Mr. Kevin Cardiff:

I thank the Chairman. I have no script but I have slides, which I think have been provided to everybody, including the MEPs in Brussels. It is a great pleasure for me to be present for the historic first teleconference meeting. That is great for us too. I am accompanied by Mr. Gerhard Ross who is a director at the European Court of Auditors. He was recently appointed chief auditor for agriculture, natural resources, environmental audits and so on. Before that, he was in charge of areas to do with quality control for the court as a whole. I am also accompanied by Mr. Shane Enright who works most of the time in my office but also does macroeconomic audits. He is an economist on secondment from the Department of Finance to the court.

We have talked to this committee often, but not to this group of members. I will talk briefly about the role of the court and then introduce the annual report.

The European Court of Auditors is the EU's external auditor. It is independent of all other EU institutions - genuinely so - and it comprises one member from each member state. I am the member nominated by the Irish Government. On joining the European Court of Auditors, each member swears to act only in the interest of the European Union and not to represent individual Governments. That is pretty much how it works.

We have a number of products, the most important being our annual report, about which I propose to speak today. This is not an annual report on the European Court of Auditors, in respect of which there is a separate report, rather it is an annual report on the administration and management of the European Union's budget. The European Union budget, relative to the size of Europe, is small but because Europe is large it adds up to approximately €140 billion, which is quite a large amount of money. Each year, we carry out a large sampling of transactions. We send out auditors from Luxembourg to all parts of the EU and many other parts of the world to audit randomly sampled transactions to get a representative view of how all of Europe's money is being spent. This information is then computed into an error rate, which is our estimate of the extent to which the budget is prone to error. I will elaborate further on that point later.

We also do a lot of specific reports - approximately 30 per annum - on individual themes such as a particular European Union programme or a policy initiative and how well it is meeting its objectives. It is akin to a Comptroller and Auditor General's value for money audit rather than an annual report which is about financial compliance, mostly. We are also asked to give opinions on forthcoming European Union legislation, the most recent being an opinion on the Juncker plan, also know as the European Union Strategic Investments, EFSI, initiative. In terms of size, taking account of trainees and secondments of various types, the European Court of Auditors comprises approximately 1,000 people. It is quite a large institution with a large geographical spread in terms of the spend of European Union money across 28 member states and many other places in the world.

On the 2015 annual report, as shown in slide 4, we gave a clean opinion on the accounts. There is a little bit of misunderstanding sometimes but we do more than audit to the standards to which a public company would be audited. In terms of a public company type audit, the European Union accounts give a fair picture of the European Union's revenue and spending for the year. Therefore, we can say that the accounts are clean. Also, in terms of the revenue's of the EU, our audits show that the revenue collection process was clean of material problems, which means the EU took in the moneys it was supposed to take in, in more or less the manner it was supposed to do so. In terms of payments out, as in most years, we found that there was a material level of error. This is not to say that the size of the errors are huge. We set a 2% threshold in terms of error. If we calculate that the errors are greater than 2% we say this is material error. This is important enough for us as auditors to take note of it and to present it to this committee, the European Parliament and the Council as a matter worthy of investigation and concern. The estimated level of error this year is 3.8%, which is an improvement on recent years. The levels in recent years have been, on average, lower than the peak levels, which some time ago were 8% and 9%.

What do we mean by an error? It is important to point out that this is not the same as a fraud or a waste. One can have a perfectly innocent error which is not a fraud but it could be money spent appropriately according to all of the rules that is not having the impact or effect it is supposed to have. One might say that it is a waste but it would not be an error. What we are actually calculating is the extent to which the transactions were made in accordance with the European Union and national rules. If a transaction should not have been passed or should have been paid out to a lesser amount than that is an error according to the rules. Slide 5 shows the progression from year to year. We calculate the level of error but obviously as we are doing sampling it is only an estimate. As such, we are only 90% confident that the errors are within the ranges indicated. As in the case of pre-election polling one cannot be sure that every time one does it the result will be the same. One cannot be sure that it is exactly right, only that one has a reasonable approximation. It appears that there is some improvement in the trend. That is probably real but one cannot say that for sure until one has a longer time perspective. One little quirk is that there was a methodological change this year which made about 0.2% of a difference such that the shift from 4.4% in 2014 to 3.8% would be slightly less if that is taken into account.

It is often assumed that member states and the Commission do not do much about errors but there are many levels of control and checking in that regard, with two levels at which adjustments can be made. The current error rate would have been 4.3% instead of 3.8% but for advanced corrective action on behalf of the member states and the Commission. In other words, before the audit was carried out the Commission or the member states had already taken corrective action, which saved approximately 0.5% in terms of the error. As members can imagine 0.5% of the EU budget is not to be sneezed at. The Commission also makes corrections after the fact. We do not give it credit for that in our audit results because the view is taken that if the correction is made following the audit or late we cannot account for it the same year. The Commission does take back hundreds of millions of euro, often from individual countries, where it believes errors have been made that ought to be corrected. There is an active control and checking mechanism in place. There is also a mechanism which allows further corrections to be made at a later point.

