Dominic Hannigan (Meath East, Labour)
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I remind committee members and guests to turn off their mobile phones. It is not sufficient to put them on silent as they interfere with the broadcasting equipment. We have received apologies from Deputy Dara Murphy.

The first item on our agenda today is the 2012 annual report of the European Court of Auditors. On behalf of the committee, I would like to welcome to the meeting the current Irish member of the European Court of Auditors, Mr. Kevin Cardiff. He is accompanied today by his colleagues Mr. Edward Fennessy, Mr. Johan Adriaan Lok and Ms Mary Kerrigan. The European Court of Auditors is the independent external audit institution of the European Union. In its annual reports on the EU budget and the European development funds, the court gives its opinion on the reliability of the accounts and the legality and regularity of the transactions that underlie them. The committee looks forward to today's engagement with Mr. Cardiff, and we are particularly anxious to explore why the estimated error rates in spending levels have been on an upward trend for the last four years.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they are to give this committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with today's proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against any person or entity by name or in such a way as to make him, her or it identifiable.

I call on Mr. Cardiff to make his opening remarks.

Mr. Kevin Cardiff:

It is a pleasure to be in Dublin to present the annual report of the European Court of Auditors. We sent the annual report itself to the committee when it was published in November, and we have also sent to the secretariat our information note consisting of a summary of the key points, which members might get a chance to browse through at some stage. We have a slide presentation today, which has been circulated, and I propose to give my opening remarks with that presentation. Do not fret, Chairman; the second set of slides are only for supplementary information, so I will not be trying to get through them all.

The European Court of Auditors is an organisation based in Luxembourg with around 900 people, including auditors, translators, administrators and support staff, carrying out audits and producing audit reports and opinions. We produce around 70 reports per year. With some limitations, we are the independent external auditor for the EU and its institutions and agencies, so many of those 70 reports are short reports on individual EU agencies. Our annual report is the key report each year on the legality and regularity of EU spending, and producing that report takes up about half of our total resources. I am here today principally to deal with that. However, we also produce many special reports, dealing with economy, efficiency and effectiveness. These are the European equivalent of the VFM audits from the Comptroller and Auditor General with which committee members here are familiar. These relate to selected areas of EU spending or operations.

At the moment, EU expenditure amounts in cash terms to about €136 billion per annum. In other words, it is about the same budget as a medium-sized European member state. Agriculture and rural development, environment, fisheries and health - generally known as the natural resources area - taken together amount to more than 40% of the budget. The Common Agricultural Policy is probably the single biggest policy area in terms of spending. Regional policy and so on amounts to about 30%, so these are the two big areas. The slide in front of us shows the breakdown of that spending.

Ireland makes an annual contribution to the spending in the same way as every other member state, based on the same calculation methods. For Ireland, that is about €1.2 billion for 2012. The next slide shows that although we have paid around €1.2 billion, Ireland received around €2 billion one way or another, so that is a positive difference of around €600 million. The slide also shows the areas in which Ireland received funds from the EU budget. The bulk of that funding is under the natural resources heading; in other words, principally for agriculture. As far as the European Court of Auditors is concerned, this is not money given to Ireland, but money used in Ireland for EU policy purposes. EU money is spent in a variety of ways and there are particular mechanisms used for getting the money out the door. The next slide shows that the bulk of funds are disbursed under the overall heading of "shared management". In other words, the moneys are handed by the EU to the member states and their regional authorities - in some countries there are many regional authorities - so the management of the funds is shared between the European Commission and the member states. In truth, it is mostly in the hands of the member states, and therefore it is for the member states themselves to ensure that the funds go to the right recipients for the right purposes at the right time. Our audits look at both systems and transactions at the Commission level but also at member state level and even regional level.

The Commission itself runs some programmes directly. These are known as direct management programmes and about 20% of the spending goes through them. In those cases, our audits look at the Commission's systems. I will skip the slide dealing with indirect management, which is about 5% of spending. The next slide shows where the management controls lie. In direct management areas, management is with the Commission, which initiates the transactions, verifies them and pays them, whereas in the case of shared management the system is quite a bit more complex. The Commission still has top-level responsibility, but typically there will be several layers of management at the member state level. For example, in some member states which are both heavily decentralised and also federal in nature, there could be quite a few different paying agencies at the regional level, each reporting to the state governments, which report in turn to the national-level governments. So while there are 28 member states, there are more than 80 paying agencies responsible for disbursing EU funds, and each agency reports to national level bodies and is overseen by external certifying bodies. Slide 26 in the supplementary material describes those control systems in more detail, and committee members can look at that slide at a later stage if they wish, but we can see that the system is complex.

The next slide shows what we call the statement of assurance exercise, presented in our annual report. We are interested in two key things. First, are the financial statements fair and accurate statements of the financial position? In other words, are the accounts more or less accurate? The answer to that is more or less always "Yes". Second, are the EU revenue and expenditure transactions carried out in a legal and regular way? In other words, do they all comply with the rules?

The answer is much more qualified - it is certainly not "Yes". Members will note from the picture shown on this slide that the ECA audit is literally a boots-on-the-ground affair. There is a huge amount of documentary work but we send auditors literally into the field - into the factories - in many places around the world because EU money is disbursed to many places around the world.

