EUROPEAN COMMISSIONEUROSTAT

Directorate C: National Accounts, Prices and Key IndicatorsUnit C-3 :Statistics for Administrative Purposes

Eurostat/C3/GNIC/333 - ENOrig: EN

32ND MEETING OF THE GNI COMMITTEE21-22 APRIL 2016

LUXEMBOURG, BECH BUILDINGROOM QUETELET

RISK ASSESSMENT MODEL FOR VERIFICATION OF GNI FOR OWN RESOURCE PURPOSES

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Point 12 on the agenda

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Risk assessment model for verification of GNI for own resource purposes

Context of risk assessment

When it comes to the verification of Gross National Income for own resource purposes (GNI OR) an element of risk assessment of Member States' national accounts compilation processes has always been inherent to the verification work. However, in previous verification cycles this risk assessment has been accomplished on an informal basis by Eurostat's GNI team based on information gathered from the completion of the GNI Inventory Assessment Questionnaire (GIAQ), information visits, annual transmission of GNI Questionnaires and Quality Reports and the expert opinion of the GNI country officers. This informal risk assessment approach allowed the prioritisation of work within the GNI team and contributed to the selection of items for direct verification to be performed during information visits.

As Eurostat is preparing to embark on a new verification cycle for GNI OR it is the natural point to review the lessons learnt from the previous verification cycle and to update the risk assessment procedure. One of the outcomes of this review is to provide clear documentation of the improved risk assessment. A stimulus for this, along with enhanced documentation of other procedures relevant for GNI verification, is the need for greater transparency of statistical procedures for the main stakeholders. In the context of GNI OR, the main stakeholders are the Member States and DG Budget.

A further stimulus was provided by the European Court of Auditors who, in a 2013 special audit "Getting the Gross National Income (GNI) data right: a more structured and better focused approach would improve the effectiveness of the Commission's verification1", recommended that "The Commission should carry out a structured and formalised analysis that takes into consideration costs and benefits allowing it to plan and prioritise its verification on specific areas or compilation (sub-) processes. Such an analysis should consider the risks relating to the Member States' compilation of their National Accounts and the relative size of the GNI components in the total economy. This risk assessment should be based on all qualitative and quantitative information available in all departments of Eurostat and concentrate on the compilation procedures described in GNI inventories and recent GNI quality reports of Member States."

In response to this recommendation the Commission agreed to further develop its strategy for GNI verification to incorporate a more structured and formalised programme that would include a risk analysis and take full account of cost-effectiveness. The Commission agreed to consider which elements of the risk assessment model used by the Court could be beneficial to this process.

When meeting this recommendation the Commission (Eurostat) kept in mind that the compilation of GNI is a highly complex process that does not lend itself to a purely

1 European Court of Auditors: Special Report no.11, 2013.

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quantitative, mechanistic assessment. Therefore it was deemed appropriate to include elements of qualitative judgment in the GNI risk assessment model.

Furthermore, in Commission's opinion, the Court's assumption that the larger sectors of the economy pose the larger risks to GNI calculation should be treated cautiously. As a matter of fact it is the public sector and the large businesses which are better covered by the accounting mechanisms and statistical surveys. It is the Commission's opinion that the main areas of risk inherent to the calculation of GNI are those areas which are difficult to measure. These areas cover the use of complex algorithms, the conceptual transition from business accounting to national accounting definitions, the use of indirect measures to capture items which are not included in administrative data or surveys, the asset/non-asset boundary, the market/non-market boundary, the need for imputed transactions and units, the need for various adjustments, financial transactions and units developed to minimise domestic tax exposure, decomposition of multinationals into the areas of relevance for a given economy etc.

The following sections set out the Commissions procedure for risk assessment to be used in the upcoming cycle of GNI verification for own resource purposes.

Definition of risk in the GNI OR context

In the context of the GNI OR, and in particular taking into account the quality dimensions of GNI data indicated in the GNI Regulation 1287/2003, the risk should be understood as any event or issue that could occur and adversely impact the reliability, comparability and exhaustiveness of national accounts data which are provided for the EU GNI OR purposes.

The risk owner in this context - i.e. the entity that has been given the authority to manage this particular risk and is accountable for that - is the GNI team within Eurostat's unit C3 (Statistics for administrative purposes). It is not possible or cost-effective for the GNI team to collect evidence in order to have absolute (100 %) assurance or confidence of detecting all material deficiencies regarding the quality of GNI data. Instead, the team tries to ensure that its conclusions and/or opinions have reasonable assurance, which results from the verification work.

