European Court of Auditors: An overview of the assurance framework and the key factors contributing to errors in 2014-2020 cohesion spending

Saatja: Helga Berger <[email protected]> Saadetud: 05.09.2024 16:50

Adressaat: ECA-Austria <[email protected]> Teema: European Court of Auditors: An overview of the assurance framework and the key

factors contributing to errors in 2014-2020 cohesion spending Manused: image001.jpg; image002.png; image003.png; image004.jpg; image007.png; Summary Review.pdf

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Dear colleagues, Yesterday the European Parliament’s CONT-Committee discussed the European Court of Auditors’ review on the Regularity of Cohesion spending during the 2014-2020 period (Review 03/2024) which was published in July 2024. This review provides a multiannual overview on the legality and regularity of cohesion spending and its assurance framework. It collates European Court of Auditors’ findings related to the effectiveness of the management and control systems, root causes of error and the measures in place for the Commission to prevent or detect and correct errors over the period. Where possible, we also provide country-specific information. Finally, we also looked into some challenges that may shape the period leading up to the final closure of programmes. With this review, we aim to contribute to further strengthening the assurance model and to provide insights for the preparation of the legislative proposal for cohesion policy in the post-2027 period. Our main conclusion, based on our previous audit work carried out between 2017 to 2022 on the 2014-2020 period and publicly available information, is, that the assurance framework for cohesion policy has helped reduce the overall error level since 2007, but it has not been effective in bringing it below the required 2 % materiality threshold. Cohesion has suffered from consistently higher error rates than other budget areas because spending checks are not robust enough Still, the level of error is above materiality, both annually and from a multiannual perspective. And we see room for all key actors – the member states and the Commission – to work hand in hand in improving the way they implement the assurance model. We invite you to visit our website and to have a look at the report, which contains interesting details on our audit work: https://www.eca.europa.eu/ECAPublications/RV-2024-03/RV-2024-03_EN.pdf For those who want to get a quick overview, I am including a summary of the main messages. If you have any questions about this review, please don’t hesitate to contact us. Best regards, Helga Berger

Reporting Member You can also follow my work at the ECA on Instagram, X, LinkedIn and Facebook

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Overview

Cohesion policy aims to reduce economic and social dispari es between EU countries and regions. For the 2014-

2020 period cohesion policy accounted for more than one third of the EU budget. The amount of more than

€400 billion cohesion policy funds in the 2014-2020 period is managed in a mul -layered control system jointly

by the Commission – which bears ul mate responsibility for the EU budget, and the member state authori es to

whom the day-to-day opera on is delegated meaning that each layer of scru ny is based on work done at the

previous level. Under the assurance framework of cohesion policy, the Commission derives assurance from audit

work done by member state authori es.

The mul annual overview of our audit results shows that the 2014-2020 cohesion policy assurance framework

has helped reduce the overall error level since 2007, but it has not been effec ve in bringing it below the

required 2 % materiality threshold. The audit results for this period consistently show annual and mul annual

error levels above this threshold:

Overall, one in four transactions in our samples between 2017and 2022 were affected by some breach of legal

requirements, even though almost all these transactions had already been examined by audit authorities.

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Reliability of the work of the key actors in the control system for cohesion policy

Not all national or regional management and control systems are sufficiently effective in preventing or detecting

irregularities in expenditure declared by beneficiaries.

The managing authorities, as the first line of defence in the assurance model, do not yet sufficiently mitigate the

high inherent risk of error in cohesion spending. Around half of the additional errors we reported for the 2014-

2020 period can be attributed to acts or omissions by managing authorities.

Audit authorities are an essential “second line of defence”. Nevertheless, and although they detect many

irregularities in the expenditure declarations prepared by managing authorities, we found weaknesses in the

work of a significant number of audit authorities. Errors remain undetected because of shortcomings in the

planning and preparation of their audit work, and in the quality of the work itself and its documentation. These

errors have limited the extent to which the Commission can rely on national controls. Between 2017 and 2022,

we identified additional errors in 51 of the 87 assurance packages we audited at least once. In 43 of these cases,

which represent a significant share of expenditure certified to the Commission, these additional errors resulted

in increasing the residual error rates exceeding the 2% threshold.

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Also, there are weaknesses in the Commission’s checks which prevent them from iden fying errors not

previously detected by member states authori es. The Commission’s own checks through desk reviews to

confirm the reliability of the residual error rates face limita ons as they are not designed to detect addi onal

errors. A greater impact could be achieved by increasing the number of compliance audits it carries out, as these

have a clear added value and are more effec ve than desk reviews in detec ng irregulari es but currently

limited in number. Their results are similar to ours, for 73% of these audits, the Commission found that AA

underes mated the level of error, for 41% the Commission recalculated the level of error above 2%.

Some types of error are more frequent

Ineligible expenditure and ineligible projects were the most prevalent type of error, both numerically and by

financial impact. Such errors also contributed most to our estimated level of error between 2017 and 2022,

followed by non-compliance with EU and national public procurement rules. Audit authorities have improved

their capacity to detect public procurement errors since the 2007-2013 period, but cohesion policy is still too

significantly affected by this kind of errors. Ineligible projects and state aid errors are lower in number but have

significant impact.

