Commission held to account

The annual reports from the heads of European Commission departments give clues as to how well EU money is being spent.

The history of the European Commission is strangely devoid of memorable phrases. European commissioners and their staff have churned out millions of words in the course of 50-plus years, and millions more have been written about them, but there are not many sentences that resonate down the ages.

An exception is the verdict of a committee of wise persons that in early 1999 was asked by the European Parliament to look at how the Commission detects and deals with fraud, mismanagement and nepotism.

The report ranged over a number of allegations against commissioners and their departments. But the single sentence that arguably forced the resignation of Jacques Santer and the college of commissioners over which he presided was: “It is becoming difficult to find anyone who has even the slightest sense of responsibility.” The effect of that sentence is still felt in the EU institutions more than 12 years later.

One of the legacies is that the directors-general of each department are required to produce an annual activity report by which they acknowledge and take responsibility for what goes on in their department. From the various activity reports, a synthesis report is put together, which has to be accepted and approved by the college of commissioners. The theory is that through the synthesis report the commissioners take responsibility for what is done with the power that they have delegated to Commission departments. This is the institutional, quasi-constitutional answer to the wise persons’ complaint of March 1999.

But over the years the synthesis report has become more narrowly focused on the never-ending struggle to persuade the Commission’s external auditors, the European Court of Auditors (ECA), to give a positive verdict on the legality and regularity of the transactions underlying the EU’s accounts. The report does flag up some issues that are not just monetary – the reputational damage from possible further delays to the EU’s computerised Schengen Information System (SIS II) is a case in point. But it is improper payments that will cause most difficulties with the EU’s auditors – notably the problems with Portugal’s agricultural payments agency.

The ECA paid its annual visit to the college of commissioners yesterday (15 June) for a preliminary discussion on the accounts for 2010. The ECA will not publish its verdict until November, but both sides know that the stakes are high this year. The verdict on the quality and regularity of spending is bound to feed into the debate about how much money the EU should have in the post-2013 period.

The ECA will pay more attention than most outsiders to the annual activity reports from the directors-general and to the synthesis report from the college. From those reports, the auditors will draw conclusions about the adequacy of controls on spending and the management of risk. In turn, that means that the commissioners and the directors-general have to flag up areas where they feel unable to provide assurance about the legality and regularity of transactions.

Last year, in its report on the 2009 accounts, the ECA said that it had seen improvements and estimated that the error rate across all areas of EU spending was 2%-5%.

Fact File

Budget responsibility and annual activity reports

The European Commission is responsible under the EU’s treaties for implementing the EU’s budget. The Commission takes political responsibility for management of the budget, while operational implementation is the responsibility of directors-general and heads of service, who are designated as ‘authorising officers by delegation’ (AODs).

AODs produce annual activity reports (AARs), which include a signed declaration of assurance on the legality and regularity of financial transactions. This assurance contains an assessment of the effectiveness of control.

AODs can enter reservations in their declarations in order to highlight problems. AARs are the principal mechanism allowing AODs to document their accountability to the college of commissioners. The synthesis report is a summary of the AARs – a tool by which the commissioners take responsibility for what is done with the power that has been delegated to Commission departments.

Error rates

An error rate of 2% or less is considered to be below the level of materiality.

An error rate of 2%-5% constitutes a material level of error.

An error rate of above 5% is considered “very serious” by the Court of Auditors.

Tolerable risk of error

In May 2002, the Commission published a communication entitled “More or less controls? Striking the balance between the administrative cost of controls and the risk of error”. It suggested a tolerable risk of error range for a number of policy areas of 2%-5%. But the figures and the approach used have not been endorsed by the European Court of Auditors.

Suspending payments

In 2010, the Commission interrupted payments worth a total of €2.6 billion.

Member states made €3.6bn worth of financial corrections to regional programmes in 2000-06 (including €1.7bn in recoveries and withdrawals of €1.9bn).