The above-defined verification risk can be considered by looking at its following three components:

- inherent risk (relating to the nature of the process; in the case of GNI OR it covers the issues of methodological soundness, application of the ESA2010, use of adequate statistical sources and methods, correctness of compilation etc.);

- control risk (relating to the internal control mechanisms in the entities compiling GNI data in the Member States);

- detection risk (a risk that Eurostat's verification procedures may fail to detect existence of a material error in the GNI OR data).

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The verification work undertaken by Eurostat determines the level of the detection risk. In order to attain the desired level of assurance the existing inherent and control risks should be counterbalanced by adjusting the acceptable level of detection risk. Thus the higher is the assessed level of inherent and/or control risk, the lower the detection risk should be. This requires more substantial verification work (e.g. more comprehensive checks of the GNI Inventory, more information visits, direct verifications etc.). Similarly, the lower the combined inherent and control risk is assessed to be, the higher the detection risk could be (fewer missions, direct verifications, etc.).

Consequently, Eurostat will differentiate the use of the verification tools it has at its disposal to adjust the level of detection risk in order to balance the total risk at a low level (and attain the desired level of assurance) for a given Member State / compilation area.

The verification tools at Eurostat's disposal include:

- GIAQs,

- GNI information visits;

- direct verifications; and

- cross-country checks.

Aim of the risk assessment

Given the theoretical considerations outlined above the aim of the risk assessment exercise is to assess the risks associated with the compilation of GNI OR in Member States in order to:

a) structure the GNI verification process in terms of the use of the available verification tools (GIAQ, GNI information visits, direct verifications) in the individual Member States;

b) define the list of high-risk transversal issues to be verified in all Member States (through cross-country checks); and

c) identify those (country-specific and transversal) areas of GNI compilation in individual Member States that should be considered when choosing items for direct verification.

The risk assessment approach

The risk assessment will be performed in two parts. The first part will determine points a) and b) above. The second part will determine point c).

When carrying out the risk assessment the GNI team will take into account the relevant information collected and assessed in the previous verification cycle(s), as well as

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information on the major revisions available from the recent Quality Reports. In addition, the risk assessment will make use of qualitative and quantitative information derived from the analysis of the ESA 2010 GNI Inventories and Process Tables as it becomes available. Furthermore, the outcome of the consultations with the respective units within Eurostat dealing with the sources for national accounts will feed into the assessment. Results of voluntary self-assessments of risky compilation areas in individual Member States will also be considered for the second part of the exercise.

The risk assessment must remain dynamic in order to be a true reflection of current risks; therefore, it will be subject to a rolling review. For each Member State the scores for individual criteria, where appropriate, will be updated on a continuous basis as new information becomes available (e.g. after the completion of GIAQs, after the missions on the country's Inventory and direct verifications, after new major revisions of GNI). The review may also lead to adding new or modification of the initial set of criteria to take on board new emerging risks.

Taking stock of the updated results for part 1 of the risk assessment and modifying the consequences for the outstanding verification work accordingly will occur once per year, before the spring meeting of the GNI Committee. For the second part of the risk assessment taking stock of the updated results will be made before the planned direct verification visits so that the most up to date pool of areas from which to choose items for direct verification is used.

Further details of the risk assessment approach are given below, for part one and part two of the exercise.

First part of the risk assessment

Outline

First part of the risk assessment will be performed with the view to meet the aims a) and b) mentioned above.

It will be accomplished by mid-April 2016 and its result will be presented at the GNI Committee meeting of April 2016.

It will be based on:

- information collected in the previous cycle(s) – 10 assessment criteria agreed;

- information easily retrievable from the ESA2010 Inventories and Process Tables – 9 criteria agreed;

- input from the first step of consultations with the units dealing with the sources for national accounts in Eurostat – 1 relevant criterion agreed.

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For outcome a), i.e. structuring of the GNI verification process, the Member States will be allocated to either high, medium or low risk groups, based on a wide range of criteria. This general grouping will have consequences 1-3 as described below.

For consequence 4 below (determining the minimum number of direct verifications per country) a subset of criteria - relating mainly to direct verifications - will be used to arrive at the DV's-tailored risk levels.

Qualitative reflection on the risks behind the individual "red cells" for each Member State is foreseen for their possible follow up in the verification process (consequence 5 below).

Subsection "Technicalities of the model" gives further detail on how this assessment will be performed.

For outcome b), high risk will be attributed by default to a pre-agreed list of transversal issues – see consequence 6 below. This list may be revised as the verification process progresses.

