010
United Kingdom departments should engage fully with…
the aim of encouraging further
simplification
and
improving transparency
Published 2005
Published 2009
2
In 2005, we highlighted the
inherent
complexity
of some European
programmes as a
major factor leading to
error,
but this
complexity persists,
as do
the resultant errors.
18
Part One
Financial management of the European Union budget in 2014
...
simplify,
create programmes
with
clear and measurable
objectives
that add value, are
simple
to apply, and capable of
being managed efficiently from
start to finish
Published 2011
2
(for financial
year 2008-09)
C&AG qualified opinion on
basis of:
In designing schemes and programmes, the European Institutions should
consider the relationship between desired outcomes of a particular
scheme, the
complexity of the rules
governing it and the
consequential
likelihood of an error occurring.
... as a top priority, press for the
simplification
of the rules and regulations
of the Common Agricultural Policy and Structural Funds to reduce the
scope for fraud and error...
•
•
•
application of accounting
policies;
accounting policy for foreign
currency transactions; and
limitation in audit scope
arising from unauditable
balancing figures
Published 2008
2
(for financial year 2006-07)
2009
2
(for financial year 2007-08)
Published
C&AG qualified opinion on basis of
inconsistent application of accounting
policies
UK Committee of Public Accounts
C&AG qualified opinion on basis of
inconsistent application of accounting
policies
Financial corrections made by the
Commission often result in a loss to
exchequer funds and it is unacceptable
that the United Kingdom authorities,
through mismanagement, have exposed
the taxpayer to... recovery.
Clear opinion
Unclear opinion
European Court of Auditors
National Audit Office
Note
1 Findings and commentary are identified with the year to which they refer, and not necessarily the year in which they were published (for example, the National Audit Office report associated
with 2009 was published in 2010).
2
HM Treasury Consolidated Statement on the use of EU funds in the UK.
Source: National Audit Office
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19
Part Two
The European Court of Auditors
2.1
This part:
•
•
•
summarises the main conclusions of the European Court of Auditors’ (ECA) annual
report on the implementation of the European Union (EU) budget in 2014;
13
considers errors identified by the ECA, and action to address the build-up of
financial commitments; and
describes recent action to address weaknesses in financial management.
The role of the European Court of Auditors
2.2
The ECA is the independent external auditor of the EU. It is a collegiate body of
28 members, one from each member state. The ECA audits the consolidated financial
statements of the EU, which are produced annually by the Commission’s Directorate
General for Budget.
2.3
The ECA audits the legality and regularity of EU revenue and expenditure, and
conducts annual performance audits considering the economy, effectiveness and
efficiency of EU spending.
Statement of assurance
2.4
A key part of the ECA’s report is the annual statement of assurance. The statement
of assurance is an audit opinion of the reliability of the EU’s accounts, and the legality
and regularity of the transactions underlying them. The findings and conclusions
supporting the opinion are published in the ECA’s annual report. The President of the
ECA communicates its annual report to the European Parliament and member states.
2.5
To assess legality and regularity, the ECA audits whether transactions conform
to applicable laws and regulations. The ECA conducts detailed testing of a sample of
transactions from across all policy areas/budget headings. The ECA uses the results
to draw an opinion on the EU budget, and also to provide specific assessments of
the different areas of the EU budget. The ECA’s audit of the EU budget is based on
international auditing standards. For an overview of the ECA’s methodology for its
statement of assurance, see
Figure 7
overleaf.
13 The EU financial year runs from 1 January to 31 December.
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Financial management of the European Union budget in 2014
Figure 7
European Court of Auditors’ 2014 methodology in respect of its statement of assurance
(legality and regularity opinion)
The ECA
Samples
around 1,200
transactions
drawn from
across the
EU budget
Follows funds
to the point of
final use
Discusses
findings with
member state
authorities
and the
Commission
Calculates
estimated level
of error by
extrapolating
quantifiable
errors
Compares
estimated
level of
error to 2%
materiality
threshold
Comes to
opinion,
publishes
opinion in
annual report
Source: National Audit Office based on information from the European Court of Auditors
2.6
The ECA’s annual report on the EU budget does not attempt to draw conclusions
in respect of individual member states, but on the EU budget and annual accounts as
a whole. However, each year the ECA examines management systems in a number of
member states, and individual member states are sometimes cited for illustrative purposes
(see Appendix Four for references made to the UK in the ECA’s 2014 annual report).
The ECA’s statement of assurance on the 2014 EU budget
2.7
On 10 November 2015, the ECA published its annual report on the 2014
EU budget.
Key conclusions:
•
The EU accounts were reliable
The EU accounts for 2014 were prepared in accordance with international
public-sector accounting standards, and present a true and fair view of the EU’s
financial results for the year, and its assets and liabilities at the end of the year.
14
•
•
Revenue was legal and regular
The estimated level of error for revenue was zero.
15
Adverse opinion in respect of payments
The ECA did not provide a positive statement of assurance on the legality and
regularity of EU payments because these were affected by material error. The
estimated level of error at 4.4% was above the ECA’s materiality threshold of 2%.
16
14 The ECA has reported a true and fair opinion on the financial statements each year since 2007.
15 The ECA has reported that revenue was legal and regular since 1999.
16 The ECA has reported an adverse opinion on the legality and regularity of EU payments each year since 1994.
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21
Analysis of errors identified by the ECA
2.8
The estimated levels of error recorded by the ECA were above the materiality level
of 2% (the level below which it deems errors do not have a significant effect) for each of
the main policy areas/budget headings except administration, which had an estimated
level of error of 0.5% (Figure
8).
2.9
The ECA’s estimated level of error represents monies not used or administered
in accordance with applicable rules and regulations. It is not a measure of fraud.
If the ECA suspects a transaction to be fraudulent, it is forwarded to OLAF, the EU’s
anti-fraud office, to investigate. Out of approximately 1,200 transactions assessed for
legality and regularity in 2014, the ECA identified 22 instances of suspected fraud,
which were forwarded to OLAF.
2.10
The main source of error in 2014 was ‘ineligible costs included in cost claims’,
followed by ‘errors in public procurement – tendering and implementation’ and ‘incorrect
declarations of area by farmers’ (Figure
9
overleaf). Together, these three sources of
error contributed almost 90% of all errors in 2014.
2.11
EU payments can be characterised by whether a recipient is ‘entitled’ to
receive EU monies, or whether a recipient is being ‘reimbursed’ for costs incurred.
17
The ECA’s analysis suggested that errors relating to reimbursements dominated the
errors detected in 2014 (Figure
10
on page 23).
Figure 8
European Court of Auditors’ estimated level of error by EU policy area/
budget heading, and contribution to overall estimated level of error, 2014
EU policy area/budget heading
Estimated
level of error
Contribution to overall
estimated level of
error by policy area/
budget heading
(%)
12
50
33
5
1
(%)
1a
1b
2
4
5
Competitiveness for growth and jobs
Economic, social and territorial cohesion
Sustainable growth: natural resources
Global Europe
Administration
5.6
5.7
3.6
2.7
0.5
4.4
Overall
100
Notes
1 Together, 4:
Global Europe,
5:
Administration
and an ‘other’ category contributed 5% of the overall estimated level of error.
2
The table does not include estimated levels of error for EU policy area/budget headings 3:
Security and citizenship
and 6:
Compensation,
as the European Court of Auditors does not provide a specific assessment of spending under
these headings.
Source: European Court of Auditors
17 Those entitled to receive EU monies could include farmers and students. Those reimbursed for costs incurred could
include, for example, construction companies contracted to build an airport or motorway.
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Financial management of the European Union budget in 2014
Figure 9
Contributing factors to overall estimated level of error in EU budget expenditure,
by error type, for 2013 and 2014
In 2014, nearly 90% of errors identified by the European Court of Auditors related to three error types
Ineligible costs included in
cost claims
41
42
2014
2013
Serious errors in public procurement
– tendering and implementation
27
18
2013
2014
Incorrect declarations of area
by farmers
20
2014
14
2013
Ineligible projects/activities
or beneficiaries
5
2014
22
2013
Administrative errors in
5
2014
natural resources
1
2013
Other error types
0
2
2014
3
2013
5
10
15
20
25
30
35
40
45
Percentage
Administrative errors
in natural resources
5%
Ineligible projects/
activities or beneficiaries
5%
Other error types
2%
Incorrect declarations
of area by farmers
20%
Ineligible costs included
in cost claims
41%
Serious errors in public
procurement
–
tendering
and implementation
27%
Source: European Court of Auditors
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23
Figure 10
The relationship between entitlements, reimbursements, risk and estimated level
of error in EU payments, based on audit testing in 2013 and 2014
Risk stemming from nature and complexity of transactions
Higher risk
Estimated level of error
Overall risk:
medium
Cohesion and natural resources
reimbursement projects
Overall risk:
high
Rural development
area-related entitlements
Competitiveness and Global Europe
reimbursement projects
4
Combined estimated level of error for the two years 2013 and 2014
Materiality
2.0%
European Agricultural Guarantee Fund
area-related entitlements
Research and educational grants – non-reimbursement
Administration: pay, pensions and other administrative costs
Overall risk:
low
Overall risk:
medium
0%
Budget support
Risk stemming from quality of systems
Entitlements
Reimbursements
Notes
1 Reimbursements: eligible costs for eligible activities are reimbursed by the EU (for example, infrastructure such as new roads).
