by Adrian Window, Head of Unit BUDG D3 – Financial Procedures and Control Systems 24 March 2009 Towards an interinstitutional agreement on the concept of Tolerable Risk of Error (TRE) in Community programmes COCOF 09/0013/00-EN

What TRE is about:  An illustration of a methodology.  An economic model (the Commission being the auditee).  A basis on which the Discharge Authority could judge budget execution.  A sound investment recognising the link between error and control costs.

The Court is at the origin  2004 – ECA opinion « Single Audit Concept »  2006 – Action Plan towards an Integrated Internal Control Framework (IICF) – action 4  Current materiality level set at 2% in line with other SAIs. However: risk differs significantly between EU activities the cost of achieving the 2% threshold may be prohibitive in some cases  COM(2009) 866 relaunched debate (Parliament & Council) on tolerable risk

A straightforward approach  TRE explores the link between: the amounts spent on control the related level of error remaining undetected  The model aims to give an indication of the “economic break-even point” (optimum point)  Focus on Cohesion Policy and Rural Development ('Red Lights')

Steps in the approach  Starting point: error rate established by ECA.  Step 1 « Improve current control system »: review of the findings and extrapolation of the remaining errors which cannot be tackled (Point A, y coordinate).  Step 2 « Current cost of the control system in 2006 » (Point A, x coordinate).  Step 3 « Further strengthening of the control systems »: cost of control for all open projects (point B).  Result: define the 'optimum point' and determine the corresponding rate of residual risk.

Diagram Rate of undetected errors (Y) Cost of control (X) Current rate Current cost of control 0% Cost of an annual control for all open projects Cost of control at tolerable risk point Rate at tolerable risk point (A) (B) Tolerable Risk Point 45°135° 45°

The approach in practice Model takes account of scope to further improve current levels of compliance and the quality of controls at “no cost”. Any further reduction in the error rate could only be achieved through increased intensity of first level “on-the-spot” management controls. Illustrates how more control could be expected to lead to lower levels of undetected error and the cost of this.

Illustration: ERDF

Key observations ERDF: Achieving a 2% error rate could require an eightfold increase in control expenditure The “economic” tolerable risk level could lie around 4%. This could imply a fivefold increase in the current control outlay. First indication of a tolerable risk level – “may lie around 5%”.

A political-level decision: Commission is the auditee and cannot set TRE. Setting tolerable risk levels would be a political-level decision taking account of: Inherent risks Reputational risk Political imperative Taking account of: 1.Legislative complexity 2.Policy objectives 3.Control costs

Simplification We should be clear on what simplification could achieve:  Eligibility rules targeted to achieve EU policy objectives.  Current complexity at least in part due to need to reach agreement in LA.  Benefits beyond spending (e.g. rural development).  Delivery mode in some areas causes higher inherent risks.  It will take time for reduction in errors to become visible.  Ultimate simplification: “no rules, no costs, no errors!”.

Closing remarks: TRE is about implementing cost-effective control systems, not about doing less or more control TRE could be set per policy area and once set could be reviewed in the light of major changes to the control environment Tolerable risk level would be likely to lie between the current (adjusted) error rate and the theoretical tolerable risk point

Possible steps forward  Interinstitutional debate between Council, Parliament and Court of Auditors.  Commission has proposed to examine other areas if there is sufficient support from Council and Parliament:  Research, energy, transport  External aid, development, enlargement  Administrative expenditure  Revised data for cohesion policy, based on actual implementation of the new legal framework for (at the earliest in 2012).

Thank you