EU auditors: Increase in error rate in EU’s budget and concerns about recovery funding and war loans

EU auditors: Increase in error rate in EU’s budget and concerns about recovery funding and war loans
Credit: ECA

The European Court of Auditors (ECA) have signed off the 2021 EU accounts as giving a true and fair view of the union’s financial position but identified again pervasive errors in the spending.

In the previous annual report, ECA was already worried about the future budget and also critical of pervasive errors in the budget which at that point was already too high but stable. In the new report, ECA is even more concerned about an increasing error rate while it also single outs new risks related to EU funds that have been made available in response to the coronavirus crisis and the war of aggression in Ukraine.

For the first time, the report includes a separate opinion on the EU’s temporary recovery instrument, the Recovery and Resilience Facility (RRF).

“With the war of aggression in Ukraine, the energy shortage, the coronavirus pandemic and climate change, the EU is being forced to deal at one and the same time with the consequences of an unprecedented series of crises”, said ECA President Tony Murphy. An Irish national and auditor, he took up his duties on 1 October 2022 as the new President of the European watch dog.

Since he became ECA Member in 2018, he has mainly been responsible for financial audits and the annual report on the EU budget.  “Such an environment creates increased risks and challenges for the EU’s finances and makes it all the more important that the European Commission manage them soundly and effectively. Through our work, we play an important role in ensuring this.”

In the annual audit report, published on Thursday (13 October), ECA issued an adverse opinion on expenditure, meaning that the auditors identified widespread problems. The overall level of errors in spending from the EU budget increased in 2021 to 3.0 % (2020: 2.7 %). Nearly two thirds of the audited expenditure (63.2 %) was considered high-risk, also an increase compared to 2020 (59%).

The rules and eligibility criteria governing this type of expenditure are often complex, which makes errors more likely, according to ECA. Material error continues to affect high-risk expenditure, at an estimated rate for 2021 of 4.7 % (2020: 4.0 %).

This is more than double the 2% threshold which is considered as an acceptable or inevitable error rate, above which it can influence users' decisions in a material way. The actual figure might be somewhat higher or lower as the auditors are basing their estimates on a sample of transactions. The error rate is an estimate of the amount of money that was not used in full accordance with EU and national rules.

During their work the auditors also identified 15 cases of suspected fraud (compared to only six in 2020). They reported these cases to the European Anti-Fraud Office (OLAF), which has already opened five investigations. One case was reported in parallel to the European Public Prosecutor’s Office (EPPO), along with an additional case that the ECA had identified in 2021.

How do you explain the increase in the overall error rate in 2021?

“There are two main factors, probably interlinked,” ECA President Murphy replied.  “First, due to the nature and evolution of the EU budget over the years, the percentage of high-risk spending increased from last year in the overall budget. Secondly, we are at the end of the 2014-2020 programming period, when there may be more pressure to spend funds quickly without due attention to regularity.

ECA President Tony Murphy presenting the annual audit report on the EU budget, credit: ECA

Does the increase in fraud cases indicate a trend?

“In 2021, we reported 15 instances of suspected fraud among the 743 transactions that we audited, in comparison with 6 cases for 2020. We cannot pronounce ourselves on the trends, as this would require a more in-depth analysis on specific areas, which is what we did in our special report last July on the the common agricultural policy (CAP) and fraud risks.”

“We are of course not fraud investigators, but we always exercise professional skepticism in auditing EU funds. Our auditors forward to OLAF and EPPO any suspected case of fraud we detect in our work. What is sure is that the two-fold increase of funding in the short term, coupled with the need for quick delivery, undoubtedly indicates an increased risk of fraud.”

This year the audit covered for the first time the RRF, the main component of the EU’s €800 billion “NextGenerationEU” (NGEU) package, which is intended to alleviate the economic consequences of the pandemic. While EU budget expenditure is based on the reimbursement of costs and compliance with conditions, under the RRF Member States receive funds in exchange for achieving predefined milestones or targets.

In 2021 just one payment was made from the RRF, to Spain. The auditors found that one of the 52 milestones included in the Spanish payment request had not been fully met and called for improvements in future assessments of the same kind.

Does the annual report come to too late for addressing the weaknesses in other countries’ payment requests?

