Seán Haughey (Dublin Bay North, Fianna Fail)
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I thank members. I was Vice Chairman of this committee at one stage, so I have some experience of chairing the proceedings.

I extend a special welcome to our colleagues from the European Parliament who are joining us via the video-conferencing facility. The committee has been very clear about the importance of strong engagement with Irish MEPs and we are eager to find the best way to do this. We will pilot the use of the video-conferencing facility for three to four meetings and then review it and see how well it is working. A number of MEPs have expressed their support for this initiative but were not able to attend today but we are delighted that a number of MEPs are joining us. We hope they will be able to take a full part in the proceedings this afternoon.

Apologies have been received from the Chairman, Deputy Michael Healy-Rae, and Senators Paul Coghlan, Terry Leyden and Neale Richmond. As time is particularly tight today and we have two important witnesses, I suggest we move directly to our engagement with the Irish member of the European Court of Auditors, Mr. Kevin Cardiff, to be followed by the Minister of State at the Department of Foreign Affairs and Trade, Deputy Dara Murphy, before dealing with issues in private session. Is that agreed? Agreed.

Mobile phones should be switched off because, even on silent mode, they cause interference with the recording equipment in the committee room.

On behalf of the joint committee, I welcome Mr. Kevin Cardiff to the meeting. Mr. Cardiff has travelled from Luxembourg to be here and we are grateful for that.

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 or body outside the Houses or an official either by name or in such a way as to make him, her or it identifiable. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. However, if witnesses are directed by the Chairman to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given. They are asked to respect the parliamentary practice that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable.

The European Court of Auditors is the independent external audit institution of the European Union. In its annual report on the EU budget, the court gives its opinion on the reliability of the accounts and the legality and regularity of the transactions that underline them. The European Union budget is large and it is important that citizens know that money is being spent appropriately with little fraud. We look forward to discussing this with Mr. Cardiff and I invite him to make his introductory remarks.

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.

Seán Haughey (Dublin Bay North, Fianna Fail)
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I thank Mr. Cardiff for that comprehensive presentation which is quite reassuring for the citizens of Europe. I welcome the MEPs. We have been joined on and off by Matt Carthy, Marian Harkin, Brian Hayes and Seán Kelly. I understand that Brian Hayes wishes to make a contribution at this stage.

Mr. Brian Hayes MEP:

Thank you very much, Chairman. You can see us, but we cannot see you. It is a great privilege to engage in this discussion and I thank the Chairman for allowing this to happen. I thank Mr. Cardiff for his presentation. He regularly appears before the European Parliament's budgetary control committee of which I am a substitute member along with another Irish MEP. We appreciate all the information he has provided. I have some questions arising from it. As Mr. Cardiff rightly said at the end of his presentation, we are now in the status of being a net contributor, even though it is hard to calculate whether one is a net contributor or a net recipient. However, we are very much moving in the direction of contributing more to the EU budget than we are taking from it. However, since Ireland joined the EU, in nominal terms we have obtained something like €44 billion or €45 billion from various budgets over that period.

My question relates to the upcoming decision on the negotiation by the United Kingdom in this area as it makes a large contribution to the budget. Does the European Court of Auditors have a view on how it will handle this issue? What will be the legal position in terms of new commitments in the budget when the British inform the other 27 member states that Article 50 has been triggered? Is it the case that the decision will lapse? Will the court continue with its perusal of EU decisions, including funding decisions that involve the UK? Where will those commitments stand once Article 50 has been invoked?

If the existing multi-annual financial framework, MFF, which is just shy of €1 trillion, remains in place for the next number of years, it may well impact on the amount of money that Ireland must contribute over and above our current commitments. Is the European Court of Auditors considering this issue?

Mr. Cardiff spoke about the useful special reports issued by the European Court of Auditors. I understand approximately 30 such reports were published last year and roughly the same number have been published this year. What are the court's plans in this area for this year and next year? I am hearing in Brussels that the number of special reports will increase next year. Will Mr. Cardiff clarify the position?

In producing special reports, the European Court of Auditors assesses a group of member states rather than all 28 of them. How does the court determine what group of member states is examined to ensure a proper assessment is done? How does it select the four or five member states in the group? This is an important issue.

It is important to note that the error rate in respect of the court's work declined in 2015. This is the most important ingredient in identifying how exactly we spend our limited funds across the 28 member states of the European Union. I welcome Mr. Cardiff's presentation and thank him for the work he does with the other members of the European Court of Auditors.