In the case of this year's annual report, which the members are kind enough to let me present, while they can take it that, as far as we are concerned, the EU accounts are within very tight ranges more or less accurate, the payments contain many errors, well in excess of what we regard as a material level of error - in other words, a statistically noticeable level of error. This is shown in slide 9. This year we calculate an error rate, on a very arcane and complex basis, of around 5%, which, as the Chairman said, represented an increase compared to the 2011 level. There are some methodological changes, but the impact of those is small and the error rate seems to be on a consistently, if not a dramatic, upward trend. Error rates had fallen in the period up to 2009 but have been rising relatively gently since. Members can note that from the graphic on page 10. There had been considerable improvements between the 2006 and 2009 annual reports but there has been some disimprovement since. There are probably some cyclical effects at work here, which we can discuss later, but the disimprovement seems real. We think it is not just a statistical artifact. To be clear on this, the error rate is not a calculation of how often there is an error, because there are errors in some areas in more than half of the cases. The rate would therefore be much higher if it was simply the occurrence of errors. This is the impact of errors on the budget. In other words, if, for example, there was a 2% overpayment, that error would be counted as having a 2% impact. It is also not the same as saying that money was wasted. If, for example, a beneficiary makes an error in a procurement procedure or if money is disbursed to a school in the wrong region, one would say that was in breach of the rules - namely, a payment that might not have been due to be made - yet one would not say necessarily that the money was wasted. It might still be used for a valid and positive public interest purpose. In other cases - thankfully, we have come across relatively few of these - there would be fraud or an over-claim, and in those cases the money is definitely wasted. Our error rate does not reflect fraud. While we come across some fraud cases in our work, those are relatively few. In practice, in so far as our auditors are concerned, most of the errors they find are actually that - errors - rather than fraud. That means that some of what is written in the press about the European Court of Auditors saying that €5 billion was wasted last year is not accurate. When we do our performance audits, which is where we examine the effectiveness and value-for-money considerations, we might find that even more money has been wasted than the 5% error rate would suggest, but that is a different matter. This is just about error.

Moving on to slide 11, members will note the different types of error that arise. A large proportion of them are serious errors in public procurement procedures. When EU money is disbursed it is supposed to done in a way that is fair and leaves the market open and so forth. There are quite of lot of errors, but the rules are quite complex in that area. Ineligible projects are another large problem. Another is ineligible costs; a project is eligible but, to give an example, staff costs might have been claimed where they should not have been claimed. These things arise relatively frequently also. There is also a large body of errors which are of very little interest. They arise often - minor clerical errors and the like - but they do not have an impact on the budget. It is important to note that when we say there is a material level of error in the transactions we are not counting every one of those simple errors as if the whole transaction was invalid. What we are saying is that impact of the error on the budget is what is reflected in our error rate. We usually do not put down the whole transaction as being flawed if there is a small mistake in it.

The most error-prone spending areas - it has been this way for quite a while, as the members will note on page 12 - are in natural resources spending areas such as rural development, excluding direct support to agriculture, and the regional policy areas. That is not out of line with previous years. In some ways it is not out of line with what one might expect intuitively. If a farmer is receiving his single payment in a year, that is a much simpler transaction than if he is receiving support under an environmental heading and he has to prove various environmental conditions have been met and so forth. In some ways, the simpler the scheme, the lower the level of error. That is intuitively correct. What is slightly worrying from our point of view is that in the shared management areas, most of the errors that our auditors find could reasonably have been spotted and corrected by the member state itself. It is an important point for us because it means that to the extent that controls operate, they need to operate close to the payment rather than at the central level.

Since it is biggest area of spending for Ireland, I will deal with agriculture as a key example on slide 14. It shows some of the results in the market and direct support areas - in other words, not the regional development area. We identified that there was a material level of error in the EU expenditure in this area of around 4%. This is considerably less than the error rate for rural development, but the schemes are simpler and, by definition, more direct. The most frequent error is over-declaration of land areas. Most of the payments are tied to land area. Those over-declarations can be a simple error, they can be just misunderstandings or, occasionally, they can be deliberate.

Dominic Hannigan (Meath East, Labour)
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Do they attract more audits than other areas as a result of the high level of non-compliance?

Mr. Kevin Cardiff:

The national pay agency is required to carry out a certain number of checks. It is required to check 100% at an administrative level and particular percentages of checks must be done at the more detailed inspection level. The Commission also does checks. When we do the annual report, those are not risk-based because we are trying to get an error rate for the whole of European spending; therefore, it has to be done on a distributed random basis. We are not entitled to pick the riskiest cases and go looking for those. However, member states can do that and they do so, and the Commission also does risk-based audits.

To qualify for payments, a piece of land, for example, must reach the standard of being in good agricultural and environmental condition. If a field that ought to be in a condition suitable for grazing is overgrown with thistles and the like, it will not qualify. If it is full of rock outcrops, the rocky areas will not qualify. If it is forested over, it is not grazing land and also will not qualify. Sometimes people erroneously claim for such lands.

Page 15 shows a similar analysis for the regional policy, energy and transport areas. As I gave the analysis of agriculture as an example, I will not bore members too much with this slide, but the pattern is not too dissimilar. There is a relatively high level of error - not as high as in regional development - and the point to note is that although the error rate in this area is 7%, the number of transactions in which some error was found was 50%. There was quite a high level of minor errors in the samples.

Slide 17 - by way of an ad for the other work we do - indicates that in addition to the annual report on EU spending in general and in addition to the specific, usually very short, reports on individual agencies, the European Court of Auditors also produces a wide range of special reports.

These are intensive investigations of the efficiency and effectiveness of our economy and the value for money of spending on EU operations in a particular area. Each of these reports reflects audit work in several member states, which member states are often chosen on a risk-based basis. Particular countries are often chosen because they are regarded as more risky because they have more of a spend in a particular area and often also because we are looking for good examples that might be of use to the European system.