Expected results of the first part of the risk assessment (in terms of consequences for the subsequent verification work) are the following:

1. Decision on the order/prioritisation of the verification of individual countries;

2. Decision on the areas of GNI compilation for which no detailed control (neither through GIAQ or direct verification) is required for a particular country;

3. Decision on the minimum number of information visits per country (missions on reservations not to be considered at this stage);

4. Decision on the minimum number of direct verifications per country (direct verifications of reservations not to be considered at this stage);

5. Identification of high-risk structural/process-related aspects for individual Member States that might be followed up in the information visits; and

6. List of high-risk transversal issues to be verified in all Member States (including ESA transition items).

Technicalities of the model

The model assigns risk scores (high: 3, medium: 2, low: 1) to individual criteria.

Specific risk formulae are defined for the expected results 1-3 and 4 (that include different sets of criteria with different weights for individual criteria) to determine the general or DVs-tailored risk levels, whereas for the expected results 5 and 6 lists of issues are identified on the basis of the individual high risk scores for some of the criteria.

Eurostat retains the possibility to adjust the allocation of an individual Member State to a high/medium/low risk group by considering the issues behind the individual high risk cells for that Member State.

The following list of criteria is used in the first part of the risk assessment:

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Information relating to the previous cycle(s)

1. Number of full GNI Inventory control cycles already carried out.

2. Quality of cooperation in the verification of GNI Inventories.

3. Number of specific reservations placed in the previous cycle.

4. Complexity of the specific reservations placed in the previous cycle.

5. Size of revisions due to reservations in the previous cycle.

6. Quality of cooperation in the process of lifting reservations.

7. Number of outstanding specific and transversal reservations.

8. Application of "pragmatic solutions" in the process of lifting of specific reservations.

9. Quality of cooperation in carrying out direct verifications (in the verification of Inventories and for lifting reservations).

10. Conclusions from direct verifications carried out (in the verification of Inventories and for lifting reservations)

Information relating to the new cycle

11. Size of major revisions, other than due to reservations and transition to ESA2010, since the last version of the GNI Inventory.

12. Transversal issues to be verified in detail in all Member States.

Current list of issues: Exhaustiveness; balancing of GDP; dwelling services; FISIM; cross-check of statistical and administrative data sources; Balance of Payments (including issues related to globalisation/cross-border production e.g. merchanting, goods sent - or received from - abroad for processing, SPEs); Euro banknotes for the Euro zone Member States

13. ESA 2010 transition items (those with significant impact on GNI to be verified in detail in all Member States).

14. Quality of cooperation in the annual GNI Questionnaires / Quality Report exercise.

15. Completeness of the ESA 2010 Inventory and its consistency with the Process Tables (initial general check).

16. Adequacy of resources in the NSI.

17. Potential weaknesses in the supervisory and control systems that may lead to compilation errors (management, control, documentation etc.).

18. Indicated planned actions for improvements (including ESA 2010 derogations).

19. Share of adjustments and some extrapolations and models (benchmark extrapolations, commodity flow, other extrapolations and models + other sources) in GDP.

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Information from the units dealing with the sources for national accounts in Eurostat

20. Summarised results of the step 1 of the consultation with the units dealing with the sources for national accounts in Eurostat

The following areas which have a key impact on GDP/GNI have been identified: Balance of Payments; Non-financial National Accounts (Main aggregates and Sector accounts); Government Finance Statistics; International Trade in Goods Statistics; International Trade in Services Statistics; Foreign Direct Investment Statistics; Foreign Affiliates Statistics; Business Registers; Structural Business Statistics; Labour Force Survey; Household Budget Survey; and Agriculture Accounts.

Table 1 gives an overview of how these criteria are applied in the risk assessment for the expected results 1-3, 4, 5 and 6.

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Table 1

Application of individual criteria in the first part of the risk assessment Weights of individual criteria for the formulae of individual expected results

For each criterion the following weights are considered:2 for "very relevant"; 1 for "relevant"; 0.5 for "less relevant"; 0 (black field) for "non-relevant"

exp. res. 1

exp. res. 2

exp. res. 3

exp. res. 4

exp. res. 5

exp. res. 6

DVs tailored

risk levels

Identification of

high risk structural/process-related aspects

List of transversal issues

Information relating to the previous cycle(s)1 Number of full GNI Inventory control cycles already carried out 2 2 22 2 2 2 13 Number of specific reservations placed in the the previous cycle 1 1 14 2 2 25 2 2 26 2 2 2 17 Number of outstanding specific and transversal reservations 2 2 28 1 1 1 19 1 1 1 210 1 1 1 2 1

Information relating to the new cycle11 2 2 2 1 112 Transversal issues to be verified in detail in all Member States ** 113 114 1 1 115 2 2 2 2 116 0.5 0.5 0.5 117 0.5 0.5 0.5 118 Indicated planned actions for improvements (including ESA 2010 derogations)* 119 1 1 1 1

Information from the units dealing with the sources for national accounts in Eurostat20 Summarised results of the step 1 of the consultation with the units dealing with the sources for national accounts in Eurostat * 1 1 1 1

