How irregular spending remains undetected and uncorrected in EU’s largest spending area

How irregular spending remains undetected and uncorrected in EU’s largest spending area
Credit: ECA

The European Commission underestimates the error rate in Cohesion spending in the member states because of shortcomings in its control system, according to a new special audit report published by the European Court of Auditors (ECA) on Tuesday-

Cohesion is a policy aimed at reducing development disparities between the EU’s member states and regions. It has become the largest EU policy area and accounts for over a third of the EU budget. It is also an area where the risk of irregular spending is high, because the rules governing it are complex, and because much of the expenditure is based on the reimbursement of declared costs.

The spending is subject of double audits and controls by member states and the Commission. Each year, after member state audit authorities have completed their audits of Cohesion expenditure, the Commission carries out its own verifications and assessment of national auditors’ work and findings.

From this, the Commission aims to confirm whether the level of error in Cohesion spending reported by member states is below the 2 % threshold which is considered to be an acceptable error rate. However, the cohesion spending is known to be prone to errors.

In its recent annual audit report (25 October), ECA issued an adverse opinion on expenditure because over half of EU expenditure in 2020 was deemed to be high risk with an estimated error rate of estimated rate of 4.0 % (2019: 4.9 %). The proportion of hight-risk expenditure in cohesion had increased to 59 %.

“The European Commission’s own control system does not sufficiently compensate for the weaknesses in the work of member state audit authorities when they check Cohesion spending”, said Tony Murphy, the member of the European Court of Auditors responsible for the new audit report.

“The estimated level of error the Commission discloses annually in the relevant Directorate-General activity reports and in the Commission’s management and performance report is not final, and can only represent a minimum level,” he added.

Audit findings

For the 2014-2020 period, the auditors noted that the Commission releases the final payment (10 %) initially withheld even if it has evidence that the expenditure in the accounts contains a level of error of above 2 %.  While this is in line with EU regulation, it is not in line with the overall objective of the payment retention, which was designed to safeguard the EU budget.

Although the Commission no longer accepts accounts with a reported residual total error rate (RTER) above 2 %, it will continue to release the reduced retention of 5 % before it has carried out its regularity checks, according to ECA.

With its desk reviews, the Commission aims to check the consistency of the regularity information that the member states have provided. The auditors nevertheless found inherent limitations implying that irregular expenditure remains undetected and uncorrected.

Compliance audits, where the Commission reviews the eligibility of operations and its related expenditure, are the most important element in its assessment of an audit authority’s work and related findings.

EU auditors draw attention to the high frequency of undetected errors noted by the Commission, even though the sample of operations reviewed was small. This indicates that further types of errors are likely to be present in the many remaining operations and in the expenditure not checked by the Commission.

The Commission nevertheless uses the results of this work as the main basis for its key performance indicator (KPI), which is supposed to be its best estimate of the residual level of error in Cohesion spending. The EU auditors regard this estimate as a minimum estimated level of error, a level which is also not final since the error rates that member states have reported may still be reassessed and increased due to ongoing or future Commission audit work.

Asked by the Brussels Times if ECA estimated the actual error rate in Cohesion spending, or whether it could indicate the error interval, the audit team referred to the annual audit report, where the error rate had been estimated at 3.5%, with an upper error limit estimated at 6.1 %.

How does the error rate differ by member state?

“Our substantive testing is designed to contribute to our estimated level of error for the EU budget as a whole,” ECA member Murphy explained. “However, it is not meant to deliver error rates per member state.” Information about and examples of errors in member states can be found in the annual report.

Does the Commission try to calculate the final error rate ex-post?

“While the Commission can make corrections for individual operational programs, it does not publish a (revised) final error rate (KPI) for Cohesion spending in subsequent Directorates-General’s Annual Activity Reports and the Commission’s annual management and performance report.”

Does it happen that the Commission recovers the payment retention after discovery of more errors in the spending?

“Once released, the payment retention cannot be recovered, but the Commission can still apply financial corrections. However, for the 2014-2020 programming period, the Commission has not recovered irregular expenditure through a net financial correction, as the disallowed expenditure can be reclaimed by submitting new expenditure for projects implemented.”

Shortcomings in the Commission’s work

Ex-ante verifications by member states are not sufficiently effective, according to ECA.  “Consequently, they reimbursed ineligible costs, granted aid for ineligible projects and did not comply with internal market rules including public procurements and state aid rules.”

“Audit authorities do not always detect these errors, which is why we continue to conclude that we cannot always rely on the error rates reported by them. In this special report we examined whether the Commission’s control system can compensate for these shortcomings but found a number of other shortcomings in the Commission’s work.”

Commission reply

The Commission is reluctant to accept ECA’s critique. In its reply to the audit report, it noted that its estimate of the level of error (KPI) is expressed as a range that includes a maximum risk. “While being below the ECA’s estimated level of error, for the last two years this range falls within the interval calculated by the ECA.”

The Commission also writes that is convinced that “the KPI and its maximum value published in the annual activity report (AAR) reflect a reasonable and fair estimate of the error rates for each programme and cumulatively for all programmes, based on all information available at the time of the AAR signature.”

The Commission did not accept the first ECA recommendation to propose a legislative revision to ensure that the payment retention is adequately protected before it is released. As regards the other recommendations about improving its audit and control work, it accepted them partially.

M. Apelblat
The Brussels Times

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