Typically, each of the member states will receive a visit and a number of projects or transactions will be audited. They will then receive a report specific to themselves, which is called a statement of preliminary findings. The Commission will also receive a separate in-depth audit report. The evidence from all member states is presented in a single report at EU level in general. This report is the one that is published. Ireland is not represented every time in these audits. However, it is selected from time to time. For example, the audit on the globalisation fund, which I forwarded to the committee a few months ago, dealt in part with Ireland. I do not propose to go into that report in detail as the Comptroller and Auditor General also did a full chapter on it in his report. My office endeavours to send to the committee reports which it believes would be of most interest to it. All our reports are published. If we are getting it wrong in terms of which reports are of interest to the committee, we can arrange to have all of them forwarded to it.

I thank members for their attention. The annual report of the Court of Auditors is addressed to the European Parliament and the Council but it is also specifically addressed to national parliaments. Therefore, we see national parliaments as one of the key audiences. Parliamentary delegations occasionally visit the court. The committee or any other committee of the Oireachtas is always welcome to visit us. I am happy to respond to any questions members may have.

Dominic Hannigan (Meath East, Labour)
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I thank Mr. Cardiff for his presentation. A number of members of the committee visited the Court of Auditors earlier this year. I thank Mr. Cardiff for hosting us at that time. I know from speaking to my fellow committee members that we all came away with a much greater knowledge and awareness of the work of the Court of Auditors.

On the annual report, it is disappointing to see that there has been a further increase in the error margin. As pointed out by Mr. Cardiff, it has been increasing over recent years. It strikes me that there is a failure, not on the part of the Court of Auditors but in terms of how we use the information it produces. For example, Mr. Cardiff pointed out that there is an over-declaration in claims for land. Surely it is down to the authorities to put in place a process for ensuring the likelihood of over-declaration is reduced. I am sure this also applies in respect of other sectors that are audited. While the information provided by the Court of Auditors is useful, it is only useful if it is used to drive down the error margins in the areas in respect of which we make payments. Why is it that the relevant authorities are not using this information to drive down these error margins? What can be done and what advice is given by the Court of Auditors to the payment authorities to ensure they use these results to the best of their ability in terms of reducing error rates?

I invite Deputy Seán Kyne, followed by Deputy Timmy Dooley, to put their questions before Mr. Cardiff responds to my questions.

Seán Kyne (Galway West, Fine Gael)
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I welcome Mr. Cardiff and his officials to the meeting and thank him for his very interesting report. Mr. Cardiff stated that half of the Court of Auditors' resources are used for the purpose of preparation of the annual report. Mr. Cardiff might clarify whether that also includes the court's investigative work. Mr. Cardiff also stated that the increase in the error margin since 2009 is not down to a change in methodology. One must presume, therefore, that there is a greater waste or misuse of funds within the Union. Perhaps Mr. Cardiff would clarify that. Another issue is the intentional error versus unintentional error or error versus fraud. Mr. Cardiff touched on the area of agriculture, which is particularly important in Ireland. I would maintain in defence of agriculture that a great number of the errors in terms of land declaration are unintentional. It is possible these are being picked up now because Ireland has one of the most advanced satellite land imaging systems. I assume this system will be rolled out across the European Union. In my view, there would be very little fraud in this area and many of the errors identified are unintentional. In their defence, farmers would have over a number of years submitted maps and forms to the Department that would have included unintentional errors, which errors would not heretofore have been picked up. Where they are picked up, there is a recoupment of funding. It is a contentious point. However, these errors would be, in my view, unintentional errors.

Regarding the recovery of misspent funds, is this left to the member states? I am speaking in this regard not of misspend in the area of agriculture but across the board. Where errors are identified, does the Court of Auditors follow up on these or is this left to the Departments of the member states to deal with? Ultimately, what are the sanctions in this regard? I presume where funds are not repaid, fines are imposed and so on.

There are no country comparisons in the report. Are there persistent offenders within the Union? Are there any other areas in Ireland outside of agriculture in respect of which errors have been identified?

Timmy Dooley (Clare, Fianna Fail)
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I welcome Mr. Cardiff and his delegation and thank them for their ongoing communications with this committee. Like the Chairman, I acknowledge and thank Mr. Cardiff and his team for their assistance during our visit to the Court of Auditors earlier this year.

On the over-declaration of land, I have mixed views about this. In effect, a particular block of money was set aside to assist farming, particularly in rural and isolated areas. It was part of the support of the principle of assisting people in rural Ireland in maintaining family farms, ensuring they have a basic level of income and maintaining the countryside in an environmentally acceptable way. Year on year there has been an increase in the number of small areas of land that have been identified as not having forage on them and have become covered in trees and so on. This is now considered a major breach and, depending on the size of it, is impacting on farmers' ability to draw down funds. Farmers are being penalised with fines and so on despite that in many cases they sought professional advice in the original mapping exercise of the area. This process, when commenced, was very basic in that the land was walked and measurements were taken. This is now being compared against satellite imaging. This has resulted in farmers having to take significant cuts in funding in conjunction with increased penalties.

While I do not question the work of the Court of Auditors in this regard from a policy point of view, we need to review what we are trying to achieve by way of the funds being provided to farmers and farm families. Rather than penalising them for what I believe are minor technical breaches, we need to have a rethink in this regard. I accept this is outside the control of the Court of Auditors as the policy is enshrined and it must do its audit and identify the mismatch between what is declared and not declared. It is stated on page 19 that failures to respect public procurement rules account for more than half the error rate in this spending area. Perhaps Mr. Cardiff would elaborate on that.

Are we to assume that these are procurement errors by State agencies, or is it a sub-layer below that, such as community enterprises or NGOs that are receiving State funding, that are failing to follow procurement rules, or is it at a higher level? Is it the case that some Departments are failing to recognise or respect the public procurement rules? If there is any breakdown by sector, that would be helpful. If not, perhaps Mr. Cardiff could provide it to us at a later stage.