* qualitative reflection for the high risk cells needed for follow up** by default high risk in all MS (or Euro zone MS for Euro banknotes)

Criteria

Quality of cooperation in the annual GNI Questionaires / Quality Reports exercise Completeness of the ESA 2010 Inventory and its consistency with the Process Tables (initial general check) * Adequacy of resources in the NSI * Potential weaknesses in the supervisory and control systems that may lead to compilation errors (management, control, documentation etc.) *

Share of adjustments and some extrapolations and models in GDP *

Quality of cooperation in carrying out direct verifications (in the verification of Inventories and for lifting reservations)Conclusions from direct verifications carried out (in the verification of Inventories and for lifting reservations) *

Size of major revisions, other than due to reservations and transition to ESA2010, since the last version of the GNI Inventory *

ESA 2010 transition items (those with significant impact on GNI to be verified in detail in all Member States) **

General risk levels ("low/medium/high risk

countries")

Quality of cooperation in the verification of GNI Inventories

Complexity of the specific reservations placed in the the previous cycle Size of revisions due to reservations in the previous cycleQuality of cooperation in the process of lifting reservations

Application of "pragmatic solutions" in the process of lifting of specific reservations *

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As it can be seen from the table, the general risk formula takes into account all criteria but 12 and 13 (relating to transversal issues regarded by default as being of high risk in all countries) and 18 (that concerns possible future improvements). The weight of individual criteria in the general risk formula is differentiated, as it was felt that some of them (e.g. number of full GNI Inventory control cycles already carried out; quality of cooperation in the verification of GNI Inventories or in the process of lifting reservations; or size of major revisions - other than due to reservations and transition to ESA2010 - since the last version of the GNI Inventory) are more relevant than others (e.g. control risks relating to adequacy of resources in the NSI or to the functioning of supervisory and control systems). The general risk formula adds weighted scores for all criteria but 12, 13 and 18.

Some criteria (including all those relating to direct verifications) are of particular importance for the DV's-tailored risk formula, while most others are not considered relevant enough for that specific expected result of the risk assessment. The DVs-tailored risk formula add weighted scores for criteria 2, 6, 9, 10 and 15.

Similarly, only some criteria are perceived as relevant for the expected result 5; what particularly matters here is the qualitative reflection on the problems leading to these criteria being assessed with high risk in individual Member States. An example here can be: high risk for criterion 11 (big size of major revisions since the last Inventory) - the identified problem: switch from surveys to administrative data for a given compilation area – follow up in the verification: potential relevance for other compilation areas in the given Member State (to be discussed in the GNI information visits) and/or potential relevance for other Member States (to be added to the list of transversal issues and verified with cross-country checks). The criteria for which the qualitative reflection for the high risk cells is needed for the follow up are: 8, 10, 11, 15-20.

The above criteria, relating to all three types of risk (inherent, control and detection risks) will be assessed by using both qualitative and quantitative information and will entail both objective and subjective assessment. They cover the following particular risks related to the compilation and verification of GNI OR:

- the fact that some Member States have had their GNI (or GNP) controlled previously, often many times, means they pose less risk of errors than those that have not been controlled before (Croatia) or that have undergone only one cycle of GNI verification;

- some difficulties hampering the cooperation during the last round of verification of GNI Inventories, in performing direct verifications or in lifting reservations (such as inadequate timeliness, completeness, relevance of the provided responses, repeating errors, inconsistencies, needs for additional revisions etc.) in individual Member States indicate higher risk; the same applies to the quality of cooperation in the annual GNI Questionnaires / Quality Report for the recent submissions;

- high number of GNI reservations placed in the last round of GNI verification, their complexity, sizeable resulting revisions as well as existence of any outstanding reservations is an indication of a higher verification risk for individual Member States; the outstanding reservations will be a high priority in 2016;

- during the course of lifting the reservations in the previous verification round, for some cases it was felt that it would not be possible to find a fully satisfactory solution; this could be, for example, where data sources were deemed not suitable, but as the periods dealt with were historical, the sources could not be invented or replicated at a

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reasonable cost; in these cases Eurostat applied the cost-benefit principle, as defined in the GNI Regulation, and adopted a pragmatic approach whereby the best possible estimates under the circumstances were made so the reservation could be lifted, and the Member State concerned was informed that the issue had been flagged; these cases may be seen as indication of a higher risk inherent to GNI compilation in a given Member State; they can be readdressed during the upcoming cycle;

- some conclusions from direct verifications carried out might indicate higher general level of risk in the concerned Member State, but they are of particular importance for the DV's-tailored risk levels (and consequently for the decision on the minimum number of direct verifications to be performed per country); the assessment of the relevant criterion will use both objective information on the revisions implemented as a result of direct verification and a subjective judgment of the possible relevance of the DV findings for other compilation areas;