In terms of where the errors arise, the highest levels of error were found in spending under economic, social and territorial cohesion and in the budget areas of competitiveness for jobs. The lowest level of error, which was 0.6%, was in the administration area. This is a feature of who is being dealt with and how complicated the programmes are. There is a much lower level of error for entitlement programmes. A good example is the single farm payment in that one is either entitled or not to a payment. It is relatively simple and there is less that can go wrong. On the other hand, for reimbursement programmes, such as a complicated project where the beneficiary has to pay out money and claim it back while meeting eligibility criteria in respect of particular parts of the project and so on, the level of error is considerably higher. Typical errors for reimbursement programmes include people claiming for costs they incurred that were not eligible or claiming for whole projects that were not eligible and serious breaches under the public procurement rules because usually when an EU programme is involved it is required that the beneficiary follows proper procurement procedures in spending EU money.

In terms of financial management, we have noted that there is a lot of precommitment in the EU budget. In other words, not only did it spend money this year but it made commitments for next year and the year after, as everybody in business has to do.

The level of those pre-commitments has risen quite a lot over the years, again reflecting the complexity and natural trend. However, the Commission does not always satisfy us that it has a good enough picture of what its future commitments are and, in particular, in what order they will arise. We have therefore been encouraging it for years to try to do better cashflow forecasting in order that the EU and its citizens will have a better picture of exactly how the moneys will fall out, so to speak, in future years. This is important, not because there is anything wrong with future commitments but because if one has already committed to do programme A, it means there is less money or less discretion on programmes B and C or whatever other programmes might arise.

We also found some issues concerning the Commission's performance management that we do each year. For example, this year we found that there was a certain amount of confusion or potential confusion. There is an EU 2020 high level strategy but there are also the Commission's ten political proposals as proposed by President Juncker. Therefore, there can be some potential for confusion over what the Commission's most important proposals are at any given moment. We have told the Commission that it should try to make these better aligned and it has more or less agreed with us on that.

By now members should be on slide 11, and I will skip a few slides for brevity. Slide 11 concerns the EU's revenue at €154 billion. The methodology used by member states for checks on importers varies across the EU. This is important because one element of the EU's income is customs. There are different customs rules in different places, so there is potential for an inconsistent application of the rules. We identified some risks there but not sufficient that we were unable to sign off on the accounts.

I will now move briefly to slide 14 which concerns natural resources, principally agriculture. I am focusing on that for this committee because this is the heading under which Ireland receives more EU funding than any other. In agriculture there are two frequent types of error. First, there is the over-declaration of land parcels. In other words, a person might declare a parcel of 20 ha as being 21 or 22. We allow a small margin of error but not that much. Occasionally a whole parcel that is ineligible is declared, but mostly the errors are quite small. Second, in the rural development programmes the main reasons for error are generally ineligible costs or non-compliance with public procurement rules.

This type of audit has had particular consequences for Ireland in the past. The Commission looks at our audit results and may re-audit an area if it think our audit results give rise to some concerns. This has in the past given rise to payments from the Irish authorities back to the EU. However, the good news this year is that among our sample of 1,200 odd transactions there were eight in Ireland, all of them in the agriculture area, and we found no errors. This is most unusual and I have not seen that pattern before. Perhaps it is a sign that, in part at least, the additional controls the Irish authorities have put in place following past occurrences are starting to work. To some extent it may also be that if one samples eight, one might occasionally get eight that are atypical. Most of the time one might expect to see half of transactions in the agriculture area with some error, although not necessarily important errors. That there were eight with no level of error is quite good.

I will now move on to slide 18 which is a brief summary. As I said, the 2015 accounts present a true and fair view of EU expenditures and incomes. The estimated level of error remains above our materiality threshold, so we insist on saying that there are errors there that need to be addressed. Reimbursement spending was most prone to error. Corrective action by the Commission and member states does impact and makes an important difference. We also noted that an increasing use of financial instruments, such as loans and guarantees, which are being used increasingly in the EU budget, presents new opportunities but also new risks. Those need to be addressed.

So far, the focus of my presentation has been on the annual report, our biggest single product. However, I should mention that our special reports contain important parts of our contribution to EU transparency. There are of the order of 30 of those per annum. For example, recent reports have dealt with the new Single Supervisory Mechanism within the ECB, and how ready that is for its new functions. One of my colleagues did an audit of EU support to countries in difficulty, in other words, the EU-IMF programmes in Ireland, Portugal and some other places. There is a separate audit on Greece. We did an audit on the land parcel identification systems, which is an important issue in Ireland. We have also done audits on humanitarian spending, public procurement, climate change policies, biofuels and emissions trading systems. We are covering quite a range of EU spending topics and are trying hard to make them the ones that are policy priorities for the EU and its member states.

Members of the committee will see some other slides that I hope provide some useful information, including some about Ireland. Members will notice that in my slides Ireland is just about a net recipient of EU funds, but in the Irish Government figures we are now a net contributor. It is just a feature of different ways of counting different things. These are the Commission's figures. Ireland's net receipts from the EU peaked at about €2.5 billion in 1997. With an adjustment for inflation, that would be a little bit more now. We are now in balance or even heading towards the net contributor stakes. That has an impact for Irish national policy but, thankfully, not much impact for the auditors of EU spending, so I do not have to comment too much on that.

I am open to questions, but even when we are finished with questions today, we are available on the phone for any follow-up that people, either in Brussels or here, might want to make.