Eric Byrne (Dublin South Central, Labour)
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I thank Mr. Cardiff for his presentation. I must confess it is the first time I have had to look at the report, so perhaps he can bear with me. I am an urban Deputy, as he can probably tell from my accent. I mention that because there are urban myths about farmers and fraudulent activities. There are classic myths of ear tags going missing or being transferred. The horror of all horrors was the illegal activities of farmers who brought foot and mouth into this country by purchasing cattle outside the jurisdiction.

Timmy Dooley (Clare, Fianna Fail)
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With respect, that was not the farmers.

Eric Byrne (Dublin South Central, Labour)
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I am just giving the urban perspective. They may or may not be myths, but the perception exists. It worries me because the most frequent error is over-declaration of land area by beneficiaries. Is it cute hoorism, so to speak? There is an urban myth that so-called cute hoorism occurs on an awful scale in rural Ireland. Is it accidental or is it the classic accidentally on purpose declaration, as it were?

Anybody who travels through France can see the miles and miles of clear open fields, with ripe crops everywhere. To be sympathetic to farmers in Ireland, I am a hill walker so I climb many mountains and see a lot of land. There is huge diversity here. The method of production involves small little fields with beautiful walls, hedges and so on. However, the land here varies from thistle infested fields to rocky, low yield fields. Perhaps that complicates the Irish scene, but if we do not have the statistics on who or what countries are the biggest defaulters, or the countries that are generating the most inaccurate claims, we may be criticising Irish agriculture in the wrong light. We might be the masters of the scene. We might be the best, most tolerant, most professional farmers in Europe. Perhaps Mr. Cardiff could answer that for me.

It would be interesting for several reasons to have the comparisons between one country and another. Ireland has been a member of the EU for 40 years, so we should be experts in drawing down funding and dispensing it properly. Other countries, such as Croatia, have only recently been admitted. It would be nice to observe their degree of compliance with the regulations and compare it with a mature country like Ireland, which has been a member for 40 years. That would help me point the finger. If mature countries are being very bold or very inaccurate in how they make their claims on EU funds, there might be a story to be told.

It disappoints me that the court has a hell of a lot of work to do at the end of the term of the Commission due to all this unspent money. There is a terrible system in Ireland - I am sure it exists in Europe as well - where at the end of a budgetary year, the money had better be spent or else it will be forfeited. Is Mr. Cardiff confronting issues like that? As auditors, would it not be better to argue that it be forfeited back into the coffers rather than rushed, misspent or badly or inappropriately spent?

Mr. Kevin Cardiff:

I will ask Mr. Fennessy in a moment to deal with our recommendations on the error rate. At the end of each section of our annual report, there is a list of our recommendations from the previous year and some indication of whether they have been addressed.

The land parcel identification systems, when satellite-based, are much more accurate. They find errors that might not have been spotted before by the old systems, but they also find sometimes that things have changed over a period of time and perhaps the old maps do not reflect that what was once a field has now partially become a track, or what was once grazing has since become overgrown or whatever. In that sense, satellite imaging makes a significant difference. In answer to Deputy Byrne's question, the satellite-based systems also sometimes find that whole parcels of land are claimed for that are mostly forest or largely ineligible. While the bulk of cases are exactly as Deputy Dooley suggests, that is to say, minor and not very serious, and perhaps there is a question as to whether the system should be simplified for those people, and under the new Common Agricultural Policy small farmers will have simplified rules, there are occasions when it is difficult to see how an error could be quite so big as it appears. That is not unique to new member states or old member states. That happens everywhere. There is one example in our annual report of a case in Northern Ireland where a parcel that was claimed for appeared from a satellite image not to qualify at all, or at least very little of it qualified. We are not saying anything about the particular farmer in that case, just that as an error, the land did not qualify but the claim was paid out.

We regularly recommend the simplification of systems with a view to having fewer errors and a more effective spending programme. We know that if recipients of benefits have to pay a lot and spend a lot of time managing the system, that is a reduction in efficiency. As auditors, we can make recommendations that complicate the system when we find the controls are not working. Compliance is very important. In areas where compliance is high, there is less need for controls and we will not get audit reports stating there is a need for more complex rules because the simple rules will have been well followed.

Deputy Dooley made a point about the non-agricultural areas and the public procurement rules. Incidentally, I thought Deputy Byrne was reneging on his urban credentials by admitting to going hill walking.

Bernard Durkan (Kildare North, Fine Gael)
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We remind him of that all the time.

Eric Byrne (Dublin South Central, Labour)
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I walk on State-owned lands.

Timmy Dooley (Clare, Fianna Fail)
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I will submit a claim for barbed wire at the weekend.

Mr. Kevin Cardiff:

Public procurement is certainly a big area. It is not a question of money being spent on things for which it was not intended, or not always at any rate. In this area, it is about spending money in a way that is contrary to EU policy. That policy is about allowing everybody a shot at tendering for large sums of moneys. It is not just small private operators that make these mistakes. Sometimes very big operators do so. In one federal member state, we found this year that several regional government bodies were all making the same procurement error and it did not seem like one they should have missed. The errors we find are not confined to new member states or to private entities. They arise on a broad basis.

In fairness to the Commission and the member states, a large amount of money and effort goes into controlling the system. That is under pressure from us, from the European Parliament and from committees like this one.

