EUROPE
Why the EU may never get its accounts straight
Spring 2008
The EU’s auditors constantly face demands for a Statement of Assurance, a kind of all-clear signal for its accounts, and they constantly decline. François Colling, a former member of the European Court of Auditors, explains why and suggests a way out
The European Court of Auditors is often misunderstood. Now that it is 30 years old, an age when you can usually expect to have got your life in order, the time may be right to clear up the various misunderstandings and look to the future.
Auditing of the European Community’s accounts was originally done by a body set up in 1959 called the Audit Board. As the Community expanded, gained new sources of money and became increasingly ambitious, the Court of Auditors was founded in 1977. It was upgraded in 1992 under the Maastricht Treaty, which introduced a new instrument in the form of a Statement of Assurance (SOA) to be provided by the Court. The SOA confirms not only that the Court has checked the European Commission’s financial transactions, but that the underlying operations have been checked too, meaning the activities of the member states and any other beneficiaries.
But right from the outset − the budget year 1994 − the Court has not been in a position to issue an SOA in respect of the legality and regularity of a major part of community budget expenditure. Although the accounts were essential reliable, the “irregularities” identified by the Court have prevented it providing a clean bill of health in the form of an SOA.
The long-standing absence of an SOA is often taken by the public to confirm the view that the European Union is inefficient in its use of taxpayers’ money. This undermines the authority of the Commission, puts Parliament in a difficult position and is detrimental to the “European idea”. Matters are not helped when journalists without enough background knowledge misrepresent the audit results and put together inaccurate reports of the parliamentary debates on the audit, which run for several months each year. In 2006, Siim Kallas, the Vice-President of the Commission responsible for this area, declared that his main objective was to achieve a “positive” SOA, further confirming its importance in the public’s mind and putting more pressure on the Court.
Others seek sensationalism by bringing fraud into the equation, which intentionally or not, they confuse with error. Yet it’s vital to point out that the overwhelming majority of irregularities identified by the Court arise from the complex rules and weaknesses in management systems rather than fraud. In any case fraud has nothing to do with the SOA. If it arises, it is dealt with by the Commission’s anti-fraud department.
It’s worth taking a closer look at the “irregularities” that bedevil the issuing of an SOA. Although the Court is the Commission’s auditor, and its annual report enables Parliament and the Council of Ministers to check that EU’s financial affairs are properly managed and so formally discharge the accounts, the Commission itself has little direct responsibility in this. Between 80% and 85% of community credits are managed and monitored by the local and national governments of member states. The Commission is only directly responsible for the management of its own administrative income and expenditure: spending on internal policy (including research) and some external initiatives. Management of the remainder of the credits (own resources, agriculture and economic and social cohesion funds) falls under “shared management” with the member states, or is “devolved” to countries in the queue to join the EU or is shared with international organisations (humanitarian aid).
A number of the more cumbersome administrative systems are due to be changed during the next few years, particularly those of member states. But they may prove to be merely procedural ones. Against this background, the financial management of the Union is being reduced to the single issue of the SOA, with the risk that the focus will be on the legality and regularity of the underlying transactions and not on the prime objective of ensuring that community funds are properly managed. Some observers believe that if the budget management system isn’t changed, the Court will never be in a position to deliver a “positive” SOA.
Is the Court to blame, as some in the Commission claim? So far, the EU executive has always been able to convince Parliament that the system is efficient and beyond professional reproach. This is based on an assurance model that estimates the inherent risk of error, and then evaluates and tests the quality of the internal audit systems. This determines the scope of the validation tests to be conducted on the underlying operations in each of the areas audited.
Because an SOA essentially involves a review of the systems and controls and appropriate random sampling, it can only give a positive result if the total number of errors remains within a predefined threshold. Once the budget has been executed, the Court is then able to identify the error rate for the previous year. For most areas of the budget, the findings and recommendations are identical year after year.
What, then, is the point of having professional audit methods, and constantly perfecting them, if the results they deliver, year in year out, systematically lead to the same conclusions? The vast majority of errors could be avoided by tightening the internal audit of the budget circuits, simplifying the rules and procedures and ensuring proper certification of the management bodies of the member states.
The fact is that audits of the legality and regularity of community programmes do not really have political or financial consequences, and since 1999 the European Parliament has systematically granted discharge, merely recommending to the Commission a multitude of solutions aimed at the recurrent weaknesses uncovered by the Court.
The only instrument of consequence at Parliament’s disposal to penalise the Commission’s “defective” budget policy is a motion of censure requiring the mass resignation of the College of Commissioners, the so-called “nuclear option” that is generally regarded as a disproportionate measure. In delivering its discharge for 2003, Parliament commented "that the SOA would not give the legislator or the public any indication as to whether the money had been used efficiently…it goes no way to sorting out the mess". Parliament appears to be saying that the SOA merely delivers a post-mortem and goes no way towards improving the management of community funds.
The Council, Parliament, the Commission and the Court should on the basis of years of experience, have engaged in a political debate on the appropriateness and effectiveness of the annual SOA in its current form. A review of the Maastricht treaty is worth considering, so as to limit the Commission’s responsibility to those areas for which it has sole competence, and thus changing the scope of the SOA. Instead of issuing an SOA every year for the budget as a whole, would it not be better if the Court looked at all areas of the budget over a 3-5 year cycle, because changes to financial and operating conditions would be slow and gradual in effect?
As a result, the European Court of Auditors would then be better placed to examine the effectiveness and efficiency of each of the community programmes, and better able in the interest of the Unions’ taxpayers to deliver more worthwhile conclusions and recommendations.