2
3
Entitlements: payments are made based on qualifying criteria (for example, enrolling as a student, being a farmer or being an
employee of one of the EU institutions).
This figure is based on audit testing in 2013 and 2014. Expenditure is grouped according to its nature. The size of the circles are
proportionate to overall spending, and their colour indicates whether expenditure is based on entitlements or reimbursements.
The position of these circles along the 45° line indicates relative levels of estimated errors.
Reimbursements for 4:
Global Europe
include multi-donor projects, which in practice have many of the attributes of
entitlement spending but are affected by lower levels of error.
Higher risk
4
Source: European Court of Auditors
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Financial management of the European Union budget in 2014
2.12
The estimated level of error for reimbursements was 5.5% (2013: 5.6%). Typical errors
included ‘ineligible costs in cost claims’; ‘ineligible projects, activities and beneficiaries’;
and ‘infringement of public procurement rules’. The estimated level of error for entitlements
was 2.7% (2013: 3.0%). Typical errors included ‘incorrect declarations of area by farmers’,
and ‘administrative errors in natural resources’. The ECA considers that the quality of
information provided by beneficiaries, and the inherent complexity of reimbursing costs,
impacts the estimated levels of error identified in respect of reimbursement schemes.
2.13
As shown in Figure 5, EU expenditure can also be characterised by whether it is
managed in partnership by the Commission and member states (approximately 80%),
or directly or indirectly by the Commission (approximately 20%). The estimated level of
error for expenditure in both of these categories was 4.6%.
2.14
The results of the ECA’s audit testing in 2014 reflects similar results in recent years
(Figure
11),
when the estimated level of error has also been consistently above the ECA’s
materiality threshold of 2%. Due to changes in the spending headings and how errors are
evaluated by the ECA it is not possible to comment conclusively on any long term trend.
Estimated levels of error vary from one policy area to another, and from year to year, but
have only been consistently below materiality in administrative spending.
Figure 11
European Court of Auditors’ estimated level of error by EU policy
areas/budget headings, 2012 and 2013
EU policy area/budget heading
1
Estimated level of error
2012
(%)
Agriculture: market and direct support
Rural development, environment, fisheries and health
Regional policy, transport and energy
Employment and social affairs
External relations, aid and enlargement
Research and other internal policies
Administrative and related expenditure
Overall
3.8
7.9
6.8
3.2
3.3
3.9
0
4.5
2
2013
(%)
3.6
6.7
6.9
3.1
2.6
4.6
1.0
4.5
2
Notes
1 EU policy area/budget heading categories changed between 2013 and 2014, and hence 2014 rates are
presented in Figure 8.
2
The overall rates for estimated levels of error have been adjusted to reflect a revised approach to measuring
error adopted by the European Court of Auditors for 2014.
Source: European Court of Auditors
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25
Action by member states to reduce errors
2.15
As in previous years, the Commission and member states took action to reduce the
occurrence of errors by applying corrective measures in cases of irregular expenditure.
In 2014, if such corrections had not been applied, the ECA’s overall estimated level of
error would have been 5.5% rather than 4.4%.
2.16
In addition, the ECA has recommended improvements in control systems in
member states and at EU level, and further simplification of rules to reduce levels
of error. Despite efforts by member states, estimated levels of error have remained
stable above materiality.
Action to improve financial management
2.17
The Commission and member states have acknowledged the need to address
weaknesses in financial management. In February 2012, the Commission set out a
simplification agenda for the current multiannual financial framework (MFF).
18
The aim
of the simplification agenda is to cut costs, reduce the scope for error and increase
the efficiency of controls. In addition, the Commission envisages that greater online
management of EU funds will help cut the administrative burden and reduce the
number of errors.
2.18
The Commission’s efforts to pursue simplification include 120 actions.
19
These actions can be grouped into three themes:
•
Simplification:
this includes efforts to reduce unnecessary bureaucracy, speed
up procedures and shift the focus to performance (for example, simplified methods
to calculate costs such as lump sum payments, flat rates and standard scales
of unit costs).
Increased accountability:
this includes measures to enhance sound financial
management and the protection of the EU’s financial interests. For example
national authorities must sign and submit annual summaries (also referred to as
annual declarations) certifying that EU monies have been used properly.
Increased flexibility:
this includes the introduction of financial mechanisms such
as loans, equity or guarantees to enable the mobilisation of third-party funds.
•
•
2.19
The Commission has appointed a group of independent experts to report on the
extent to which simplification measures are being incorporated in partnership agreements
(see paragraph 1.17). This group will inform the forthcoming mid-term MFF review.
18 European Commission,
A simplification agenda for the MFF 2014–2020,
COM (2012) 42 final, February 2012; and
European Commission,
Simplification and gold-plating in the European Social Fund,
November 2013.
19 European Commission, Press release,
Final ”simplification scoreboard”: 120 measures to cut red tape on EU funding,
4 March 2014.
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Action to address the build-up of financial commitments
2.20
The ECA has drawn attention to the growing level of financial commitments.
2.21
The EU budgeting system is different from that in the UK. The EU system operates
with commitments (legal pledges to finance specific activities) and payments (money to
be paid from the budget to beneficiaries). In some spending areas, this differentiation is of
little consequence. With direct payments relating to agriculture, a commitment turns into a
payment in the same year with no time lag. In other areas the differentiation is important.
2.22
With the European Structural and Investment Funds (which might include large
infrastructure projects) there is a lag between commitments becoming payments, and
some commitments never do. This could be due to member states’ institutional capacity
constraints, because projects take time to implement, or because co-financing from a
member state is not available. In December 2013 the European Parliament and Council
extended the time allowed for using commitments from two to three years.
20
Member
states gained one more year in which to benefit from commitments before they lapse
(are ‘decommited’).
2.23
The stock of unspent commitments has been growing and stood at more than
€222 billion at the end of 2013. Although unspent commitments fell to €189.6 billion in 2014,
they are projected to increase again in 2015 and subsequent years. In some member
states unspent commitments, together with required national co-financing, is equivalent
to more than 15% of general government expenditure (see
Figure 12).
The ECA has
highlighted that spending this money will be a challenge for some member states.
2.24
In March 2015, the Commission presented a payment plan intended to ‘bring
the EU budget back on a sustainable track’.
21
The ECA has commented that the
measures proposed by the Commission seek to improve shorter-term cash flow
management; however, dealing with the high level of unspent commitments will
require a longer-term strategy.
The ECA’s assessment of performance and value for money
2.25
The ECA’s 2014 annual report also emphasised the importance of achieving value
for money from the EU budget. The ECA commented on the EU’s long-term strategy,
noting that:
•
•
•
decision-makers must align the budget better with the EU’s long-term strategic
priorities, and make it more capable of responding in a crisis;
legislators need to ensure that spending schemes are clear about the results
to be achieved and the risks it is acceptable to take
22
; and
financial managers have to ensure that the money spent complies with the rules
and achieves the intended results.
20 Regulation (EU) No 1303/2013 of the European Parliament and the Council.
21 European Commission,
Elements for a payment plan to bring the EU budget back onto a sustainable track,
March 2015.
22 The European Parliament and the Council of the European Union.
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Financial management of the European Union budget in 2014
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27
Figure 12
Outstanding commitment appropriations of EU European Structural and Investment Funds (ESIF)
at 31 December 2014 as a percentage of 2014 general government expenditure in the EU-28
In four member states the accumulated share that could be claimed from EU ESIF is equivalent to 15% or
more of annual general government expenditure
Romania
Bulgaria
Slovakia
Czech Republic
Hungary
Latvia
Poland
Malta
Lithuania
Slovenia
Estonia
Greece
Spain
Portugal
Croatia
Cyprus
Italy
Germany
France
United Kingdom
Ireland
Finland
Austria
Belgium
Denmark
Netherlands
Sweden
Luxembourg
0
2
4
6
8
10
12
14
16
18
20
Percentage
Notes
1 EU ESIF includes the European Regional Development Fund (ERDF), the European Social Fund (ESF), the Cohesion Fund (CF), the European
Maritime and Fisheries Fund (EMFF) and the European Agricultural Fund for Rural Development (EAFRD).