As Deputy Dooley was implying, the big issue for policymakers is how to keep it simple. The answer is that if there are many different policy objectives for a single instrument, there will be a good deal of complexity. For example, under the Common Agricultural Policy, direct payments are aimed at income support, and that is understood. They are aimed at supporting rural communities, and that is understood as well. However, they are also aimed at environmental progress and sustainability. They are also aimed at European Union procurement rules and many other things as well as the simple income support objective. This means the small farmer to which Deputy Dooley referred as well as bigger farmers have a range of things which they must look out for. There are at least a dozen areas of cross-compliance and probably more which they must watch out for. I gather there are 18. The EU authorities and policymakers have said all these issues are important, and if we are going to pay money to farmers with a view to maintaining the rural environment and developing rural areas, we are entitled to expect them. From the point of view of auditors, it is our job to inspect and see whether the rules have been followed. It is not our job to complain about the policy. We make policy recommendations from time to time but it is not in our hands to do that.

The land parcel identification system, LPIS, was mentioned. As committee members are aware, this is a major issue in Ireland and in other countries too. The systems in agriculture and other areas have major flaws, at least having regard to the standards the policymakers have set. Again, in the North, in England and in various other countries, our audit report has identified particular systems problems. Even in Ireland under the European Social Fund there are some systems issues. Member states are quite good at following up on European Court of Auditors and Commission reports, and when they do not, they run the risk of losing funds or at least having funds moved around.

Our problem as auditors is that sometimes we see policy problems. We not only see errors but also policy problems. In our value for money audits in particular we try to bring these to attention. Our value for money audits range widely. Deputy Eric Byrne referred to the food cycle. We have done work on organic foods and whether they are properly controlled. We have done work on slaughterhouses, especially in the new member states, since they received specific moneys for upgrading. We have done work on the rural environment. I have referred to agriculture a good deal because we are in Ireland, but we have also done work recently on EU supports for Palestine and Egypt and on road programmes. There is controversy in Spain because we found some things about the cost of roads in Spain compared with Germany. We try to inform policymakers and the European Parliament about what we find in the course of our work which might be of assistance to them. In the value for money areas we find the Commission takes many of our recommendations into account. That is not to say it takes all of them on board fully, but it takes them into account at least and that is heartening to us. What is somewhat puzzling is why, even after all the recommendations are taken into account, we still see the error rate drifting up. On that very difficult question I will pass the committee on to Mr. Fennessy.

Mr. Edward Fennessy:

I thank Mr. Cardiff and I thank the Chairman and members of the committee for their interest in our work. I hope we can give some explanations. I will take the questions in no particular order, other than to say I think I should give a special translation of the concept of cute hoorism to my Dutch friend next to me, but I will do that later.

A question was asked about the court's role in fraud and investigation. We do not have a specific role in fraud, although we detect suspected fraud and we hand over those cases to the body responsible, namely, the European Anti-Fraud Office, OLAF, in the Commission. There is an old adage in auditing which holds that the auditor is a watchdog, not a bloodhound. We live by that because if one wishes to be a bloodhound, one must have police powers. We do not seek them and we do not want them.

Deputy Kyne raised the question of what member states are doing to drive down error rates. They are doing a good deal. There is a particular preoccupation with the error rates. I go to the six monthly meetings of the directors of paying agencies. At each meeting there is a preoccupation with the court's error rates and what to do about them. The Commission is taking it seriously. There are more action plans than I could count on my fingers. Everyone is making a noble effort to try to address the issues we raise.

Deputy Dooley raised a question about the concept of genuine mistakes and so on and so forth. There is the concept of deliberate error allowed into legislation. If it is clear that a given error was purely by genuine mistake, it is taken into account by the paying agencies before they make payment.

There was a question on recovery of misspent funds. We carry out regular follow-up to see what the Commission and member states do in terms of the errors we raise. I wish to put into perspective Ireland's role in the error rate, especially in agriculture, for which I have a particular responsibility. We do a sample of 180 transactions for Pillar 1 and a sample of 180 transactions for Pillar 2, rural development. Ireland features probably four to six times in these transactions. We find errors but certainly Ireland is not the most error-prone country. That said, we do not have a sample that would permit us to give an insight by member state. We would need an army of comptrollers and auditors to do that. We give a global déclaration d’assurance, DAS, and Ireland features in that in a relatively minor way. That is one reason we cannot give country-to-country comparisons; we do not have the basis for doing so. As Mr. Cardiff said, to a certain extent we give country-to-country comparisons when we examine performance audit work. We make a selection of certain member states, either because they get the majority of the funds or because we know there are difficulties in those particular member states or because there are high risks. As Mr. Cardiff also noted, sometimes we do so to identify and highlight cases of good practice.

The question of over-declarations of land was raised and Deputy Dooley asked about the overall envelope. Naturally, we are particularly aware of that and we take note of it. We believe, nevertheless, that it is important for us to point out that the envelope is perhaps sometimes distributed in an uneven way or in a way that is not necessarily respecting all the rules. That is our role.

We are aware there are big problems in many member states with the LPIS. In certain respects it is a moving target. Last year, we had considered doing a performance audit on the LPIS. However, after mature reflection we decided to defer that audit since there is a good deal of movement in the LPIS at the moment because of the new CAP regulations, the greening concept and all the rest.

We will certainly come back to that issue and are aware of the difficulties. No doubt, within the next 18 months, we will reconsider the appropriateness of conducting a performance audit in that area.

I hope I have answered the majority of the questions asked or embellished the answers given by Mr. Cardiff. If there is anything I have not touched on, I will be happy to do so.

Seán Crowe (Dublin South West, Sinn Fein)
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I welcome the delegates. I do not pretend to be an expert in this area and if some of my questions are way off the mark, I apologise in advance.

Mr. Cardiff mentioned the accuracy of audit reports. That statement will probably create a number of headlines around Europe, but it is refreshing to hear him say it. One of the difficulties I have with the report is that we are told that the error rate is going up, but what will happen next? Mr. Cardiff will provide a recommendation for the Commission, but what steps will be taken, given that the rate seems to be moving in the wrong direction? Why does he believe it is going up?