Nine member states1 responsible for 76 % of cohesion spending accounted for 91 % of the estimated level of

error. Our audit results indicate an error level above materiality for all these member states receiving the most

cohesion funds except for Poland, where one large programme accounted for more than one third of the

country’s entire cohesion spending. Member states vary in how effectively they detect irregular expenditure

and certain error types have been more common in some member states.

Our findings for specific member states differ from those of their AAs: German AA reported a high number of

irregulari es, with a low value. We detected a low number of addi onal errors, but with a high average error

rate, making Germany the third biggest contributor to our error rate. Also, Spain and Portugal represent an

unpropor onate high share of the errors rela ve to the funds they received.

1 Czechia, Germany, Greece, Spain, Italy, Hungary, Poland, Portugal, Romania.

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Also, the Commission recalculates a residual error rate above the materiality threshold for some member states

more often than others, indicating that member states differ in how effectively they apply the assurance

framework. This underscores the role of the Commission in continuing to actively address country-specific

issues.

Different root causes for errors at national level

A clear novelty of this report is the categorisation of the root causes. We have for the first time analysed the

root causes at national level and we assigned them to three groups. Inadequate administration, lack of diligence

or suspected intentional violation, and the differences in the interpretation of the regulatory framework are the

three main root causes of these errors. Errors occurring at each stage could have been detected and corrected

by the subsequent control level in the member states:

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1. More than a third of the addi onal errors could have been prevented by be er decision making or more

efficient verifica ons by managing authori es.

These errors happened as a result of inadequate (or even non-existent) first-level checks during project

implementa on (approval of expenditure despite project objec ves not having been met) or Lack of appropriate

checks by managing authori es during their verifica on of eligible expenditure (the provision of financial

support that is not in line with condi ons set out in project approval documents, lack of eligibility checks on

par cipants or reimbursement of expenditure not incurred by beneficiaries).

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But we iden fied as well inappropriate assessments by audit authori es: Shortcomings in audit planning and

prepara on, in the quality of audit work or in the documenta on of audit work. These cases mainly concerned

non-repor ng of errors and/or inadequate quan fica on.

2. Over a quarter of the addi onal errors can be a ributed to a lack of diligence or suspected inten onal non-

compliance with rules by beneficiaries. In these cases, the rules were rather clear, but the beneficiary took

insufficient care to follow them. But this category also includes cases of errors which resulted from inten onal

acts by beneficiaries - cases, where we suspected fraud. However, around 35 % of audit authori es’ checklists

s ll did not explicitly address the risk of fraud or document how they addressed this risk during their audits.

3. Another quarter are linked with the interpretation of the regulatory framework. The majority of these cases

occurred because managing authorities themselves interpreted the rules incorrectly. The main challenge for the

Commission is how to provide more explicit guidance to clarify aspects for which the legal basis is not

sufficiently clear, but also to avoid “gold-plating”. Member states with decentralised administrations and

regionalised programme implementation may face greater challenges in implementing cohesion policy

programmes effectively.

Use of available tools by the Commission

Despite various simplification initiatives, the simplification of the regulatory framework has not achieved all the

intended results. During the 2014-2020 period, simplified cost options were the most frequently used

simplification measure. Transactions using simplified cost options are less prone to errors but are not being

used across the board.

The 2014-2020 assurance framework provides various ways for the Commission to safeguard the EU budget.

The retention of 10 % from each interim payment until the acceptance of the annual accounts could be an

effective safeguard. The Commission, however, analyses legality and regularity issues only after it has released

the amount retained. The Commission also uses financial corrections in cases where it considers that there are

serious deficiencies in programmes’ management and control systems. However, it has not yet applied net

financial corrections, the only type that results in a direct and immediate loss of funding for member states

concerned. These instruments, therefore, have weaknesses in design and implementation.

Upcoming challenges

Despite the system of annual acceptance of accounts, the implementation of the 2014-2020 cohesion policy

funds still comprises several elements of a multiannual nature that will need to be taken into account during

closure procedures and following the payment of the final balance, in view of legality and regularity

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considerations. The rules on the examination and acceptance of the accounts for the final accounting year are

the same as for any other accounting year and the rules give no final deadline for definitive closure.

Pressure to absorb available EU funding poses an additional risk to sound and regular spending. The flexibility

provided to address the COVID-19 pandemic, including in particular the temporary possibility of 100 % EU

funding, helped to make up for slow absorption in the preceding years. However, the removal of the

requirement for national, regional or private co-financing of programmes goes against the long-standing

principle of EU finances: that national or regional public (as well as private) co-financing has been seen as an

essential safeguard to ensure the economical, efficient and effective use of EU funding and ownership of public

investments as a factor in reducing risks to sound and regular spending.

Closing remarks

These findings indicate the need for further improvements in the way the framework is implemented by both

member state authori es and the Commission. Against this backdrop, we consider that more ac on is necessary

to strengthen the way the assurance framework for the outgoing period, but as well for 2021-2027 cohesion

spending is implemented and, in par cular, steered by Commission, given that it is ul mately responsible for

implemen ng the EU budget. Commission and MS should work hand in hand in delivering benefits to ci zens,

more needs to be done that spending follows the rules.