2
EU-28: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, the United Kingdom.
Source: European Court of Auditors based on European Commission data
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2.26
During 2014, the ECA published 24 special reports, which examined whether
the principles of sound financial management had been applied to EU spending,
and two landscape reviews. These are listed at Appendix Six. The ECA’s work in
2014 identified a weak focus on results, and instances where projects likely to deliver
best value for money were not always selected. In 2015 the ECA published 22 special
reports, including one considering procurement.
23
2.27
During the current MFF, the Commission intends to place a greater emphasis on
results from the EU budget. In 2015 the Commission launched the ‘Budget Focused on
Results’ initiative; and in spring 2016 it will announce further proposals to strengthen its
focus on performance.
2.28
The upcoming mid-term review of the current MFF is a crucial point in the
management of EU spending. The ECA has recommended that the Commission
analyses the areas of persistently high levels of error as soon as possible, and
assesses opportunities for reducing these while strengthening the focus on
performance in spending.
23 European Court of Auditors,
Efforts to address problems with public procurement in EU cohesion expenditure should
be intensified,
September 2015.
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29
Part Three
The EU budget and the UK
3.1
This part identifies UK contributions to the European Union (EU) budget, and UK
private- and public-sector receipts from the EU budget. It summarises the use made of
EU monies in the UK, oversight arrangements and information on the extent to which
these monies have been managed in line with EU and national rules.
Forecast UK contributions to the EU budget
3.2 Figure 13
overleaf details Office for Budget Responsibility (OBR) figures for
outturn and estimates for UK contributions to the EU budget, 2014-15 to 2020-21.
These contributions do not include private-sector receipts: EU monies secured by UK
organisations through competitions, including universities (see figure 19).
Figure 14
overleaf details OBR figures for outturn and estimates for public-sector receipts from
the EU budget to the UK over the same period.
24
UK contribution to the EU budget in 2014
3.3
In 2014 the UK made a gross contribution (post-rebate
25
) of €14.1 billion (£11.4 billion),
and received EU public- and private-sector receipts of €7.0 billion (£5.6 billion). It therefore
made a net contribution of €7.1 billion (£5.7 billion). This was the third-largest net
contribution to the EU budget.
3.4
In 2014, based on data from the European Commission (the Commission), the UK
was one of ten countries that made a net contribution to the EU budget. The others were
Germany, France, Italy, the Netherlands, Sweden, Austria, Denmark, Finland and Ireland.
The UK made the third-largest net contribution, accounting for 14.3% of the total net
contribution of these ten countries (see
Figure 15
on page 31).
3.5
In 2014-15 the UK net contribution to the EU budget of £8.8 billion was
equivalent to 1.4% of UK government total departmental expenditure of £620.6 billion
(Figure 16 on page 32).
26
24 The EU financial year is based on the calendar year of 1 January to 31 December, whereas the UK financial year runs
from 1 April to 31 March. Differences in the financial years used by the EU and UK authorities makes interpreting and
comparing UK and EU data challenging.
25 In 2014 the UK received a rebate of €6.1 billion. Calculating the UK rebate is complex, but it is broadly equivalent
to 66% of the difference between the UK’s contribution to the EU budget, and its receipts from the EU budget. The
method for calculating the rebate is laid down in Council Decision 2007/436/EC, and in the supporting Council of the
European Union document
Method for the calculation of the UK correction.
26 This net contribution figure considers the gross contribution and deductions resulting from the rebate and public-sector
receipts only. It does not take into account private-sector receipts (see paragraphs 3.8 and 3.9).
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Financial management of the European Union budget in 2014
Figure 13
UK contributions to the EU budget (taking into account UK rebates
and public-sector receipts, but excluding private-sector receipts),
2014-15 to 2020-21
Year
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
2020-21
Contribution
(£bn)
8.8
1
10.8
9.7
8.4
9.3
9.6
9.9
Notes
1 2014-15 represents an outturn, other years are forecasts.
2
Contributions in this figure do not include private-sector receipts: EU monies secured by UK organisations
through competitions (including universities). Private-sector receipts are not forecast.
Source: Office for Budget Responsibility
Figure 14
Public-sector receipts to the UK from the EU budget,
2014-15 to 2020-21
Year
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
2020-21
Public-sector receipts
(£bn)
4.6
1
4.1
4.2
4.4
4.7
5.0
5.2
Note
1 2014-15 represents an outturn, other years are forecasts.
Source: Office for Budget Responsibility
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31
Figure 15
Net contributor countries to the EU budget, and net contribution/capita, 2014
Country
Net contribution
to the EU budget
(€bn)
17.7
7.5
7.1
6.4
5.2
2.6
1.3
1.0
0.8
0.1
49.7
Proportion of total
net contribution
(%)
36
15
14
13
11
5
3
2
2
<1
100
Net contribution/
capita
(€)
219
114
110
378
85
270
152
177
154
19
Germany
France
UK
Netherlands
Italy
Sweden
Austria
Denmark
Finland
Ireland
Total
Note
1 Figures may not sum exactly due to rounding.
Source: European Commission
Receipts from the EU budget to the UK
3.6
In 2014 the majority of EU payments to the UK (97%) related to activities in support
of policy area 1a:
Competitiveness for growth and jobs,
1b:
Economic, social and territorial
cohesion,
and 2:
Sustainable growth: natural resources
(see
Figure 17
on page 33).
3.7
Over the seven years of the current MFF, the UK will receive approximately
€39 billion in respect of six allocated funds: more than €22 billion from EAGF, and more
than €16 billion from the European Structural and Investment Funds (ESIF).
Figure 18
on
page 34 identifies how the latter will be allocated to the regions of the UK.
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Figure 16
UK net contribution to the EU budget and UK total departmental expenditure in 2014-15
UK net contribution to the EU budget in 2014-15 was equal to 1.4% of UK total departmental expenditure in 2014-15
Department for Work & Pensions
NHS (health)
Department for Education
Ministry of Defence
Scotland
CLG
−
Local Government
Department for Business, Innovation & Skills
Northern Ireland
Department for Transport
Wales
Home Office
Cabinet Office
Department for International Development
Department of Energy & Climate Change
Net contribution to EU budget
Ministry of Justice
CLG − Communities
Department for Culture, Media & Sport
Department for Environment,
Food & Rural Affairs
Foreign & Commonwealth Office
Small and independent bodies
Law Officers’ departments
Chancellor’s departments
-50
-15.5
0
50
100
150
200
42.7
33.1
25.8
24.7
19.6
19.1
15.7
13.5
13.4
9.8
9.3
8.8
7.4
7.3
7.1
2.4
2.0
1.5
0.6
70.9
135.6
174.7
£ billion
Notes
1 UK net contribution to the EU budget in 2014-15 was £8.8 billion. This considers the UK’s gross contribution and deductions resulting from the rebate and
public-sector receipts only. It does not take into account private-sector receipts. Total departmental expenditure in 2014-15 was £620.6 billion.
2
Net expenditure for Chancellor’s departments was negative as income and other gains associated with financial sector interventions exceeded expenditure.
Source: National Audit Office analysis of HM Treasury and Public Expenditure Statistical Analyses data
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33
Figure 17
EU policy areas, objective or purpose, and UK public- and private-sector receipts from
the EU budget in 2014
EU policy area
Objective or purpose
UK receipts in 2014
£/€ billion
1
Smart and inclusive growth
Supports research and innovation;
education and training; trans-European
energy, telecommunications and
energy networks; social policy;
enterprise development
Supports regional policy intended to
help the least developed EU countries
and regions catch up with others,
encouraging competitiveness and
inter-regional cooperation
 
Supports rural development and
environmental measures
£0.8 (€1.0)
15
As a proportion of total
UK receipts in 2014
(%)
1a
Competitiveness for
growth and jobs
1b
Economic, social and
territorial cohesion
£1.4 (€1.7)
25
2
Sustainable growth:
natural resources
£3.2 (€4.0)
57
Other
Total
Notes
1 Figures may not sum exactly due to rounding.
2
£0.2 (€0.3)
£5.6 (€7.0)
4
100
Other includes headings 3:
Security and citizenship,
5:
Administration.
There were no public- or private-sector receipts from the EU budget in 2014
in relation to heading 4:
Global Europe.