Mr. Cardiff has said the sampling approach changed, but why was that? Was it inaccurate? How large is the sample in each country? Why are certain companies, farms or counties picked? Is the European Court of Auditors acting on information? Does it operate on the basis of someone looking at Google-Earth and saying, "This farm does not look the part"? Are such aids used in the court's investigations?

There was controversy here about public procurement because larger companies seemed to be getting contracts. We now discover, however, that contracts can be broken down into smaller elements. Are there different procurement rules in various countries or is there an overview? In Northern Ireland, for example, in part of any roads contract youth apprentices are required to be used. Is the court able to do this as part of an audit or can it make such recommendations in dealing with the youth unemployment crisis?

Another issue concerns the failure to fulfil the necessary conditions for projects. One hears many complaints about this. There is a difficulty with Irish companies being paid for certain projects and some have gone into receivership as a result of suppliers not being paid. Where projects are part funded by the European Union, will the court examine instances where companies are not paid? What impact would such events have on a company that may reapply for contracts in the future?

According to a report issued in October, the European Court of Auditors investigated the issue of EU aid to the Democratic Republic of Congo. The report stated the effectiveness of the European Union's aid amounting to €1.9 billion from 2003 had been limited, with fewer than half of the programmes likely to deliver the intended results. We know about the involvement of some EU member states and European companies in mining for diamonds, copper, cobalt, zinc and other minerals. It is believed such activities have helped to fuel the conflict in the Congo. One can, therefore, be seen to be working against the other and it makes it hard to undertake a straightforward audit. Does the court have recommendations to make in that regard in order that European businesses will not inadvertently fund the conflict in the Congo while taxpayers' money is being paid to prevent it? I am seeking information on the court's recommendations on the structures to be used.

Joe O'Reilly (Cavan-Monaghan, Fine Gael)
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I welcome Mr. Cardiff and his team. I share my colleagues' concern about the increasing error rate, which is hardly good news. As regards the agriculture sector, I was heartened to hear Mr. Fennessy say Ireland was not high in the error, misappropriation or irregularities rankings. My own observations support that view. From my constituency work, I know that the bulk of farmers' mapping errors are genuine and there should be some system to accommodate this fact. The penalty does not fit the crime for many innocent farmers in this regard, although that is not in any way to condone malpractice. Mr. Fennessy's submission suggests attempted malpractice is rare.

On procurement, there is a policy issue. Will the delegates comment on how it can be addressed? In my constituency small indigenous firms in the construction or plant hire sector find it difficult to compete under existing procurement rules. In Ireland we may be a little over zealous in adopting stringent procurement rules. Can the court allow tenders up to a certain threshold and exclude international or external competitors up to a point? Current procurement rules are certainly not supportive of small indigenous construction or plant hire firms. Will the delegates comment on this, bearing in mind that they are not policy makers? I appreciate that fact, but I wish to draw their attention to this point and it would be remiss of me not do so, as it arises in much of my constituency work. The Chairman will also be aware that small plant hire or construction firms find that they are not at the races in competing for procurement contracts, particularly given the level of competition in the Border area.

I understand the European Court of Auditors has produced a special report on the issue of rural development. I would be interested in hearing how the European Union's rural development budget is being spent. Does the outcome of the report suggest the Union's rural development budget is being spent satisfactorily? As this issue has arisen in recent times in our work, I would be interested in hearing the delegates' comments on it.

To put it succinctly, there are three issues that I have come across in my work. First, there is the fact that many innocent people make mapping errors, yet they get into a lot of trouble over it. Second, small indigenous firms are not at the races owing to current procurement rules.

Third, there is the lack of an acknowledgement of the excellent job being done in the delivery of the rural development budget. I would welcome a comment from Mr. Cardiff in that regard.

Eric Byrne (Dublin South Central, Labour)
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The European Court of Auditors is responsible for auditing all member states of the European Union. As Mr. Cardiff stated, we are moving towards the 2014-20 programme and a question arises about the financial commitments for previous years in respect of which funding remains unspent and which will likely lead to additional mistakes. If it is anticipated that there will be mistakes as a result of this mechanism, what alternative is proposed to deal with the huge sums of money that remain unspent? Given the regional nature of the system in place in some of the countries concerned, for example, Spain, France and Italy, is monitoring of these countries more complicated? Are such countries, as opposed to countries like Ireland in which the system is more centralised, more prone to making mistakes?

Aideen Hayden (Labour)
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I would like to comment on a number of issues, one being expenditure in 2012. The cost of agriculture, marketing and direct supports is very high, while expenditure in the area of social affairs is considerably lower at 8%. I am confident that this will change in the next couple of years, given the increased commitment to amending expenditure in the direction of employment in social affairs. As stated by Deputy Joe O'Reilly, the estimated error rate has increased every year since 2009. In regard to the overall estimated error rate by type, I was struck by the fact that the largest increase concerned the serious failure to respect public procurement rules. The use of the words "serious failures to respect public procurement rules" in this regard stands out. Has the organisation delved into the reason for these serious failures to respect public procurement rules and do they in any way relate to the fact that there may be issues with the rules that need to be addressed? In regard to the serious failures issue, on a scale of one to ten, what is the most and least serious failure?

I am struck by the fact that even though the statistic for serious failures is recorded as 29%, of these 21% were related to ineligible costs included in cost claims, while 17% were related to incorrect declarations in agriculture. An issue of great concern in the Seanad has been the level of genuine errors made in terms of the costs claimed in agriculture. Perhaps Mr. Cardiff might comment on this. It was stated by him that the key message in the 2012 annual report concerned the increases in the estimated error rates that were greatest in spending in the direction of employment in social affairs, agriculture, market direct supports and so on. What recommendations would Mr. Cardiff make on how these increases could, first, be capped and, second, moved in the other direction? In other words, how can the error rate be reduced?