The Commission has reason to be optimistic about achieving an even more favourable verdict on the 2010 accounts. The number of problem areas identified by directors-general – known as reservations to declarations – has fallen to 17, down from 21 in 2009 (and 15 of the 17 were carried over from 2009). There were two new reservations: one from the climate action department on security weaknesses in national registries for the emissions trading scheme; the other from the executive agency for education and culture, about an excessive error rate in directly managed programmes.

The main problem highlighted in the latter was complex rules on the eligibility of beneficiaries for grants for directly managed programmes, especially those in education and culture. Here, error rates ranged from 3.4% for programmes managed by the directorate-general to 4.28%-7.38% for those managed by the executive agency. Clearly the introduction of an executive agency has not cleared up what is a longstanding problem.

Several departments entered a reservation because of a high error rate in cost claims for projects financed under the sixth framework programme (FP6). The synthesis report says that in some departments the multiannual error rate fell very close to the target of below 2%.

The report adds, however, that the error rate for projects financed under the seventh framework programme (FP7), which began in 2007, is likely to be above 2%. Simplification measures introduced in January, including greater use of flat-rate payments, may reduce this rate, the Commission has said.

Six reservations entered last year were withdrawn after assessments suggested that the problems had been dealt with. The Commission believes that error rates were reduced to an acceptable level or that controls had been strengthened.

Portuguese agriculture

There was a specific concern about the management of spending on agriculture and rural development. This has deteriorated in recent years, according to the ECA’s reports. In the 2008 accounts the error rate was under 2%, but for 2009 it was in the 2%-5% range, because of problems with the Integrated Administration and Controls Systems (IACS) in Romania and Bulgaria, and spending on rural development programmes. The Commission has flagged up the possibility of additional problems in 2010, highlighting a serious deficiency in Portugal’s control system as well as continuing problems in Bulgaria and Romania.

The Commission argues that there has been significant improvement in the management of funding for rural development programmes, saying that the error rate for 2010 is below 2%.

Cohesion spending remains the biggest problem area for the Commission. The ECA found a significant reduction in the error rate in 2009, down to 5.5% from 11% in 2008. But cohesion spending is the only area of EU spending where the rate remains higher than 5%. The Commission has highlighted problems by entering reservations concerning a range of cohesion policy programmes dating back to 2000 and involving more than half of all member states.

The Commission maintains that member states, which are responsible for shared management of cohesion fund spending, need to improve their own management and control systems. The Commission said it would continue to suspend payments to member states where it finds irregularities, arguing that this has proved an effective means of pressuring member states to improve national controls.

Cohesion funds

One of the main sources of errors is a failure by member states to apply public-procurement rules correctly. The Commission is seeking to address this problem by providing more guidance and training to national authorities. It will also present a legislative proposal towards the end of this year on streamlining public-procurement rules as part of the Single Market Act.

The Commission has estimated that the proportion of payments at risk under the cohesion policy is 0.8%-1.5% of the total for 2010. It attributes the difference between its assessment of the risk and the error rates identified by the ECA to the way that the court makes an assessment and gives its opinion on a single year. The Commission’s calculation is based on a multiannual approach, which takes into account the various corrections that can be applied in subsequent years. The effect of these mechanisms is to reduce the overall error rate over time, the Commission argues.

With this year’s synthesis report, the Commission is keen to show a continuing trend of steady progress over the past few years in improving management of the EU’s spending. The ECA’s report on the 2010 accounts is likely to recognise improvements in a number of areas.

The Commission has also launched a debate on the tolerable risk of error, which tries to identify the right balance between the cost of controls and their effectiveness in improving the management of funds. National governments and the ECA have yet to set out where they see the right balance.

The Commission argues that without a clear signal from the member states on where the balance lies between the costs and value of additional controls, it will be hard to make more than incremental annual improvements to the management of EU funds. And without agreement on a definition of acceptable level of risk, it will be impossible to agree on the appropriate level of controls to ensure effective use of those funds.

There is little doubt that the uncertainties of 1999 have been reduced. The accountability of the Commission, of departmental heads and of individual commissioners is much clearer. But holding to account the spending that is managed by and in member states is more difficult. Although it may be held responsible, the Commission finds itself struggling to improve the EU’s overall performance.

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