Source: National Audit Office analysis of European Commission data
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Financial management of the European Union budget in 2014
Figure 18
EU public-sector receipts: fund allocations to UK regions, 2014 to 2020
Region
England
EU fund
ERDF
EAFRD
ESF
YEI
EMFF
Funding allocation
(€m)
3,628.3
3,460.2
3,308.9
159.8
97.2
10,654.4
Northern Ireland
ERDF
EAFRD
ESF
EMFF
308.0
227.4
205.4
23.5
764.3
Scotland
EAFRD
ERDF
ESF
EMFF
YEI
844.7
476.8
417.8
107.7
46.3
1,893.3
Wales
ERDF
ESF
EAFRD
EMFF
1,406.8
1,005.7
651.0
14.7
3,078.2
Sub-total (regions)
UK-wide
Total
EAGF
16,390.2
22,283
38,673.2
Notes
1 EAGF: European Agricultural Guarantee Fund; ERDF: European Regional Development Fund; ESF: European Social
Fund; EAFRD: European Agricultural Fund for Rural Development; EMFF: European Maritime and Fisheries Fund;
YEI: Youth Employment Initiative.
2
3
The table does not include Gibraltar, which will receive €6 million in respect of ERDF, and €5 million in respect of ESF
between 2014 and 2020.
The UK will not receive payments from the Cohesion Fund between 2014 and 2020, because UK GNI per capita is
more than 90% of the EU average. Gibraltar, Northern Ireland and Wales will not receive payments in respect of the
YEI during this period. Gibraltar will also not receive payments in respect of EAGF, EAFRD or EMFF during this period.
Source: European Commission, Department for Environment, Food & Rural Affairs, Department for Communities
and Local Government, Department for Work & Pensions, and the devolved administrations for Northern Ireland,
Scotland, Wales and Gibraltar
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35
3.8
In addition to these six funds, in 2014 the UK received EU monies secured by
public or private organisations through competitions (for example grants funded by
Horizon 2020).
27
Over the seven years of the current MFF,
Horizon 2020
will provide
nearly €80 billion to research and development projects. By December 2014 over
14,000 applications for funding had been received from the UK, more than from
any other member state, accounting for more than 12% of applications from the
entire EU. The UK has received the highest number of grants issued (approximately
15% under the programme). UK projects also received the second-largest amount
of grant funding – just under 15% of the €5.5 billion issued in 2014 by
Horizon 2020
has gone to UK projects.
3.9
The UK benefited significantly from the previous seven-year research and
development programme. Between 2007 and 2013 the UK won more grants from
the European Research Council than any other member state (761 compared
with Germany’s 467) and received the second-highest share of overall funding
(€6.9 billion/£5.8 billion).
Figure 19
identifies estimated private-sector receipts
from the EU budget to the UK for all years for which data are available.
Financial oversight in the UK
3.10
Grants secured through competition are managed directly by the Commission,
which has responsibility for their financial oversight. On the other hand, allocated
funds are managed in partnership with UK national or regional authorities. The UK
has devolved responsibility for implementing EU obligations, and hence the proper
administration of EU funds in England, Northern Ireland, Scotland and Wales is a
matter for the relevant administration.
Figure 19
Estimated private-sector receipts from the EU budget to the UK,
2010 to 2013
Year
2013
2012
2011
2010
Source: HM Treasury
Private-sector receipts
(£bn)
1.4
1.5
1.6
1.0
27
Horizon 2020
is the EU’s research and innovation programme.
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3.11
Within the UK, departmental accounting officers have responsibility for the use
made of EU monies within their budgets. There is no single point of responsibility for
the use made of EU monies in the UK. However, following a recommendation from the
UK Committee of Public Accounts, in 1980 HM Treasury started publishing an annual
statement to the UK Parliament providing information on the EU budget. This statement
is intended to support greater scrutiny of the UK’s management of public-sector receipts
from the EU budget, and of the financial relationship between the UK and the EU.
28
The most recent statement was published in December 2015.
3.12
HM Treasury produced a consolidated statement on the use of EU funds in the
UK for each of the UK financial years 2006-07, 2007-08, and 2008-09, which the
National Audit Office (NAO) was invited to audit. The preparation, audit and publication
of these statements was designed to strengthen parliamentary scrutiny of the UK
government’s management of EU monies, and help detect weaknesses in controls.
The Comptroller and Auditor General (C&AG) qualified his opinion for each year.
HM Treasury published the consolidated statement for 2008-09 in 2011, and has not
published any further statements since. In July 2012, HM Treasury committed to help the
UK Parliament strengthen its scrutiny of the financial relationship between the EU and
the UK government by improving the consolidated statement.
29
3.13
The arrangements for overseeing the management of allocated funds are complex.
EU regulations governing these funds require member states to designate:
•
•
managing authorities
to decide which operational programmes to fund, and by
how much (in respect of ERDF, ESF, YEI, EAFRD and EMFF);
certifying authorities
to seek assurance in respect of the eligibility of payments
provided by managing authorities, and to generate and submit certified statements
of expenditure to the Commission;
audit authorities
to seek assurance over the systems and operations of managing
and certifying authorities, and report to the Commission;
paying agencies
to distribute EAGF and EAFRD; and
certification bodies
to seek assurance over paying agencies’ management,
monitoring and control systems, and report to the Commission.
•
•
•
Figure 20
identifies the principal roles in relation to the distribution of EU funds.
Figure 21
on pages 38 and 39 seeks to illustrate how these appear when mapped out in the UK.
28
Europe 2020
is the EU’s ten-year jobs and growth strategy, launched in 2010.
29 HM Treasury,
European Union Finances 2012: statement on the 2014 EU Budget and measures to counter fraud and
financial mismanagement,
July 2012.
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Figure 20
Funding and information flows involved in the distribution of EU funds
European Commission
2
Sustainable growth:
natural resources
Coordinating body
Member states
1
Smart and
inclusive growth
Managing authorities
Paying agencies
Aid applications from farmers
Operational programmes
ERDF, ESF and EMFF
Audit authorities
Payment
information
Reports on
control activities
EAFRD
Assurance
over systems
and operations
Rural development
programmes
Market
interventions
Direct payments
to landowners
EAGF
a) Annual control report
b) Audit opinion: reasonable assurance on
correctness of statements of expenditure and
legality and regularity of transactions
Certifying authorities
Certification bodies
Assurance over aid applications from farmers
Certified statements of expenditure
Funding
Information
Notes
1 ERDF: European Regional Development Fund; ESF: European Social fund; EMFF: European Maritime and Fisheries Fund; EAGF: European Agricultural Guarantee Fund; EAFRD: European Agricultural
Fund for Rural Development.
2
1:
Smart and inclusive growth
and 2:
Sustainable growth: natural resources
refer to EU policy areas.
3
Commission regulations specify that it is important for member states with more than one paying agency to establish a coordinating body. This organisation is responsible for ensuring consistency
in the management of funds within the member state, to provide liaison between the Commission and the paying agencies, and to ensure information flows from paying agencies to the Commission.
The dashed lines represents how this would apply in member states with more than one paying agency.
Financial management of the European Union budget in 2014
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37
Source: National Audit Office
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Figure 21
The relationships between the EU institutions and UK public bodies with regard
to European monies, 2014
OLAF
European Commission
National Audit Office
1
Certified financial statements
2
Value-for-money reports
HM Treasury
Government Internal Audit Agency
AA for ERDF and ESF
Department for Communities
and Local Government
MA and CA for ERDF in England
Department for Work & Pensions
MA and CA for ESF in England
and Gibraltar
Department for Business, Innovation & Skills
Policy lead for ERDF and ESF
Greater London Authority
IB for ERDF and ESF in London
Government of Gibraltar
IB for ESF in Gibraltar
Scottish Government
MA for ERDF and ESF in Scotland
Birmingham City Council
IB for ESF in Birmingham
Welsh European Funding Office
MA for ERDF and ESF in Wales
Department of Enterprise, Trade and Investment
MA for ERDF in Northern Ireland
ERDF
Department for Employment and Learning
MA for ESF in Northern Ireland
ESF
Gibraltar EU Programmes Secretariat
MA for ERDF in Gibraltar
Notes
1 MA = Managing authority; PA = Payments agency; CA = Certifying authority; AA = Audit authority; IB = Intermediate body. A managing authority may
delegate a number of functions to an intermediate body.
2
3
In 2014, the Greater London Authority and the Government of Gibraltar had a responsibility for ESF expenditure in their respective territories. Birmingham
City Council did not have this responsibility, rather it had a national role considering innovations to achieve ESF objectives.
ERDF: European Regional Development Fund; ESF: European Social fund; EMFF: European Maritime and Fisheries Fund; EAGF: European Agricultural
Guarantee Fund; EAFRD: European Agricultural Fund for Rural Development. Youth Employment Initiative does not feature because the UK did not receive
monies from the EU in respect of this fund in 2014.