- some criteria relating to the new cycle cover the aspects of compliance with ESA 2010; in particular the conceptual differences between ESA 95 and ESA 2010, the so-called "transition items", are seen as a potential risk as they have not yet been controlled in detail; these items – and in particular those among them that have a significant impact on GNI, e.g. capitalisation of R&D and weapons systems in government - will be a high priority for all Member States;

- nearly all Member States were granted some form of temporary derogation from the ESA 2010 transmission programme; whilst these do not necessarily affect the total of GNI itself, their existence indicates some form of difficulties in complying with ESA 2010; the derogations have been examined for their risks to GNI and some of them might be followed up in the GNI OR verification process alongside the "planned actions for improvements" as indicated by the Member States in Section 2.4 of the GNI Inventories; however, neither derogations nor "planned actions for improvements" will impact the general risk level of individual Member States in the risk assessment process (see Table 1);

- benchmark revisions, not directly related to the conceptual changes between ESA 95 and ESA 2010, were also introduced at the time of the implementation of the ESA 2010 in most Member States (2014); where these cases were for the open years, they have not yet been fully investigated; the size and scope of these revisions will be taken into account when assessing risk levels and identifying issues for follow up;

- some areas of national accounts call for a detailed comparative analysis of the solutions adopted by Member States; in some cases they may also require agreement in the GNI Committee on conceptual aspects; these areas – as listed under the criterion 12 above - are considered as being of higher risk and will by default be assigned a high risk score for all Member States;

- some risks to the reliability of GNI estimates arise out of structural problems in the NSIs and concern, for example, the adequacy of resources in the national accounts departments, the level of experience of the core national accounts staff or weaknesses in the supervisory and control systems employed; while it is recognised that the quality of GNI estimates relies first and foremost on the quality of the statistical sources and methods used, the abovementioned structural issues (and related control risks) will be taken into account for the assessment of the general risk level – albeit

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with a relatively lower weight – and for their possible follow up in the GNI information visits;

- some risks inherent to the compilation of GNI could be identified at an early stage of the verification process based on an initial analysis of the completeness of the GNI Inventories and Process Tables and their consistency; this will be assessed directly after the elapsing of the deadline for the transmission of GNI Inventories and Process Tables, by using an internal check-list;

- some risks, relating to the general national accounts framework for compilation of GNI in the Member States, can possibly be quantified through a basic analysis of the Process Tables, e.g. by looking at the shares of adjustments and some extrapolations and models in GDP; one of the proposed assessment criteria is designed to cover this aspect through such a preliminary analysis;

- finally, as national accounts take as its basic source a wide range of official statistics, deficiencies in those sources may adversely impact the reliability, comparability and exhaustiveness of GNI OR estimates if no remedial actions are taken in national accounts to rectify them; this poses a risk that needs to be taken into account in the risk assessment and, in cases where this risk is high, should be followed up in the GNI OR verification process2.

Consequences for the subsequent verification work

Table 2, given below, presents the practical consequences for the subsequent verification of the GNI OR estimates in the Member States falling into the respective high, medium and low risk groups.

Table 2

Practical consequences of the first part of risk assessment for the GNI verification process

Expected result Which risk formula?

Tools to be applied

Practical consequence

1 Decision on the order/prioritisation of verification of individual countries

General risk formula

GIAQ, missions, DVs

For each desk officer the consecutive stages of the verification (GIAQ, missions, DVs) to be performed first in the higher risk countries.

2 Decision on the areas of GNI compilation for which no detailed control is required for a particular country

General risk formula

GIAQ The following parts of Inventory will not be subject to detailed checks with GIAQ (and would not qualify for DV) for the low and medium risk countries:- approaches to GDP other than the major approach(es) (chapters 3 and/or 4 and/or 5 of the Inventory).In addition, for the low risk countries

2 Further details on how the domain specific expertise in Eurostat is utilised for this purpose are provided in the document GNIC/332 "Verifying GNI for own resource purposes – outline of the control approach".

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only:- within the major approach(es) the NACE sections / COICOP / AN items / sectors (as appropriate) with a small share in GVA/GDP and a small share of adjustments (based on the PTs).

3 Decision on the minimum number of information visits per country

General risk formula

Missions For the low risk countries: minimum 1 visit;For the medium and high risk countries: minimum 2 visits.

4 Decision on the minimum number of direct verifications per country.

DVs tailored risk formula

DVs For the low risk countries: minimum 1 DVs;For the medium risk countries: minimum 3 DVs;For the high risk countries: minimum 4 DVs.