Seán Haughey (Dublin Bay North, Fianna Fail)
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We will take questions from several contributors in one round. I will switch from Brussels to Dublin and back to Brussels again. I call Deputy Bernard Durkan followed by Ms Marian Harkin, MEP.

Bernard Durkan (Kildare North, Fine Gael)
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I welcome Mr. Cardiff and our colleagues in Brussels. Mr. Cardiff noted that the level of error appears to be reducing, which is a good and positive sign. Are certain member states especially prone to shortcomings in their budgetary strategy? If so, has the European Court of Auditors identified them and has it identified any persistent issues? To what extent has the court detected fraud in the European Union and what action has been taken in this regard? To what extent has it identified outstanding customs debts from countries from outside the European Union?

With regard to audits on programme countries such as Ireland, to what extent has the European Court of Auditors carried out audits in so far as the programme countries' dealings with the European Union have been monitored? Has it noticed any particular frailties in this area? Mr. Cardiff referred to the programme countries, namely, Portugal, Greece, Ireland and Spain.

Ms Marian Harkin, MEP:

As with Mr. Hayes, I am delighted to participate in this inaugural meeting using the video-conferencing facility. I will not comment on the fact that members of the joint committee can see us, whereas we cannot see them.

Mr. Hayes referred to some of the special reports the court does. It has done special reports on the globalisation fund and it is in the process of doing a report on the youth guarantee. These are very useful reports for Members of the European Parliament because they allow us to see how European money is spent, what is the added value and so forth. As a result, we have a good basis on which to tweak the relevant legislation, where necessary. I thank the European Court of Auditors for that.

I had to go through the European Court of Auditors annual report because I was writing opinions on it for my committee. The report states that member states had sufficient information available to them to prevent and correct errors before claiming reimbursement. If that information had been used, the estimated errors could have been reduced by approximately 2.4%. Furthermore, the error at member state level is of the order of 0.6%. If both of these matters had been dealt with, we could get below the 2% error level we speak about. I would like to hear Mr. Cardiff's views on that.

It is important to note the error level is, by and large, reducing every year. While there may be slight blips, the trend is definitely downwards. That is positive as it means that all involved, including member states and the Commission, are working to reduce errors.

Under competitiveness and growth, one of the reasons given for errors in the annual report is that beneficiaries sometimes misinterpret the complex eligibility rules or calculate costs incorrectly. I propose to ask about the misinterpretation of the complex eligibility rules because all Members of the European Parliament and Deputies regularly meet groups which access European funding and the first point they raise with us is the complexity of these rules. What is Mr. Cardiff's view on the Commission's proposals for lump sums? Would that idea help in this instance. I will leave it at that.

I thank the joint committee again. It is great to be part of this meeting. I am not sure if Cáit Hayes came up with the idea but it is great. When the joint committee's agenda includes a topic in which MEPs are interested or have some expertise, this approach gives us an opportunity to make an input to its deliberations.

Mr. Kevin Cardiff:

On Brexit, the European Court of Auditors is not the first in line for information on the plans for the future. While we will have a number of roles, we do not yet have much information. An audit is a verification of something that has happened or even a negotiation. However, since these things have not yet happened, we have not yet acted.

We can imagine two or three different roles the Court of Auditors may have to play. First, when legislation is being produced, we may be asked to comment on it, which would allow us to bring our understanding of the EU budget into play. The second role is that when negotiations are completed and moneys have to change hands, I am sure we will audit the transactions and calculations involved and the way in which the process operates. We hope we will continue to audit all EU transactions where they remain EU moneys. Even post-Brexit, we will have a role if there are EU moneys at stake or EU moneys are being spent. If eligible criteria that were subject to a timeframe, in other words, cases where moneys were paid in year one but one cannot see whether they were properly utilised until year two or three for whatever reason, we would expect to be still involved at that stage, unless some agreement is made to the contrary.

We have done audits in recent years, in Turkey, in Afghanistan and in all sorts of places where EU funding is spent. For us, it is not a question of whether a country is in the EU. It is a question of whether the EU funding is being spent that applies. Naturally, within the EU constitutes most, but not necessarily all. There is no particular reason we should cease auditing EU moneys spent in the UK until those programmes have expired in terms of eligibility criteria, etc. If, for example, EU money is spent in 2019, and Brexit was to be in 2020, we would expect to be auditing UK transactions in 2020, barring some global agreement to the contrary.