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39
European Commission Synthesis Report
European Court of Auditors
1
Annual report
2
Special reports
European Parliament
Committee on
Budgetary Control
Informal political dialogue
Annual report
Lords Select
Committee
EU Select Committee
Department for Food, Environment &
Rural Affairs
1
Policy lead for EAGF, EAFRD and EMFF
2
MA for EAGF and EAFRD in England
3
AA for EMFF
Commons Select Committees
HM Treasury
Committee of Public Accounts
Environment, Food & Rural Affairs
Communities and Local Government
Business, Innovation & Skills
UK Parliament
Oversight
Rural Payments Agency
PA for EAGF and EAFRD
in England
Welsh Government
MA and PA for EAGF
and EAFRD in Wales
Department of
Agriculture and
Rural Development
MA and PA for
EAGF and EAFRD
in Northern Ireland
Scottish Government
Rural Payments &
Inspections Directorate
MA and PA for EAGF
and EAFRD in Scotland
Marine Management
Organisation
MA for EMFF in UK
EMFF
UK Co-ordinating body
1) Submits financial audit
and statistical information to
the European Commission
2) CA for EMFF
National
Audit Office
CA and AA
for EAGF
and EAFRD
in England
Natural England
EAFRD
Supranational oversight
National oversight
Policy lead
Forestry Commission
EAGF
Local delivery groups
Fund
Funding
Information/assurance
Notes
4 The figure does not show funding flows from the UK government to the Scottish Government, Welsh European Funding Office, Department of Enterprise,
Trade and Investment (Northern Ireland), Department for Employment and Learning (Northern Ireland) and the Gibraltar EU Programmes Secretariat.
5
The European Court of Auditors also communicated its annual report and special reports to the Comptroller and Auditor General.
Source: National Audit Office
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3.14
EU payments to the UK government are accounted for in the financial statements
of the relevant public bodies. Audits undertaken by the relevant UK external auditors
will include these monies, although the extent to which EU money is a material element
varies significantly. For example, at the Department for Environment, Food & Rural
Affairs (Defra), which is the policy lead and managing authority for EAGF and EAFRD,
EAGF and EAFRD expenditure accounted for 45.3% of total departmental expenditure
in 2014-15. In comparison, at the Department for Communities and Local Government
(DCLG), the managing authority for ERDF, ERDF expenditure accounted for 1.8% of total
departmental expenditure in 2014-15.
Legality and regularity of EU expenditure in the UK
3.15
In 2014, 80% of UK public-sector receipts from the EU budget related to two
funds: EAGF and ERDF. Member states have a responsibility to protect the EU’s financial
interests, including detecting irregular transactions. This section focuses on error, financial
corrections and recoveries in respect of these two funds.
European Agricultural Guarantee Fund
3.16
In 2014, EAGF expenditure in the UK primarily provided payments to farmers (98.0%),
based on farm area and application of land management standards. It also funded some
coupled (production-related) grants (0.8%), and other market measures (1.2%).
3.17
The NAO leads a consortium that assures the UK annual accounts for the EAGF,
in line with Commission guidelines.
30
In 2014, the C&AG provided unqualified opinions
on the accuracy, validity and completeness of all four regional accounts. The legality
and regularity of these accounts was not considered, in line with the EU legislation
and guidelines then in effect. From 2015 revised assurance arrangements have been
implemented which involve certification authorities (including the NAO) performing
specified additional work on the legality and regularity of payments.
3.18
Since 2005, UK disallowance has amounted to £2.70 for every £100 of EAGF
funding it receives from the Commission. This is the sixth-highest figure among the
member states.
Figure 22
shows the UK’s position in relation to the other member
states as at June 2015. This is a snapshot at a particular point in time, so caution is
required when interpreting this analysis. Many of the Commission’s audits are not yet
complete, and member states may be confirming with the Commission disallowances
that have yet to be finalised.
30 Other consortium members are Audit Scotland, Northern Ireland Audit Office and Wales Audit Office.
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Figure 22
Disallowance as a proportion of EAGF and EAFRD funding received from
the European Commission between 2005 and June 2015
The UK has the sixth-highest level of all member states
Greece
Romania
Portugal
Bulgaria
Cyprus
UK
France
Italy
Netherlands
Slovenia
Denmark
Sweden
Poland
Spain
Luxembourg
Lithuania
Hungary
Malta
Finland
Belgium
Slovakia
Ireland
Czech Republic
Estonia
Germany
Latvia
Austria
0
1.5
1.4
1.3
1.2
0.9
0.7
0.7
0.4
0.4
0.3
0.2
0.2
0.1
0.1
0.1
0.1
1
2
3
4
5
6
7
8
9
2.4
2.1
1.9
1.8
1.8
2.7
3.4
3.3
3.2
3.0
8.7
Total disallowance as a proportion of all funds received (%)
Note
1 As a new member state, Croatia has not yet incurred any disallowance and so has not been included in this figure.
Source: National Audit Office analysis of UK Co-ordinating Body information
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European Regional Development Fund
3.19
The Department for Communities and Local Government (DCLG) is currently
managing three ERDF programmes, spanning three different MFF periods dating
back to 2000-06 (see
Figure 23).
DCLG is still attempting to recover ineligible
payments in respect of the 2000–2006 MFF, which in part explains the delay in
closing this programme.
3.20
DCLG’s 2014-15 annual report notes that in parallel with the closure process, the
department undertook a full review of the current state of ERDF-supported projects to
identify all potential liabilities. It closed three cases during 2014-15, which resulted in a
loss to DCLG of £8.1 million due to ineligible payments. No further provision has been
made in respect of the remaining seven cases (2000–2006) as these are not material
to the accounts, and existing accruals made in previous years are deemed sufficient.
Errors identified by the ECA in UK EAGF and ERDF transactions
3.21
The European Courts of Auditors’ (ECA) annual report does not attempt to draw
conclusions in respect of individual member states, but on the EU budget and annual
accounts as a whole. Nevertheless, member states are occasionally cited for illustrative
purposes. In preparing its 2014 annual report, the ECA tested 40 transactions in the UK,
and found 23 to be affected by error. These errors included examples of:
•
•
•
•
•
ineligible and unsubstantiated costs;
unjustified direct awards;
serious failures to comply with public procurement rules;
payments for overstated eligible land; and
non-compliance with agri-environment commitments.
Figure 23
Status of European Regional Development Fund programmes
in England, 2014
Multiannual financial
framework
2000 to 2006
2007 to 2013
Programme status
in UK
Nearly closed
In closure
Notes
Seven cases to close
Spending deadline December 2015,
closure forecast for 2017
Operational programme is live
2014 to 2020
Live
Source: Department for Communities and Local Government
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Financial management of the European Union budget in 2014
Part Three
43
Financial corrections and recoveries in the UK and EU
3.22
The corrections imposed by the Commission on the UK in 2014 were below the
EU average when expressed as a proportion of payments received in that year. Since
2012, the Commission has published details of corrections in respect of member states
on an annual basis. Published UK correction figures suggest the UK performs equally
well, or better, when compared with the EU average. In practice, we might expect annual
correction levels to be volatile, reflecting when discussions over amounts are concluded
and the factors giving rise to the corrections.
3.23
In 2014 the Commission confirmed €3,890 million of financial corrections relating to
25 countries, and implemented €2,549 million relating to 24 countries. The Commission
confirmed €62 million, and implemented €89 million of corrections relating to the UK in
2014 (see
Figure 24).
31
Other analysis of financial corrections are presented in
Figure 25
and
Figure 26
overleaf.
Figure 24
UK financial corrections in 2014, compared with the EU-28 average
UK
Payments received (€m)
Financial corrections confirmed (€m)
Financial corrections confirmed as a proportion
of payments received (%)
Financial corrections implemented (€m)
Financial corrections implemented as a proportion
of payments received (%)
€5,685 million
€62 million
1.1%
EU-28
€110,537 million
€3,890 million
3.5%
€89 million
1.6%
€2,549 million
2.3%
Notes
1 A financial correction is confirmed when it is accepted by a member state, or is subject to a European Commission
Decision. A financial correction is implemented when it has been applied, and recorded in the European
Commission’s accounts.
2
EU-28: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany,
Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania,
Slovakia, Slovenia, Spain, Sweden, the United Kingdom.
Source: European Commission
31 The process of confirming and implementing financial corrections can take a considerable time, and there can be
a significant time lag between an error being confirmed and a correction implemented. It is likely that many of the
€62 million confirmed corrections, and €89 million implemented corrections relate to previous years.