“We have started to include the RRF in our audit work for the annual report, but only to a very limited extent so far,” he replied. “We based our assessment on the condition for payments, i.e., that the milestones and targets had been satisfactorily achieved. Compliance with other EU and national rules is not part of the regularity assessment.”

“This aspect will be looked at separately through future audits when the Commission work in this regard has been completed and can be assessed by us. We’ll cover other performance aspects in dedicated special reports.”

The ECA President recalled that ECA in a recent assessment of the recovery plans already has pointed out that the Commission has not yet defined a methodology for calculating the suspension or partial reduction of payments in case of any partial achievement of milestones and targets.

“The issue is connected with the fact that milestones are not linked with any price tags if you will. We are still waiting for the Commission to develop such a methodology for deciding on withholding parts of funding if milestones are not fully met. This will be important when we will be looking at more payments."

In their report, the auditors also refer to the written notification which the Commission sent to Hungary in April 2022, triggering the procedure that may lead to measures against a Member State for breaches of the rule of law. But the Commission has not disclosed how this notification may affect the regularity of expenditure in Hungary.

What was your concern about EU’s notification letter to Hungary?

“We noted that the Commission’s reporting on the Hungarian case leaves certain questions open,” Tony Murphy replied.  “When sending Hungary a written notification about alleged breaches of the rule of law, the Commission must have reasonable grounds for believing that these breaches affect or may seriously affect the sound financial management of the EU budget or the EU’s financial interests.”.

However, the Commission’s did not disclose details of the letter sent to Hungary or about how this may affect the regularity of the expenditure concerned. Asked about this at the Commission press conference on Thursday, its chief spokesperson Eric Mamer assured that the Commission’s proposal to the Council was well founded.

In the meantime, the Commission has proposed budget protection measures to the Council and shared additional information, where it referred to a number of issues, including the public procurement system and the prevention and correction of conflicts of interest.

ECA also warns of the risks that the war of aggression in Ukraine poses to the EU budget. At the end of 2021, Ukraine had outstanding loans with a nominal value of €4.7 billion under multiple EU programmes. The European Investment Bank has also granted Ukraine loans, covered by EU guarantees, to the value of €2.1 billion.

Do your concerns about the loans to Ukraine imply that the loans might not be repaid if Ukraine cannot defend its independence and start rebuilding the country after the war?

“We are talking about risks of potential non-repayment of loans, which have been given to Ukraine both via macro-financial assistance and the EIB and which could have a consequence on the EU budget Currently, the exposure is limited. Once the war of aggression is over and reconstructions starts, this will require more attention.”

“We recommend the Commission to closely monitor the increasing risk of contingent liabilities to the EU budget being triggered in connection with Russia’s war of aggression against Ukraine, and take action as necessary to ensure that risk mitigation tools maintain sufficient capacity.”

On a positive note, ECA confirmed that the European Parliament and the Council have partly approved ECAs request last year for more audit resources. Currently, ECA employs about 900 staff, of which 600 are directly involved in auditing. “If we don’t get the additional funding, we won’t be able to do the work as we want,” the former ECA President, Klaus-Heiner Lehne, said last year.

“The budgetary authority has granted the ECA 20 additional posts, which we required in the light of our new responsibilities in auditing the NGEU funding which essentially doubled the EU funding,” said ECA President Murphy.

“Given the volume of funds involved, it’s essential that we provide the citizens of Europe and our stakeholders with assurance that the funds are being put to good use and are offering value for money. In order to do so, we’ll require further audit resources and have made a request to the budgetary authority again this year.”

On another issue, progress seems slower. EU’s outstanding commitments have continued to grow, reaching more than €340 billion by the end of 2021, mainly due to the recovery funding after the pandemic. ECA has called for changes in the budget rules to speed up budget planning and avoid last minute spending.

Have EU spending rules been changed to deal with the problem of outstanding commitments?

“For many years, we have voiced concern about the growth in outstanding commitments in the EU budget, and recommended that the Commission take action to counter the trend,” he replied.

A high level of outstanding commitments increases the budget’s financial exposure, entailing a risk that not enough payment appropriations will be available to cover all amounts due in the first years of the current seven-year multiannual financial framework (MFF 2021-2027).

“We recommend that the Commission inform the budgetary authority about the factors contributing to the evolution of outstanding commitments, and take appropriate action with a view to gradually reducing outstanding commitments in the long term.”

M. Apelblat

The Brussels Times

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