5 Identification of high-risk structural/process-related aspects for individual Member States that might be followed up in the information visits.

Issues behind the individual high risk cells for selected criteria

Missions The identified high-risk structural/process-related issues will be followed up in the GNI information visits in the individual Member States.They will impact the second part of the risk assessment through assigning high risk to the related compilation areas.

6 List of high-risk transversal issues to be verified in all Member States (including ESA transition items).

Pre-defined list of transversal issues

Cross-country checks

The identified transversal issues will be verified across all Member States by designated desk officer(s).The individual transversal issues will impact the second part of the risk assessment for some countries.

With regard to consequence 2 in the table, the relevant shares in GVA/GDP, referred to above, will be defined for the low risk countries. An internal list of areas of GNI compilation for which no detailed control is required per Member State will be kept in Eurostat. This is not meant as a list of non-material issues. Eurostat does not foresee communicating to Member States which areas will not be controlled in detail in their case.

As regards consequence 6, list of transversal issues, it is important to stress that further items of this nature may be identified during the control cycle, as the result of the rolling review of the risk assessment.

Second part of the risk assessment

Outline

Second part of the risk assessment will be performed with the view to meet the aim c) mentioned above, i.e. to identify those (country-specific and transversal) areas of GNI

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compilation in individual Member States that should be considered when choosing items for direct verification. Thus the expected outcomes of this part of the exercise are:

7. A pool of country-specific areas of GNI compilation that are prone to high risk from which to choose areas to be checked by means of direct verification in the individual Member States;

8. A short list of transversal issues in individual Member States that have a significant impact on GNI and which could be considered for direct verification.

The second part of the risk assessment will be performed upon the completion of the analysis of GNI Inventories with GIAQ for a given Member State.

It will be based on:

- information provided in the ESA 2010 GNI Inventories and Process Tables (as analysed with GIAQ);

- information on any new major revisions provided in the Quality Reports;

- input from the second step of consultations with the units dealing with the sources for national accounts in Eurostat;

- voluntary self-assessment by Member States.

Some results of the first part of risk assessment (in particular in terms of its consequences 2, 4, 5 and 6) will be taken into account for the second part. In practical terms this means that:

- the areas of GNI compilation for which no detailed control is required for a particular country, as identified in the first part of the risk assessment (expected result 2), will not be considered for direct verification;

- the minimum number of the areas eventually chosen for direct verification per Member State is determined in the first part of risk assessment (expected result 4); the size of the pool of country-specific areas to be identified under the outcome 7 will be bigger for the countries that will undergo more direct verifications and smaller for those that will undergo fewer direct verifications;

- the high-risk structural/process-related issues identified for each Member State under the expected result 5 of the first part of the risk assessment might eventually be followed up by means of direct verification - they will impact the second part of the risk assessment through a relevant criterion by assigning high risk to the related compilation areas;

- the transversal issues that can be considered for direct verification in individual Member States (outcome 8) will be confined to those identified under the expected result 6 of the first part of the risk assessment.

Technicalities of the model

Since the transversal issues identified in the first part of the risk assessment are by default assigned a high risk, and due to some technical solutions adopted, the assessment procedure

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for the outcomes 7 and 8 will differ. Below it is described first for the country-specific areas of GNI compilation.

The individual GNI compilation areas are defined for the model by using the rows of the Process Tables. Thus for the production approach they will be NACE sections, taxes or subsidies on products; for the expenditure approach – individual COICOP items within HFCE, FCE of General Government and FCE of NPISH (totals), individual AN items within GFCF, changes in inventories, acquisitions less disposals of valuables (totals), exports of goods, exports of services, imports of goods, imports of services; for the income approach – individual institutional sectors within compensation of employees or gross operating surplus (if independent approach), mixed income (if independent approach), taxes on production and imports and subsidies. For the transition from GDP to GNI3 the individual compilation areas are: compensation of employees received from the rest of the world, compensation of employees paid to the rest of the world, taxes on production and imports paid to the institutions of the EU, subsidies granted by the institutions of the EU, individual categories of property income received from the rest of the world and individual categories of property income paid to the rest of the world.

A set of criteria will be applied to the abovementioned individual compilation areas for each Member State. Those criteria cover mainly risks inherent to the compilation of GNI and as such will be assessed primarily on the basis of the results of GIAQ analysis and analysis of Process Tables. The following list of criteria will be used:

1. Has the area been identified as needing "detailed checks" under expected result 2 of the first part of risk assessment?

2. Has the area been identified as leading to high risk structural/process-related issues for individual Member States under expected result 5 of the first part of risk assessment?

3. Has the area been identified as needing remedial actions in national accounts to rectify important deficiencies in the source?