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44
Part Three
Financial management of the European Union budget in 2014
Figure 25
Number of EU member states with a higher or lower financial correction
rate in 2014, compared with the UK
Financial
corrections
confirmed
UK rate of financial corrections
as a proportion of payments
to the UK
Number of EU countries with a
higher rate than UK
Number of EU countries with a
rate equal to the UK
Number of EU countries with a
lower rate than UK
1.1%
Financial
corrections
implemented
1.6%
13
–
12
9
1
15
Notes
1 A financial correction is confirmed when it is accepted by a member state, or subject to a European Commission
Decision. A financial correction is implemented when it has been applied, and recorded in the European 
Commission’s accounts.
2
Croatia and Cyprus had no financial corrections confirmed or implemented in 2014. Following a Court of Justice
of the European Union judgment, the Netherlands had a negative financial correction confirmed in 2014
(that is, the European Commission must reimburse the Netherlands).
Croatia and Cyprus had no financial corrections implemented in 2014.
3
Source: European Commission
Figure 26
UK and EU-28 financial corrections confirmed, 2014
Fund
UK
(€m)
European Agricultural Guarantee Fund
European Agricultural Fund for Rural Development
European Regional Development Fund
Cohesion Fund
1
European Social Fund
Financial Instrument for Fisheries Guidance/European
Fisheries Fund
2
European Agricultural Guidance and Guarantee Fund
Other
Total
10
2
47
–
1
0
3
0
62
EU-28
(€m)
1,649
220
1,330
292
342
39
13
5
3,890
UK proportion of all
financial corrections
(%)
0.6
0.9
3.5
–
0.3
0
23.1
0
1.6
Notes
1 The UK did not receive Cohesion Fund payments in 2014, because UK GNI per capita was more than 90% of the EU average.
2
3
4
5
Financial Instrument for Fisheries Guidance relates to the 2000–2006 MFF; European Fisheries Fund to the 2007–2013 MFF.
European Agricultural Guidance and Guarantee Fund: provided payments in respect of the Common Agricultural Policy between 1962 and 2006.
EU-28: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, the United Kingdom.
Figures may not sum exactly due to rounding.
Source: National Audit Office analysis of European Commission data
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Financial management of the European Union budget in 2014
Appendix One
45
Appendix One
Bibliography
1
Comptroller and Auditor General,
Financial management in the European Union,
Session 2010-11, HC 34, National Audit Office, June 2010.
2
Comptroller and Auditor General,
Financial management in the European Union,
Session 2008-09, HC 349, National Audit Office, March 2009.
3
Comptroller and Auditor General,
Financial management in the European Union,
Session 2007-08, HC 480, National Audit Office, April 2008.
4
Comptroller and Auditor General,
Department for Environment, Food & Rural Affairs
and the Rural Payments Agency, Managing disallowance risk,
Session 2015-16, HC 306,
July 2015.
5
European Commission,
Synthesis of the Commission’s management achievements
in 2014,
June 2015.
6
European Commission,
Elements for a payment plan to bring the EU budget back
onto a sustainable track,
March 2015.
7
8
European Commission,
EU budget 2014: Financial report,
2015.
European Commission,
The OLAF report 2014,
2015.
9
European Commission,
Financial Regulation applicable to the general budget of
the Union and its rules of application,
March 2014.
10
11
European Commission,
Protection of the EU budget to end 2014,
October 2015.
European Commission,
Protection of the EU budget to end 2013,
September 2014.
12
European Commission,
Protection of the European Union budget to end 2012,
September 2013.
13
European Court of Auditors,
EU audit in brief: Introducing the 2014 annual reports
of the European Court of Auditors,
November 2015.
14
European Court of Auditors,
Annual reports concerning the financial year 2014,
November 2015.
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46
Appendix One
Financial management of the European Union budget in 2014
15
HC Committee of Public Accounts,
Financial Management in the European Union,
Thirty-second Report of Session 2008-09, HC 698, June 2009.
16
HC Committee of Public Accounts,
Financial Management of the European Union,
Eighteenth Report of Session 2004-05, HC 498, April 2005.
17
HM Government,
Review of the Balance of Competences between the United
Kingdom and the European Union, EU Budget,
Summer 2014.
18
HM Treasury,
European Union Finances 2015: statement on the 2015
EU Budget and measures to counter fraud and financial mismanagement,
Cm 9167,
December 2015.
19
HM Treasury,
European Union Finances 2014: statement on the 2014
EU Budget and measures to counter fraud and financial mismanagement,
Cm 8974,
December 2014.
20
HM Treasury,
European Union Finances 2012: statement on the 2012 EU Budget
and measures to counter fraud and financial mismanagement,
Cm 8405, July 2012.
21
HM Treasury,
Consolidated statement on the use of EU funds in the UK: for the
year ended 31 March 2009,
HC 722, January 2011.
22
HM Treasury,
Consolidated statement on the use of EU funds in the UK: for the
year ended 31 March 2008,
HC 439, October 2009.
23
HM Treasury,
Consolidated statement on the use of EU funds in the UK: for the
year ended 31 March 2007,
HC 619, July 2008.
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Financial management of the European Union budget in 2014
Appendix Two
47
Appendix Two
EU institutions involved in budget-setting,
budget monitoring, audit and assurance,
or arbitration
See figure overleaf.
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48
Appendix Two
Financial management of the European Union budget in 2014
EU institutions involved in budget-setting, budget monitoring, audit and assurance, or arbitration
European Council
Citizens
National leaders of member states, and
Presidents of the European Commission
and European Council
Provides political direction
Role in
appointment of
commissioners;
scrutinises
European
Commission
performance
National
governments
Sets political agenda
Role in
appointment of
commissioners
European Commission
28 commissioners representing member states
Executive body of the EU
Proposes legislation, and proposes
and manages budget
European Parliament
Political assembly of 751 directly elected members
Proposes and debates legislation
Council of the European Union
Political assembly of ministers from 28 member states
Policy coordination
Co-decision to accept new budget or legislation
Assurance
New budget
New law
Legal interpretation
and arbitration
Court of Justice of the European Union
Judges from 28 member states
Interpretation and arbitration of EU law
EU institution
New budget or law
Audit
European Court of Auditors
28 members, one representing each member state
External auditor of the EU
Function
Representation
Red text and arrows indicate process
for establishing a new budget
Note
1 The European Central Bank is also an institution of the EU; however, it has no role in budget-setting, budget monitoring, audit and assurance,
or arbitration.
Source: National Audit Office
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Financial management of the European Union budget in 2014
Appendix Three
49
Appendix Three
EU accountability cycle and EU budget
discharge process
See figure overleaf.
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EU accountability cycle and EU budget discharge process
European Parliament:
Funds granted
1
European Parliament
and
Council
of the European Union
grant
funds to European Commission
European Commission
spends funds,
and submits:
1
annual accounts to the
European
Parliament
and the
Council of the
European Union;
and
grants, refuses, or postpones
a discharge of the
European
Commission
(if approved the
accounts of a given year are
closed and approved); and
Recommendations
European Commission
responds
to
European Parliament
recommendations
Discharge
recommendation
1
2
makes recommendations to the
European Commission
Opinion
2
Response to
recommendations
European Parliament, Committee
on Budgetary Control:
Discharges
and
recommends
1
The EU
accountability
cycle
considers annual accounts
from the
European
Commission;
Gives
account
an annual synthesis report (detailing
management achievements) to the
European Parliament, Council of
the European Union
and
European
Court of Auditors
2
Advises
Audits
considers annual synthesis
report from the
European
Commission;
Annual
synthesis
report
50
Appendix Three
Financial management of the European Union budget in 2014
3
considers reports from the
European Court of Auditors;
4
Annual accounts
considers advice from the
Council of the European
Union;
and then
Council of the European
Union
examines EU
spending, and reports to
the
European Parliament
European Court of Auditors:
1
2
examines the accounts of all revenue
and expenditure of the EU; and
reports to the
European Parliament
Annual accounts
Annual synthesis report
5
reports its opinion to the
European Parliament
Reports of the
European Court of Auditors
Note
1 Since 2010 the Netherlands, Sweden, and the United Kingdom have submitted a counter statement to the Council’s discharge recommendation, advising against discharge.
Source: National Audit Office
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Financial management of the European Union budget in 2014
Appendix Four
51
Appendix Four
References to the United Kingdom
in the European Court of Auditors’
annual report, 2014
1
Chapter 1 of the annual report presents the
statement of assurance and
supporting information.