We are not yet there on Brexit. Nobody is. No one has told us - no one has told anybody - what are the negotiating positions. In fact, in formal terms, there has not yet even been a reference under Article 50. We are not in a position to say precisely what we will do but we expect to be involved in the audit of the financial transactions involved and we hope or expect to be asked to give opinions on key financial aspects of any legislation that is involved. I was asked the legal position post-Article 50 and whether we will continue to audit. I have just answered that. We should, unless there is some global arrangement that says this is no longer regarded as EU money in return for something else happening.

On the special reports, I was asked how do we assess a group of member states to be looked at. For the annual report, we use a random sampling approach. It has to be purely representative of a particular type of spending on that basis. For the special reports, we make assessments on a judgment basis. Usually, for a special report, what we look at is, for example, which countries use a particular programme most. There is not much point in looking at doing an aquaculture audit in Germany, for example, where there is not much aquaculture. In Romania, in fact, there is a lot because of the way rivers are used for carp farms. In some cases we go where the funding is spent most but then we adjust that. We might go to a country that has particularly good systems for control so that we can see what the messages from those good systems are and then see how those systems might have helped in a country with what we expect might be poorer controls and sometimes we are surprised. Sometimes the countries we expect to have the better controls are not exactly the ones that we have picked out.

For each audit, we might typically visit six or eight countries at the top. In effect, that means instead of doing one audit we are doing six or eight audits and it becomes a complex product. As for why we do not do every country, the committee can imagine that with 28 countries we have to cover 23 or 24 different languages. When our auditors arrive on the spot, they do not only have to speak in some common language, for example, they do not only have to speak to officials in English who speak English. They have to be able to read the national legislation in the national official languages. They have to be able to respond in those official languages. It is just too much to cover every country and we try to get a grouping of countries that will represent the best chance of finding the lessons that we feel are most likely to be needed in that particular audit.

On Deputy Durkan's questions on error reductions etc., it is good that it is reducing. As for whether there are particular countries that are prone to shortcomings, for our annual report, because we are sampling across the EU, we do not get a sufficiently large random sample for each member state. For Ireland, there are only eight transactions, and as I said, one can be happy that there are no errors in Ireland but one cannot say it is representative because eight transactions out of all the Irish transactions does not give one a sufficient basis for saying so, whereas 1,200 transactions for the whole of the EU gives one reasonable grounds for saying that one has a representative sample of EU transactions. However, the Commission has to make a different set of distinctions because it has to decide to whom to continue making payments and from time to time the Commission blocks payments for a period, makes estimates of errors, etc. For example, one or two countries in the eastern side of the EU had payments blocked for quite a long period of months. I do not have them to hand but if members wish, we could get for the committee a list of the Commission's assessment of who to block at different times and its assessment of where it should take money back.

One point, to be clear, though, is there is not a single member state where we would generally find that there are no errors. There are one or two very small member states which do not feature much in our samples because they are so small, but everybody that we visit is prone to error. That applies as much to the highly sophisticated very highly developed economies as to those which are more rural. In the past we have found, for example, in agriculture, systems problems in many member states, including the most developed, including in Ireland and in the UK. It is not the case that there is some significant east-west divide with all the errors happening on one side of the economies and not on the other.

In terms of the extent of frauds, we report frauds to OLAF where we are fairly clear that there is a fraudulent activity. From the annual process, we reported 12 this year. We also see potential frauds when we are conducting special reports and other activities and in a typical year, we might send 20 or so to OLAF. It does not suggest that most of the places we audit are engaged in large and obvious frauds. Obviously, where there is a small error, one has to wonder if the error was a beneficiary who was just trying it on a bit and trying to push the envelop a little bit beyond where it should, in other words, a small fraud, or whether this was just an error. Most of the time, we think it is just errors. In terms of significant frauds that need to be reported to the fraud institution, it is 20 or so a year in our estimation. It is not large in numbers. The problem is that, of course, a single fraud could involve a large amount of money, and, even more importantly, that where one has even a small amount of fraud or corruption, it tends to undermine general faith in the process and it is really important that those be squeezed out. In the court, we are looking at how we can address those even more than we do at present and whether there are particular characteristics of systems that are fraud or error-prone so that we can look at the systems and reduce the level of fraud by reducing the level of systemic weakness and that will be a feature of our work in the next year or so.