4. Has the area been identified as prone to a high risk in the self-assessment made by the Member State?

5. Has the area been subject to a major revision, other than due to reservations and transition to ESA2010, since the last version of the GNI Inventory?

6. Is the area affected by one or more action points A covering several compilation areas?4

7. Is the area affected by one or more action points B covering several compilation areas?

8. Is the area affected by one or more action points A specific for this area only?

9. Is the area affected by one or more action points B specific for this area only?

3 The transition from GDP to GNI (and the use of Balance of Payments data) being a transversal issue, it may also enter the pool of areas to be considered for direct verification through the procedure for transversal issues (outcome 8).

4 For the typology of action points see the document GNIC/332 "Verifying GNI for own resource purposes – outline of the control approach".

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10. Is the area characterised by a high share of Data Validation, Conceptual, Exhaustiveness or Balancing Adjustments in output/IC (for NACE sections) or GDP/GNI?

11. Is the area characterised by a high share of Extrapolations and models or "Other sources" in output/IC (for NACE sections) or GDP/GNI?

12. For the given area are there any other unexplained characteristics of data in the Process Tables that call for a detailed investigation?

13. Is the area affected by ESA2010 derogations relevant for GNI?

14. Is the area responsible for a high share of GVA (for NACE sections) or GDP/GNI?

The risk level for each individual compilation area will be determined by using the following formula:

Risk level = score for criterion 1 * (sum of scores for criteria 2 to 13) * score for criterion 14

Risk scores assigned to individual criteria 2-14 will be respectively: high - 3, medium - 2 or low - 1 (for some criteria only high or low), whereas the score for the criterion 1 will be either 1 (for "yes") or 0 (for "no"). Thus the further assessment will be restricted only to those areas for which the answer to the first question is "yes", leaving aside many of the compilation areas for the low and medium risk countries.

The score for the criterion 14, that can be viewed as the "impact" factor of the assessed risk (whereas the remaining criteria represent the "probability" factor), will be determined by a ranking of the compilation areas according to their share in GVA/GDP/GNI (as appropriate). This solution is deliberately applied in order to diminish the influence of the "impact" factor on the assessed risk, in line with the considerations in the first section of this document. The score for the criteria 10 and 11, relating to the quantitative information in the Process Tables, will also be ranking-based.

It is acknowledged that for some criteria some "bridging" between e.g. the individual structural/process-related risk (criterion 2) or the source domain (criterion 3) or relevant derogation (criterion 13) and the assessed GNI compilation areas may be needed.

For the criterion 2 the list of relevant structural/process-related issues behind the "red cells" identified in the 1 part of risk assessment will be reviewed with the aim to assign high risk to the related compilation area. If the latter is eventually chosen for direct verification, the relevant risky issue should be included in the verification trail constructed for that compilation area.

As concerns the criterion 3, results of the second step of consultation with the units dealing with source statistics for national accounts will be exploited. This consultation should allow for identification of particular deficiencies in individual sources that might adversely impact reliability, comparability and exhaustiveness of GNI. These deficiencies might be followed up in the GNI information visits to verify if appropriate actions are taken in national accounts to remedy them (e.g. if relevant adjustments are made). It may be that in some cases, as a

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consequence of their consideration in the second part of the risk assessment, these aspect would eventually be followed up through direct verification.

As concerns the criterion 4, Member States will be asked to provide, on a voluntary basis, a self-assessment based on their internal control systems identifying the areas of GNI compilation deemed most risky in terms of reliability, comparability and exhaustiveness. This self-assessment should be documented with a report/article/note produced by the Member State. Provision of this information would reduce the detection risk; however, if it is not provided, the criterion 4 will be considered as not applicable (with the score 0).

For the criterion 5, apart from the information that should be available in the section 2.3.2 of the Inventory also any new revisions described in the Quality Reports issued after the completion of the Inventory will be taken into account.

As concerns the criteria 6-9 the risk levels will be differentiated according to the number of the relevant action points set in the course of the verification of Inventories for the given compilation area.

The "other unexplained characteristics of data in the Process Tables that call for a detailed investigation" referred to in the criterion 12 may concern e.g. high share of Data Validation in output/IC (for NACE sections) or GDP/GNI; basic sources contributing in more than 100% to the final estimate; high unexplained discrepancies between output and IC as concerns the shares of individual sources; surprisingly low share of adjustments or "expected" sources, etc.

For the criterion 13 the results of analysis of ESA 2010 derogations for their risks to GNI made for the first part of the risk assessment will be used. Only those derogations that might have an impact on GNI (be it direct or indirect) will be taken into account.

As mentioned above, the assessment procedure for identifying those transversal issues in individual Member States that pose the highest risk in terms of quality/compliance and impact on GNI and which might be considered for direct verification is different.

