EU auditors: Increased error rate in cohesion spending, assurance gap in recovery spending

EU auditors: Increased error rate in cohesion spending, assurance gap in recovery spending
Building of the European Court of Auditors in Luxembourg, credit: ECA

The European Court of Auditors (ECA) have signed off the 2022 EU accounts as giving a true and fair view of the union’s financial position but found that the errors in spending from the EU budget increased significantly in 2022, according to its annual report published on Thursday.

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 continues to single out new risks related to EU funds that have been made available in response to the coronavirus crisis and Russia’s war of aggression against Ukraine. The auditors also warn of the growing risk of borrowing for additional payment needs.

As in the last four years, the auditors concluded that the level of error was material and pervasive, and have thus issued an adverse opinion on the EU’s spending in 2022. The total EU spending reached a record high of €344.3 billion in 2022, thereof 46.9 in recovery spending under the Recovery and Resilience Facility (RRF).

The overall level of errors in the non-RRF spending from the EU budget increased in 2022 to 4.2 % (2021: 3 %). Two thirds of the audited expenditure (66 %) was considered high-risk, also an increase compared to 2021 (63,2 %). In high-risk spending, such as the cohesion fund, the estimated level of error is 6.0 %.

The auditors also concluded that the regularity issues and weaknesses found in the member states’ control systems affect the money spent until now under RRF but did not estimate the error rate there. ECA’s opinion on the error level in the RRF is rather based on the frequency of the errors.

“The EU has demonstrated its ability to respond swiftly to a whole series of unprecedented crises with unprecedented action,” commented ECA President Tony Murphy at a virtual press briefing on Wednesday. An Irish national and auditor, he took up his duties on 1 October 2022 as the new President of the European watch dog.

“However, the substantial amount of available funds in such an environment entails an increased budgetary risk,” he warned. “Our findings show that the risk has to be better managed, as we continue to detect errors through our work that led to a significant increase in spending affected by error.”

The estimated level of error, which is based on a sample of about 750 transactions, is not a measure of fraud, inefficiency or waste, the auditors cautioned. It is an estimate of the amount of money that was not used in compliance with EU and national rules. The rules and eligibility criteria governing this type of expenditure are often complex, which makes errors more likely, according to ECA.

“There is nothing new here,” said the ECA President, “it’s the same type of errors as in the past.” Possibly the error risks increased because of the pressure to spend the money during the corona crisis. However, he found the increase of the error rate in high-risk spending especially concerning since this type of spending is similar to that under the RRF.

In the course of their work the auditors also identified 14 cases of suspected fraud. They reported these cases to the European Anti-Fraud Office (OLAF), which has already opened two investigations. Six of these cases were reported at the same time to the European Public Prosecutor’s Office (EPPO), which opened three investigations.

2022 was the second year of implementation of the RRF. Under the RRF, EU countries receive funds in exchange for achieving predefined milestones or targets, a paying model which differs from EU’s traditional budget.

13 grant payments with a value of €46.9 billion were made to 11 member states in 2022. The auditors found that 11 of the 13 payments were affected by regularity issues, because 15 of the 281 milestones and targets examined were either not satisfactorily fulfilled or did not comply with eligibility conditions. As a result, six payments were affected by material error.

The auditors also identified cases of weak design in the measures and underlying milestones or targets, and problems with the reliability of information that member states included in their management declarations. The auditors therefore issued a qualified opinion also on the RRF expenditure.

Tony Murphy repeated ECA’s criticism against weaknesses in the RRF control system which has resulted in an “assurance gap” on EU level. While there is a room for interpretation of the paying model, he called on the Commission to reassess its assessment of the milestones.

Another worrying issue is the EU debt, which  jumped to €344.3 billion in 2022 (2021: €236.7 billion), mainly because of new borrowing (€96.9 billion) for NextGenerationEU (NGEU) which  is financed by bond issues. The RRF accounts for about 90 % of NGEU funding.

Only the NGEU instrument debt entails an interest rate risk for the EU budget. The related borrowing costs increased significantly in 2022 due to rising interest rates. The return of high inflation rates has also significant budgetary implications. The EU budget could lose nearly 10 % of its purchasing power by 2023.

According to ECA, it is no clear how the EU debt will be paid at the maturity dates. The dept payments could require an increase in the contributions from the member states to EU’s budget or a decrease in the spending programs.

M. Apelblat

The Brussels Times

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