In terms of audits on programme countries, our audits were of the EU's interaction. We were auditing the EU actions in those countries, not the countries themselves. The Commission would make an assessment of the country. We were looking at its process rather than at the particular country assessment. We did not assess Portugal, for example, for its progress. We assessed the Commission's activities in Portugal. On this particular audit, I was involved in the negotiations on the programme at the other side and I will not comment any further on that particular audit. I was not even the slightest bit involved in the carrying out of that audit. We have fairly strong expectations in the court about avoiding conflict of interest and if the Deputy does not mind, I will not get into the detail. We can arrange for someone to do so, with him or with the committee, if that is okay. It is a matter of propriety.

On the questions of Ms Harkin MEP about whether member states have sufficient information to reduce the level of error, in quite a high number of cases where we find an error we also find that the member state had more information than was used in terms of reducing errors.

It is at least theoretically the case that if member states could use all the information they had, the error rate would sink close to 2%, which would be the material level. There is, of course, a question of the cost-benefit. In some cases, the cost of reducing all errors might be more than the errors cost. However, it is one of the reasons we do not say we are happy with the reduced level of error. It is because we see that there is scope for activity within the existing system without enormous amounts of new controls to reduce the error rate to an even greater extent. It is a matter for the European Parliament and the Council, however, to decide whether they are happy with the error rate. We do not, in the end, give the discharge to the Commission for its activities. That is done by the Parliament and the Council.

It is good to see the error rate starting to reduce again. There had been a couple of years where it was on a slightly upward trend whereas it is now on a slightly downward trend. It is not the case that the European Union budget is organised and run by a bunch of people who do not really care about waste. It is exactly the opposite. The systems are full of intensive controls which are quite costly and which have improved considerably over the years. In the 1990s and in the early 2000s, much of what concerned the European Court of Auditors related to the European Union's accounts and whether they were properly managed and the moneys properly accounted for. We no longer have those concerns because all of those systems have improved. We now make regular recommendations which sometimes relate to member state systems as well as the Commission but it is a system which no longer has the very broad weaknesses we used to find in the 1990s and early 2000s. In other words, it is an improved system albeit at some cost in terms of the cost of systems.

I might have missed a question or two by mistake, but I have tried to address everything. On the number of special reports, there were approximately 30 in 2016 and we expect approximately 30 in 2017. It is a considerable increase in terms of my own experience. When I arrived three years ago, we were doing approximately 15 to 20 per year. We are trying to be more productive. Occasionally the people in the Parliament tell us we are producing too many reports, but Parliament is also reacting by changing the systems for dealing with our reports which we very much appreciate. I ask Mr. Ross to deal with two points I have passed over.

Mr. Gerhard Ross:

There was a question concerning the misinterpretation of complex rules. It is just that in our annual reports for several years now we have said, for example in relation to social funds, that the use of a simplified cost option brings down the error rate and that when simplified cost options like lump sums and other things are used, this reduces the error. This possibility exists also in agriculture, but while there is a certain reluctance to use it, we also see there that if is used properly it can bring down error. As such, that is an option to simplify things and reduce the error.

Ms Mairead McGuinness:

It is good to be able to join the committee this evening. My comments are more by way of observation than questioning as Mr. Cardiff has answered a lot of questions I had in reply to other speakers. There is an interesting comment under one of the slides on financial management and the second bullet point about the increasing use of financial instruments not directly funded by the EU budget nor audited by the court which poses higher risks for accountability and the co-ordination of EU policies and operations. Discuss please. It is interesting that the court has made that observation and I would like to hear a little bit more comment on it.

Mr. Kevin Cardiff:

In fact, we are so concerned about it that one of my colleagues organised a conference on it just a few days ago, which included people from the Commission, EIB and other areas. There were also some people from the budget committee, CONT. There is quite a difference of opinion between those of us on the accountability side, the auditors and parliamentarians, and those on the implementation side. If one thinks about it, the essence of a financial instrument of the type we use is that it is in some sort of partnership. The EU provides a guarantee so that someone else will provide funding for a project or we provide funds which are lent to a bank or financial institution which are then on lend to the final beneficiaries and so forth. In terms of a simple financial audit, we could just stop at the point where the moneys reach the bank concerned or at the point where the guarantee is given but that does not say much about the effectiveness of the programmes. We said it in our landscape review, which was a broad review of accountability in 2014, and we say it again in this year's annual report and in a lot of other public pronouncements. There are some risks. Financial instruments can be very powerful and they have some really important advantages, including that one gets greater leverage and more miles to the gallon in terms of the impact of one's euro. However, the risk is that it is difficult to account for these and to say how effective they are.