Transversal issues may concern cross-cutting aspects (like e.g. balancing, exhaustiveness, FISIM) for which the area for possible direct verification may be better defined via the columns rather than via the rows of the Process Tables. Furthermore, in some cases the transversal issue may not be easily identifiable in the Process Tables (e.g. R&D).

For these reasons the identification of the transversal issues that might be followed up with direct verification (outcome 8 of the risk assessment) will be made in the following way: for each transversal issue a pool of up to 5 Member States will be identified by the responsible desk officer for which the given issue poses the highest risk in terms of quality/compliance and impact on GNI. This will lead to a list of transversal issues posing particularly high risk in individual Member States. One or more of such risky transversal issues should be considered for further follow up with direct verification in a given Member State; for some Member States there could be no transversal issues to be followed up with direct verification.

Some transversal issues (e.g. dwellings, FISIM, R&D) may be identified in a particular Member State as a high risk area through both criteria 1-14 (as a part of the given NACE section or COICOP or AN item) and through the procedure described in the precedent paragraph. In such cases the given transversal issue should preferably be included in the verification trail constructed for the relevant NACE/COICOP/AN (as appropriate) item.

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Eurostat reserves the right to modify - based on a qualitative reflection - the composition of the resulting pools of country-specific and transversal areas of GNI compilation, from which to choose areas for direct verification.

Consequences for the subsequent verification work

The practical consequences of the second step of risk assessment are:

- for countries with a low level of DVs-tailored risk (see expected result 4 of the first step of risk assessment): identification of a pool of 4 compilation areas (that may include transversal issues) from which to choose minimum 1 area for direct verification;

- for countries with a medium level of DVs-tailored risk (see expected result 4 of the first step of risk assessment): identification of a pool of 6 compilation areas (that may include transversal issues) from which to choose minimum 3 areas for direct verification;

- for countries with a high level of DVs-tailored risk (see expected result 4 of the first step of risk assessment): identification of a pool of 8 compilation areas (that may include transversal issues) from which to choose minimum 4 areas for direct verification.

The areas eventually chosen for direct verification should be identified from the resulting pool, after qualitative consideration of the criteria referred to in the "Guidelines for the direct verification exercise in the framework of the verification of Member States ESA 2010 GNI Inventories" (document GNIC/334 "Guidelines for the direct verification exercise in the framework of the verification of Member States ESA 2010 GNI Inventories").

Organisational aspects

The risk assessment will be carried out by the members of the GNI team. Most of the criteria will be assessed for individual Member States by the respective country desk officers. However, for some criteria the assessment will be done centrally for all Member States by a designated person and for some others - by a small group of team members. Detailed internal instructions have been prepared for assessing the individual criteria to ensure a fair and consistent assessment.

Some inputs into the risk assessment will stem from the consultation of other units in Eurostat. An element of a voluntary self-assessment by the Member States is also foreseen for the second part of the exercise.

As mentioned above, the first part of the risk assessment will be accomplished by mid-April 2016 and its results will be presented at the GNI Committee meeting of April 2016. The second part of the risk assessment will be performed upon the completion of the analysis of GNI Inventories with GIAQ for individual Member States. The review, taking stock of the updated results and modifying the consequences for the outstanding verification work will be done along the lines presented in the section "The risk assessment approach" of this document.

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Documentation of risk assessment

The risk assessment done for each country will be documented in an internal Excel document filled in by the GNI team. This document will contain scores for individual criteria, alongside some comments/justifications by the assessors (if deemed necessary). Whenever the assessment of an individual criterion requires aggregation of some inputs results or is derived from underlying checklists, those inputs/checklists scores will be integrated in the abovementioned file.

The overall results (and any updates thereof) of the risk assessment that are relevant for all Member States, as they structure the whole GNI verification process, will be presented at the spring meetings of the GNI Committee. In particular the following information will be given:

- countries falling into the high, medium or low general risk groups (with consequences of determining the order/prioritisation of verification of countries, areas of GNI compilation for which no detailed control is required in the countries and minimum number of GNI visits for each country);

- countries falling into the high, medium or low DVs-tailored risk groups (with a consequence of determining the minimum number of direct verifications for each country);

- list of high-risk transversal issues to be verified in all Member States.

Details of the assessment (in terms of scores obtained for each criterion and respective results, including the lists of high-risk structural/process related issues and high-risk compilation areas) will be disclosed to individual countries assessed. In case of the first part of the risk assessment this will be done after the spring meetings of the GNI Committee (after taking stock of the updates made in the rolling review). For the second step this will be done before the planned direct verification visits to individual countries. However, the assessments/analyses leading to individual scores will not be disclosed.

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