I was struck by Mr. Cardiff's statement that the authorities within the member states had sufficient information available to them to allow detection and correction of the errors. Perhaps he might elaborate further on this. It appears from the statement that there is the capacity within member states to identify and correct errors, but for whatever reason they are not doing so. Perhaps I have misunderstood him. What more needs to be done at member state level?

Dominic Hannigan (Meath East, Labour)
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The key message in the report is that the areas most prone to errors were rural development, the environment, fisheries and health. While I am not directly involved in agriculture, I have some knowledge of the sector as I represent a mixed constituency. I often receive complaints, as I am sure do other representatives of rural Ireland, about the minutiae of the new mapping system. Given that the punishment for breaches is quite severe and penalties can have a lasting impact on the budgeting of the individual directly affected, to what extent can applicants be forewarned?

On fisheries, an issue which was previously the subject of an animated discussion at this committee in the context of penalties, many people within and outside the country believe the greatest damage to the fishing industry has not been inflicted by Ireland but by other member states and non-member states. To what extent is it possible for the European Court of Auditors, in the same way as it is possible to identify the culprits in this jurisdiction, to identify the culprits off our shores?

On health, procurement is an issue in which we all have an interest. An issue of concern for me which has been referred to by other speakers is the difficulty being experienced by small companies in meeting the criteria laid down for public procurement. For example, a company wishing to supply a particular product, perhaps artificial limbs or a particular medicine etc., much in the same way as supermarkets use loss leaders, may be competing with a broker who can source its product from numerous areas, often at way below the market price, which is to the detriment of small companies. To what extent is it possible in monitoring procurement to ensure we get the best value for money, in particular in the health service, while ensuring that in all instances every effort is made to ensure products are sourced in a fair and equitable way which is not to the disadvantage of those operating and providing employment here? There is a huge level of brokerage in supplying markets all over the world. This is happening to a far greater extent than in the past.

Mr. Kevin Cardiff:

I remind committee members that we need to leave at approximately 3.45 p.m. in order to catch a flight.

Deputy Seán Crowe and Senator Aideen Hayden asked what was the reason for the ever increasing error rate. That is a difficult question to answer. Some errors are due to changes in methodology.

They simply change because the European system itself is changing. Therefore, from time to time we need to take a step back and ask whether we are measuring correctly. Whenever we change the methods we use, we calculate how much impact it is having in order that it is transparent. We know that the increases this year and last year, taken together, are no more than approximately 0.3% due to our methodological changes. People, including those in the committee and the European Parliament, can then see that it is still going up, but they can allow a little for that.

There was a question about the sampling approach and how we decide on sample size. We get a group of statisticians to decide how many beneficiaries we must sample in a particular area to have a reasonable prospect of stating that when we have a number for the error rate it is correct within reasonable limits. It is simply a statistical calculation.

How do we pick beneficiaries? We sample the euro, not the beneficiaries. For example, we pick the beneficiary who got the 35,300,000,206th euro because that comes up in the sample. That euro is the key. The person who got that euro and the entire transaction that the euro in question represented is sampled. When we examine a single transaction, it relates to a single EU transaction and the money going to the beneficiary. However, that might require an audit of 20 transactions in which the beneficiary engages in turn. It is rather extensive. The sample is in the thousands; we are not dealing with a couple of hundred cases. To get reasonable sample sizes for each policy area we must get into the thousands. For each country we have to get into tens of thousands of transactions. We simply cannot get there.

Everyone is interested in public procurement, and rightly so. What is the best way to ensure it is fair and effective for everyone? Ironically, in some ways, the best way is probably not to play favourites with smaller or indigenous firms. Let us consider why. If we do not have a fair system then the people who will take advantage of unfairness are probably not those from small indigenous firms. The European rules are quite specific about the market being open to all who are qualified to provide to the market. That openness is supposed to start from a relatively low level, from €130,000 or thereabouts. The full European procurement rules, including tendering and openness and so on, start at a low level. We were asked what we would do about exploring this a little more. We are making several efforts. On the agricultural side, we are starting an audit on cost reasonableness - in other words, the reasonableness of costs incurred by beneficiaries using EU money and, therefore, their procurement of services. Some of my colleagues in other areas are going to do a larger study of procurement systems at EU level. In part, this has been prompted by the European Parliament, which is concerned about some of the large procurement projects and how much might or might not have been lost due to inadequate procurement policies.

The question of failure to fulfil conditions and Irish companies having difficulties with receiverships and suppliers and so forth was raised. To my knowledge, we have not examined that. It is a feature of the rules of some European schemes that the suppliers must have a reasonable prospect of completing the service. Occasionally we might come across these cases, but as a subject we have not examined it.

The question of European states' involvement in conflict and so forth was raised. Europe spends large amounts of money in some of the most conflict-ridden areas of the world. The objective of the spending is political, or it is a policy objective. Usually, it is about genuinely trying to support and help people in a particular region. However, it is also about the application of European foreign policy in the same way as other power blocs apply their foreign policies. At the European Court of Auditors we examine when the money was spent and whether it was spent according to the objectives laid down. Sometimes our findings on whether the objectives were met are not really convenient for all policy makers, who want to feel they are having an impact but perhaps do not want to know or hear, in all cases, that the money they spend, for good reasons, is not being used as effectively as it could be or for the best purposes. It is something of a conflict for us. We consider whether we might turn people off or end up in a situation whereby, because we find that spending was not effective, the result might be that spending which would be very helpful in a region is not allocated. To be honest, we resolve that conflict by saying that we are auditors. We audit. If we find things, we say it. It is not that we go looking for errors that are not there, but if we find errors, even in countries that desperately need the money, then we say we have found errors. We realise, as auditors and as human beings, that we cannot expect the same standards of governance in the middle of a war zone as one might expect in a mature European state. No one is suggesting that the standard should be astonishingly high for that type of spending.