As part of the introduction, Graph 1.1 shows EU spending in
each member state as a share of total general public spending of each member state,
including the UK, in the calendar year 2014:
•
The second table of Annex 1.5 shows the frequency of detected errors in audit
sampling for the year 2014 under MFF headings 1b and 2. The table shows that,
of the 40 transaction in the UK in the year which the European Court of Auditors
(ECA) audited, 23 were affected by error.
2
Chapter 2 of the annual report deals with
budgetary and financial management
in 2014. There are references to the UK in:
•
•
Graph 2.4, which shows the absorption and totals of the European Structural and
Investment (ESI) funds for the 2007–2013 MFF period;
32
and
Graph 2.5, showing outstanding commitments of ESI funds as of December 2014
by member state.
32 The European Structural and Investment Funds (ESIF) are the European Regional Development Fund (ERDF),
the European Social Fund (ESF), the Cohesion Fund (CF), the European Maritime and Fisheries Fund (EMFF),
and the European Agricultural Fund for Rural Development (EAFRD).
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52
Appendix Four
Financial management of the European Union budget in 2014
3
Chapter 4 covers
revenue.
There are references to the UK in:
Paragraph 4.4(a)(i), where the audit of revenue is described, specifically identifying
the UK as one of the three selected member states whose traditional own
resources accounting systems the ECA examined in the year;
Paragraph 4.8, which discusses member states’ addressing of GNI reservations.
The UK is mentioned as an example of where the resulting corrections had a
‘significant impact on some member states’ contributions’;
Paragraph 4.13, footnote 20, which identifies the UK as one of seven member
states that requested to postpone their payments, fully or partially, because of
‘major revisions to the gross national income (GNI) balances’;
Table 4.1, where the VAT/GNI balances for 2014 for the member states are listed;
Table 4.2, where the ECA sets out the member states’ GNI/gross national product
reservations and traditional own resources open points, as of 31 December 2014;
Paragraph 4.19, footnote 33, which lists the UK as one of three member states
which the ECA visited concerning traditional own resources, where the quality,
scope and results of the post-clearance was found to vary substantially; and
Paragraph 4.22, where problems relating to the management of traditional own
resources B accounts, which are sent to the Commission quarterly, are described
and in which the ECA notes that procedures in the UK are complex and that this
has led to mistakes.
•
•
•
•
•
•
•
4
Chapter 5 deals with
competitiveness for growth and jobs.
There is a reference
to the UK in:
•
Box 5.3, which provides examples of errors in costs reimbursements. A project in
the UK funded by the European Programme for Recovery is mentioned.
5
Chapter 6 deals with
economic, social and territorial cohesion.
There are
references to the UK in:
•
•
Paragraph 6.21(a), footnote 20, which identifies the UK as one of the member
states sampled in the examination of 161 transactions for regional and urban policy;
Paragraph 6.21(c)(i), footnote 21, which lists the UK as one of the member states
included as part of the ECA’s assessment of the Commission’s supervisory
activities of audit authorities;
Box 6.1, which provides examples of ‘serious failures to comply with public
procurement rules’. The UK is mentioned as one of five member states in which
errors relating to ‘unjustified direct awards’ were detected in the ECA’s audit of
the year; and
Paragraph 6.39, footnote 37, which shows the ECA identified 14 European Regional
Development Fund and Cohesion Fund projects in eight member states that
infringed the EU State Aid rules, including the UK.
•
•
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Financial management of the European Union budget in 2014
Appendix Four
53
6
Chapter 7 deals with
natural resources.
There are references to the UK in:
Paragraph 7.14(a), footnote 14, which identifies the UK as one of the member states
included in the sample of European Agricultural Guarantee Fund transactions;
Paragraph 7.14(a), footnote 15, which identifies the UK as one of the member states
included in the sample of transactions for rural development, environment, climate
action and fisheries;
Box 7.1, where the UK is referred to for errors relating to payments for overstated
eligible arable land;
Box 7.2, where the UK is referred to in examples of cross-compliance errors; and
Box 7.5, where the UK is cited in examples of errors relating to non-compliance
with agri-environment commitments.
•
•
•
•
•
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54
Appendix Five
Financial management of the European Union budget in 2014
Appendix Five
Conclusions and recommendations from the
2009 UK Committee of Public Accounts report
1
In 2009, the UK Committee of Public Accounts reported on financial management in the EU.
33
It made ten
recommendations to improve the management and accountability of the EU budget. This appendix sets out those
recommendations, and provides an update on progress against each.
Committee of Public Accounts conclusion and recommendation
1
The Commission, working with Member States, has made a significant effort over
recent years to improve the financial management of the European Union, and this
effort is reflected in some progress since our last report.
The introduction of accruals
accounting helped the Commission, for the first time, to achieve a clear opinion from the Court
on the
reliability
of the 2007 accounts. On
legality and regularity,
the Court gave a clear opinion
on some 45% of European Union expenditure, compared to an estimated 5% in 2003.
There remains an unacceptably high level of error in some key budget areas and
consequently, for the fourteenth successive year, the European Court of Auditors
has not provided a positive overall Statement of Assurance on the legality and
regularity of the underlying transactions.
Qualification of the accounts year after year
undermines public confidence in the financial management of the European institutions
and of Member States and devalues the significance of the qualification. Qualification
should be an exceptional procedure not the norm, and yet, although the Court has noted
improvements, the same criticisms are repeated year after year. The new Commission, in
late 2009, in consultation with the European Parliament and the Council of the European
Union, should publish a timetable for obtaining a positive Statement of Assurance.
Concerted action is needed by the Commission, the Court of Auditors and Member
States on a number of fronts to achieve a positive audit opinion.
In 2005, we highlighted the inherent complexity of some European programmes
as a major factor leading to error, but this complexity persists, as do the resultant
errors.
Some of the most complex programme expenditure in the budget continues to
be in the Cohesion policy area, which is responsible for some €42 billion of expenditure in
2007. It is usual for auditors to set a threshold before the audit opinion must be qualified.
The Court set the threshold for the value of error which can be tolerated at 2% of the
expenditure. In Cohesion policy the Court estimated that at least 11% of spending is
subject to error. This level of error is unacceptable. Challenging targets should be set for
the Commission to simplify regulations as much as possible and the relevant national
delivery bodies should prioritise simplicity when interpreting Commission requirements.
Developments since Committee report
Clear audit opinion on reliability of
accounts since 2007.
Adverse audit opinion on legality and
regularity of payments since 1994.
2
Estimated level of error of 4.4%
in 2014 was above the materiality
threshold of 2%.
No timetable has been published.
3
The Commission has attempted
to simplify the complexity through
the financial regulation governing the
2014–2020 MFF: simplification, increased
accountability, and increased flexibility.
33 HC Committee of Public Accounts,
Financial Management in the European Union,
Thirty-second Report of Session 2008-09, HC 698, June 2009.
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Financial management of the European Union budget in 2014
Appendix Five
55
Committee of Public Accounts conclusion and recommendation
4
The Commission has proposed introducing higher levels of ‘tolerable error’ in areas
of expenditure where the implementation of programmes is riskier and more prone
to error, for example, in Cohesion policy.
The solution to such complexity does not lie in
adjusting the level of tolerable error. This would undermine the accountability of European
Union funds rather than enhance it, and European citizens would see this as lowering the
bar; whether a €1 million error occurs within a complex or a simple area of expenditure
should not make a difference to its acceptability. The European institutions concerned
should consider the repercussions of such a change, including the risk of removing
the incentive to simplify rules governing European funding at a time when simplification
is needed.
Developments since Committee report
In 2014 estimated level of error varied
from 0.5% (heading 5:
Administration)
to
5.7% (heading 1b:
Economic, social and
territorial cohesion).
In 2010 the Commission proposed
introducing a level of tolerable error above
2%.
1
The European Court of Auditors
noted that the question of what should be
considered tolerable is a political decision.
The decision to determine a level of
materiality is for the external auditor, and
must be set in accordance with international
standards.
2
Materiality has remained at 2%.
Whilst the traffic light presentation no
longer features in the ECA’s annual
report, the analysis in the report has been
expanded to provide extensive analysis
of the main risks, sources and patterns
of error across the EU budget as a whole
and in the specific spending areas.
For example, in its annual report 2014,
see paragraphs 1.17 to 1.29.
During the period 2009 to 2014 financial
corrections and recoveries showed
an increasing trend (see Figure 27
on page 57).
5
Ongoing problems with controls over Cohesion policy expenditure are, in effect,
condemning the European Union accounts to qualification for many years to
come.
The Court’s ‘traffic light’ assessment of performance across expenditure areas,
produced since 2007, has brought much needed clarity to where the challenges in
financial management lie. This clarity should help in targeting activity to overcome those
challenges. The Court could bring further clarity by providing a Statement of Assurance on
each individual expenditure area in addition to that for the whole budget. If necessary, the
Court should seek changes to its treaty obligations to effect this.