It is difficult to provide good accounting for them and for us sometimes to carry out performance audits. We have audit rights over the European Union budget but not in all cases over private institutions. We think the Parliament and Council as legislators and the Commission as implementer in chief ought to have a little more regard to the accountability systems that are being applied. In fairness to them, however, we are conscious that these are people who are trying to change the whole system of European support for the economies of Europe in a relatively short time. There is a great deal of work going on and people are trying very hard to make the euro more effective but perhaps not every point is being addressed and some of the accountability points may be among them.

Bernard Durkan (Kildare North, Fine Gael)
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It just occurred to me that there may be changes taking place in the physical structure of Europe, albeit we do not yet know, which will, in turn, impose broader responsibilities on the court where the number of countries outside the Union increases, especially larger countries. To what extent does Mr. Cardiff envisage any difficulties arising in the audit as it affects the administration of the Europe that remains? That is assuming a worst-case scenario.

I cannot resist the following question. It has been indicated to us that a large bonanza of funding is about to arrive on our shores from taxes which the European Union alleges should have been levied on multinational corporations. What provision does Mr. Cardiff see the court having to make in future for audits across the European Union in circumstances where it is alleged that some multinational corporations do not pay their full share of taxes either within the European Union or outside it? This country has been labelled as one of the erring bodies, which we strongly deny, of course. Has it occurred to anyone that these issues may present complications for the Court of Auditors in the future and, perhaps, in terms of the past also?

Mr. Kevin Cardiff:

I presume in terms of his first question, the Deputy is talking about the potential exit of Britain from Europe. People keeping saying that but in fact Britain cannot exit Europe but can only exit the EU and therefore the relationship between Britain and the EU will be essential to all of us. The question is so broad as to be almost unanswerable.

The implications of a Brexit are so broad as to be very difficult to answer, certainly in the short term. The audit implications are clear enough. We will have to work out how we audit any EU funds that remain in the UK after Brexit and will have to work out how to audit the financial impacts of a Brexit. There will be payments in different directions, a net payment or whatever. There has to be a calculation of amounts. We could potentially be involved in any of those things. We could also give opinions on the legislation. All those matters are in the future and it is not possible to plan an audit without a sense of what the transaction will look like.

Regarding a bonanza on taxes, there are three or four things happening. Most taxes are member state competences in principle and in practice. Corporation taxes are principally a member state competence, but there are co-ordination mechanisms, including what is called a code of conduct group at EU level. There is co-ordination at super-EU level, for example, the OECD base erosion and profit shifting, BEPS, initiative. That is not to say it is suggesting the base should be eroded and the profits shifted, but it is asking how to address the fact that those things happen.

We do not look at national level tax systems because they are outside our remit. To an extent we can look at national level VAT systems because the VAT system is not a purely national issue. We have done audits on the VAT system in the past and we have found flaws in the system that needed to be corrected. We need to remember that some EU income is based on VAT receipts, so that is also important.

The final item in the mix is the EU state aid rules. We are all aware of the Apple case. I have no more knowledge about that case than anybody else who reads the newspapers. In that case the Commission is not saying we have breached a particular directive or that this was EU money that was misused; it is saying there was a breach of European state aid rules. The easy answer is to tell the committee that it is a matter for the European Court of Justice rather than for the European Court of Auditors. However, there is a potential audit angle in the future.

In the past we have looked at the area of the Commission that deals with state aids. We have looked at its organisation and some of its activities especially around the financial crisis in 2007 and so forth, and came to some conclusions about its organisation. I cannot imagine that we, as an audit body, would reopen a particular legal case that the European Court of Justice is looking at. However, the part of the Commission that deals with state aids is within the audit remit, so we would occasionally look at its organisation and its product.

Seán Haughey (Dublin Bay North, Fianna Fail)
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We may return to that subject at a later stage. I again thank Mr. Cardiff for his presence this evening and for his comprehensive replies to the various questions posed. We also appreciate his offer to assist us on an ongoing basis with any queries we may have.