Deputy O'Reilly asked questions about innocent people involved in mapping and so forth. We do not set the rules; we merely report what we find. Sometimes we make recommendations, some of which might be in favour of the people Deputy O'Reilly referred to and some of which may be against. For example, when we make recommendations on the CAP and its shape, we say the penalty should be more or less proportionate to the offence. Small errors should have small penalties, including repayments and so forth, and for bigger errors there should be bigger penalties. Sometimes a person can make a major error but it is still a mistake; it is not necessarily a deliberate thing. The question of whether such a person should be penalised arises. Mostly, in such cases the first penalty is reimbursement. The thing is set back to the point at which it should have been. Generally speaking, it is not that people are being asked to pay criminal penalties. Mostly, the money that ought not to have been paid is recovered. At the same time, we have been encouraging the simplification of schemes to make them easier and to make it less likely that errors will arise. The new simplification for small farmers will be an interesting experiment. We will be watching closely to see whether it actually leads to fewer errors. Certainly, they will have far fewer cross-compliance-type requirements to meet. Therefore, in those areas at least they should have some additional comfort. It will not affect the issue of over-claims, because either an area is over-claimed or it is not.

I will address Deputy Durkan's questions next. I have dealt with the question about the punishment being severe. We do not identify individual culprits or countries in the fisheries area. Two and half years ago we carried out a major audit on the fisheries policy. We made some rather trenchant remarks, including comments relating to the dangers that arise when what an organisation is requiring of people and its policy ambitions do not align well. Sometimes that has been a problem in fisheries policy. For example, we referred to the throwing back of fish, discards, and what that means for a policy of conserving fish stocks and such matters. I believe we had some impact in that area. I know the discard rules are changing in 2015 or thereabouts.

There was a question about health issues and smaller companies. We would never suggest that any health standards should be weakened to let small companies in, but I realise the Deputy was not really suggesting that. The question related to services to hospitals and so forth.

We audit according to the current rules. We sometimes make recommendations on simplification of the rules but we would never make a recommendation that would favour small businesses on one side of a border. We operate within the treaty and such favouritism would be contrary to the European treaty.

We see a huge range of breaches in public procurement. Let us go back a little. In our system, a serious procurement error must be quantified as such. In order to be regarded as serious it has to be a procurement error that seems to have undermined the whole process, in effect. When we see that, however, we have no way of saying exactly what the financial impact is. When we see a serious error we count the whole amount as if it was in error. It might therefore be a little bit over-represented in that sense. On the other hand, most of the procurement errors are minor. We do not count those at all because they are not having a big impact on the European budget. There is a huge range and it is as simple as that, but there are many more errors than are reflected in the statistics. These things are quite difficult and we do not count minor breaches at all when we are calculating the error rate. We ignore them for that purpose. We count them in the total number of errors found but not in the error rate, as such.

I will let Mr. Lok deal with the question on commitments and their regional nature. The commitments issue is particularly important. The annual report stated that there is a mismatch in the European budgets. There is a certain cash budget each year but there is also a big stock of moneys that have been pre-committed. That runs the risk of creating an imbalance. We see it from time to time. The Commission will explain it differently to us, but in any given year so much money has been pre-committed that it leaves relatively little room for discretionary manoeuvre in changing policy and so forth. The Commission sees it differently. It says it has a particular budget and spends that much cash each year, but sometimes the Council and the Parliament say that Europe is strapped for cash and therefore they must hold back on cash spending, which means that the pre-committed spending takes precedence. Maybe Mr. Lok will deal with that matter.

Mr. Johan Adriaan Lok:

The European Union budget process has two main elements which need to be considered: the commitment appropriations and the payment appropriations. To put it simply, payment appropriations hurt. They require cash from member states and they lead to payments to member states. Commitment appropriations are important because with them the Commission can say to member states or regions that this is their budget for the next couple of years - three years, mostly. In chapter 1 of the annual report, the Court of Auditors says that member states must be aware that the number of commitment appropriations is on the rise. By definition, they will lead to requests for payment. In the additional information in the slides, there are key dates in the EU budget process. One can see that in the approval process there was an enormous debate between the European Parliament, the Commission and the Council on the 2012 budget. It ended up with the Council winning, so the payments were lowered.

Looking at the 2012 budgetary management, however, in total more than €7 billion in additional payment requests was needed to complete the 2012 budget. So the whole process in 2012 led to a reduction in payments requested, but in the end far more payments were needed. The warning in chapter 1 of the annual report is to look not only at payments but also at commitments, as these will lead to payments in the coming years. Commitments outstanding on 31 December 2012 are about 2.5 times the yearly budget, so the room for manoeuvre becomes smaller as one goes into the new programme period.

Bernard Durkan (Kildare North, Fine Gael)
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Does Ms Kerrigan want to say something?

Ms Mary Kerrigan:

No. I do not have anything to add at this point.

Bernard Durkan (Kildare North, Fine Gael)
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That concludes our discussion. I wish to thank the witnesses for their attendance at the joint committee. Their task is a responsible one, which is to look after the EU's budgetary expenditure. Procuring the budget is one thing but spending it is another. The European Court of Auditors must ensure that the budget is spent appropriately. That is of major importance to the EU and each member state within it. We thank the witnesses and wish them well for the future.

Our next item will be taken in private session.