6
The Commission has increased its focus on recovering ineligible expenditure
through financial corrections.
Where the Commission identifies ineligible expenditure it
seeks to recover the funds from the Member State. The Commission’s activities in this area
are to be commended and it should seek to recover all irregular expenditure. We hope that
the threat of correction will lead to improved administration by Member States to ensure
that corrections are, ultimately, unnecessary.
The United Kingdom authorities made provisions for possible future financial
corrections of over £400 million in 2007-08, and some £100 million of corrections
have since been imposed.
Financial corrections made by the Commission often result
in a loss to exchequer funds and it is unacceptable that the United Kingdom authorities,
through mismanagement, have exposed the taxpayer to this level of recovery. The United
Kingdom authorities must ensure they manage European funds more effectively in the
future to minimise the likelihood of financial corrections.
The number of Special Reports on value for money produced by the European Court
of Auditors has increased but it could do more to assess whether European Union
programmes are achieving their objectives in an efficient and effective manner.
The Court has increased the number of Special Reports it produces from five in 2005 to 12
in 2008. This is an improvement but still short of the level required to provide the necessary
assurance that European Union funds are well used. We would like to see the growth in
reports continue and encourage the Court to focus on the efficiency and effectiveness
of programmes.
7
See Part Three of this briefing.
8
Year
2010
2011
2012
2013
2014
2015
2016
Number of special
reports published
14
16
25
19
24
22
4 to date
Source: European Court of Auditors
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56
Appendix Five
Financial management of the European Union budget in 2014
Committee of Public Accounts conclusion and recommendation
9
The level of fraud and irregularity within the European budget is unclear.
OLAF
continues to report that the reliability of published information on fraud and irregularity
depends on the quality and timeliness of information submitted by Member States and
should be treated with caution. To resolve this longstanding issue, on which we reported
in 2005, OLAF and the Commission should press Member States to work with them to
develop a consistent arrangement for recording and reporting irregularity and fraud across
the European Union. OLAF should state alongside its published figures where it has
concerns about the quality and timeliness of the information submitted.
Developments since Committee report
OLAF would like to point out that
improvements are constantly being
achieved in this area and specific
initiatives are ongoing in this respect.
After the publication on 10 November
2015 of the harmonised reporting of
irregularity provisions package for the
MFF 2014–2020 concerning all shared
management funds, OLAF and experts
from the Member States work, under
a collaborative approach, to develop
consistent guidelines for irregularity and
suspected fraud reporting across the
European Union.
The annual report on the protection
of the EU’s financial interests – Fight
against fraud, in its analytical part always
includes information about the quality and
timeliness of the information reported by
the Member States.
10 The Fundamental Review of the European Union budget presents the Commission
with a rare opportunity to make long term changes to improve financial
management.
The Commission, the Court and Member States should work together
to ensure that suitable, practical changes are implemented, using this review as a
springboard for large scale constructive action to resolve the issues which have blighted
European Union financial management for years.
Notes
1 European Commission,
More or less controls? Striking the right balance between the administrative costs of control and the risk of errors,
May 2010.
2
European Court of Auditors,
Opinion No 6/2010 on a proposal for a regulation of the European Parliament and of the Council on the Financial Regulation
applicable to the general budget of the European Union,
December 2010.
 FIU, Alm.del - 2015-16 - Bilag 93: Materiale fra temamøde 19/4-16 om EU’s budget og regnskaber: Samspillet mellem Folketinget og EU’s kontrolorganer
1626616_0059.png
Financial management of the European Union budget in 2014
Appendix Five
57
Figure 27
European Commission combined financial corrections and recoveries,
2009 to 2014
Financial corrections and recoveries confirmed 2009–2014
€ million
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2009
Administration
External policy areas
Internal policy areas
Cohesion policy
Agriculture
2010
2011
2012
2013
2014
Source: European Commission
 FIU, Alm.del - 2015-16 - Bilag 93: Materiale fra temamøde 19/4-16 om EU’s budget og regnskaber: Samspillet mellem Folketinget og EU’s kontrolorganer
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58
Appendix Six
Financial management of the European Union budget in 2014
Appendix Six
Special reports and landscape reviews adopted by the
European Court of Auditors, 2014 to 2016
Special reports and landscape reviews adopted by the European Court of Auditors in 2014
Special reports
Effectiveness of EU-supported public urban transport projects
Are preferential trade arrangements appropriately managed?
Lessons from the European Commission’s development of the second generation Schengen Information System (SIS II)
Integration of EU water policy objectives with the CAP: a partial success
European banking supervision taking shape – EBA and its changing context
Cohesion policy funds support to renewable energy generation – has it achieved good results?
Has the ERDF successfully supported the development of business incubators?
Has the Commission effectively managed the integration of coupled support into the single payment scheme?
Is the EU investment and promotion support to the wine sector well managed and are its results on the competitiveness of
EU wines demonstrated?
The effectiveness of European Fisheries Fund support for aquaculture
The establishment of the European External Action Service
Is the ERDF effective in funding projects that directly promote biodiversity under the EU biodiversity strategy to 2020?
EU support for rehabilitation following the earthquake in Haiti
How do the EU institutions and bodies calculate, reduce and offset their greenhouse gas emissions?
The External Borders Fund has fostered financial solidarity but requires better measurement of results and needs to provide
further EU added value
The effectiveness of blending regional investment facility grants with financial institution loans to support EU external policies
Can the EU’s Centres of Excellence initiative contribute effectively to mitigating chemical, biological, radiological and nuclear risks
from outside the EU?
EuropeAid’s evaluation and results-oriented monitoring systems
EU Pre-accession Assistance to Serbia
Has ERDF support to SMEs in the area of e-commerce been effective?
EU-funded airport infrastructures: poor value for money
Achieving economy: keeping the costs of EU-financed rural development project grants under control
Errors in rural development spending: what are the causes, and how are they being addressed?
Is EU support for preventing and restoring damage to forests caused by fire and natural disasters well managed?
Landscape reviews
Gaps, overlaps and challenges: a landscape review of EU accountability and public audit arrangements
Making the best use of EU money: a landscape review of the risks to the financial management of the EU budget
 FIU, Alm.del - 2015-16 - Bilag 93: Materiale fra temamøde 19/4-16 om EU’s budget og regnskaber: Samspillet mellem Folketinget og EU’s kontrolorganer
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Financial management of the European Union budget in 2014
Appendix Six
59
Special reports adopted by the European Court of Auditors in 2015
EU Pre-accession Assistance to Serbia
Has ERDF support to SMEs in the area of e-commerce been effective?
Errors in rural development spending: what are the causes, and how are they being addressed?
Is EU support for preventing and restoring damage to forests caused by fire and natural disasters well managed?
Inland Waterway Transport in Europe: No significant improvements in modal share and navigability conditions since 2001
EU-funding of Urban Waste Water Treatment plants in Danube river basin: further efforts needed in helping Member States
to achieve EU waste water policy objectives
EU Youth Guarantee: first steps taken but implementation risks ahead
Technical assistance: what contribution has it made to agriculture and rural developments?
Are financial instruments a successful and promising tool in the rural development area?
The integrity and implementation of EU Emissions Trading Scheme (ETS)
The EU policy in Afghanistan: mixed results
Is EU financial support adequately addressing the needs of micro-entrepreneurs?
EU support for the fight against torture and the abolition of the death penalty
Efforts to address problems with public procurement in EU Cohesion expenditure should be intensified
Are the Fisheries Partnership Agreements well managed by the Commission?
The EU priority of promoting a knowledge-based rural economy has been affected by poor management of knowledge-transfer
and advisory measures
EU support to Timber-Producing Countries under the FLEGT Action Plan
The ACP Investment Facility: does it provide added value?
ACP–EU Energy Facility support for renewable energy in East Africa
Commission’s support of youth action team: redirection of ESF funding achieved, but insufficient focus on results
Improving the security of energy supply by developing the internal energy market: more efforts needed
Review of the risks related to a results-oriented approach for EU development and cooperation
Special reports adopted in 2016 to date
The cost-effectiveness of EU Rural Development support for non-productive investments in agriculture
Water quality in the Danube river basin: progress in implementing the water framework directive but still some way to go
Financial assistance provided to countries in difficulties
EU supervision of credit rating agencies – well established but not yet fully effective
Source: European Court of Auditors
 FIU, Alm.del - 2015-16 - Bilag 93: Materiale fra temamøde 19/4-16 om EU’s budget og regnskaber: Samspillet mellem Folketinget og EU’s kontrolorganer
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