Saturday, July 06, 2013

Better Audit for the EU

UPDATE MAY 2016

The original wording of this post, which is given below, was first published in July 2013.

Most of what I wrote then still applies today, but, while the auditors still make very similar criticisms on the spending of money contrary to EU rules as those to which I referred three years ago in relation to the 2011 accounts, the Court of Auditors have clearly stated that they regard the accounts of the European Union for the most recent year (2014) and indeed all years since 2007, as having been accurately prepared in accordance with international accounting standards.

The Auditors' website specifically says that, quote  "the ECA have signed off the 2014 accounts of the European Union as they have done for every year since 2007."

Therefore the statement which has regularly been made by "Leave" supporters from Boris Johnson down during the current EU referendum debate, that the EU accounts have not been signed off for twenty years (or whatever time period is conjured up within the imagination of the person making the claim) is not correct.

However, the European Court of Auditors do have significant criticisms of the way EU investment and spending is managed and say that the "error rate" of spending which is not in accordance with EU rules is too high. And we are talking billions of Euros not properly spent here.

So a "Remainer" who tells you that the European Court of Auditors have given the EU's finances a clean bill of health and a "Leave" supporter who tells you that the accounts have not been signed off for twenty years are both wrong. The truth lies between these two positions.

The ECA report on the most recent set of EU accounts available as at this update in May 2016, which are the 2014 accounts, is available at http://www.eca.europa.eu/en/Pages/AR2014.aspx

And this is what they have to say about the accounts and how the EU spends its' money.

"the European Court of Auditors (ECA) calls for a wholly new approach to the management of EU investment and spending. Major changes are required by all those responsible for the way EU funds are managed. According to the ECA’s presentation of the report to the European Parliament, EU decision-makers must align the budget better with the EU’s long-term strategic priorities and make it more responsive in a crisis. EU legislators need to ensure spending schemes are clear about the results to be achieved and the risks it is acceptable to take; and financial managers have to ensure that the money spent complies with the rules and achieves the intended results.

"As independent auditors, the ECA have signed off the 2014 accounts of the European Union, as they have done for every year since 2007. They say in their latest report that the upcoming review of the EU’s current spending cycle provides an opportunity to re-think priorities, and warn that if the EU is to address the pressing challenges it faces, it must manage the Budget better. The EU needs to deal with a number of financial backlogs in order to free up funds so they can be used where they are most needed. Some Member States are struggling to absorb the EU funds they have been allocated. The Commission has put funds at the disposal of Member States, without sufficiently considering their capacity to invest them. At the same time, new ways of funding EU policies should not put financial risks beyond public scrutiny and audit.
 
ECA President Vítor Caldeira said, “The EU must invest its money better. It must ensure its investments match its priorities more closely, simpler rules are framed to achieve results and resources are managed more efficiently.”
 
"In the report, the auditors give a clean opinion on the accounts. They also conclude that the collection of EU revenue was free from error. However, the ECA’s estimated error rate for expenditure was 4.4% (compared with 4.5% in 2013). This is not a measure of fraud, inefficiency or waste; it is an estimate of the money that should not have been paid out because it was not used fully in accordance with EU rules."

"The auditors found the same estimated level of error (4.6%) under shared management with the Member States and for expenditure managed directly by the Commission. The highest levels of error were found in spending under ‘economic, social and territorial cohesion’ (5.7%) and for ‘competitiveness for growth and jobs’ (5.6%). Administrative expenditure had the lowest estimated level of error (0.5%)."

"Corrective action and recovery by the Commission and national authorities in shared management areas had a positive impact on the estimated error rate. Without this action, say the auditors, the error rate for all spending would have been 5.5% rather than 4.4%. But they add that more errors could have been corrected and they call on the Commission to make full use of its powers to reduce errors further and recover misspent funds."

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MY ORIGINAL 2013 POST

In Britain any major organisation which is run in something resembling a competent and honest manner can generally get its' accounts signed off, but if the accounts are qualified by the auditor, all hell breaks loose.

For example, a few years ago after Copeland Borough Council took a couple of years to get its' accounts straight, the last Labour government is believed to have come very close to sending in Commissioners to take over the council. It was one of the few times while I was a member of that local authority that the fact that the council was seriously failing in its' responsibilities got through to the Labour executive of the council.

The European Union does not have the same approach to Audit. On the positive side, the bar for a clean audit is much higher. To enable the European Court of Auditors to provide an unqualified "declaration of assurance" which corresponds to approving the accounts, the EU has to show that every one of the account headings is fully in order.

It's a good thing that the EU has a high audit target, but it's not so good that not enough happens when it isn't met. In fact, since the "declaration of assurance" requirement was adopted in 1994 it has not been achieved. Hence you will frequently hear it stated that the EU's accounts have not had a clean bill of health from the auditors for nearly twenty years.

Let's look at the most recent year for which the Court of Auditors has reported, 2011. If you look on the website of the European Court of Auditors here, go to the annual reports section, and read the report for 2011 you will find the following for that year's declaration of assurance.

It starts OK:

VII) “In the Court’s opinion, the consolidated accounts of the European Union present fairly, in all material respects, the financial position of the union a of 31 December 2011, and the results of its operations and its cash flows for the year then ended, in accordance with the provisions of the Financial Regulation and the accounting rules adopted by the Commission’s accounting officer.”

VIII) “In the court’s opinion, revenue underlying the accounts for the year ended 31 December 2011 is legal and regular in all material respects.”

IX) “In the court’s opinion, commitments underlying the accounts for the year ended 31 December 2011 are legal and regular in all material respects.”

But the accounts are then qualified as follows:


X) “The Court concludes that the examined supervisory and control systems are partially effective in ensuring the legality and regularity of payments underlying the accounts. The policy groups agriculture, market and direct support; rural development, environment, fisheries and health; regional policy, energy and transport; employment and social affairs as well as research and other internal policies are materially affected by error. The Court’s estimate for the most likely error rate for payments underlying the accounts is 3.9%."

XI) “In the Court’s opinion, because of the significance of the matters described in the basis for adverse opinion on the legality and regularity of payments underlying the accounts paragraph, the payments underlying the accounts for the year ended 31 December 2011 are materially affected by error.”
 
If the auditors for a major British company, the district auditor for a council, or the relevant audit authority of any other major body in Britain put a comment like that on an annual audit, it is almost certain that heads would roll, and so they should.
 
Heads ought to roll in the EU too when there is an audit report like that, but they generally don't. Except when the EU sacks a whistleblower such as Marta Andreasen (subsequently a UKIP and currently a Conservative MEP.) 
 
If we want to get genuine reform of the EU, and effective action against fraud and waste, it is essential that failure has consequences. Which means that if the Court of Auditors qualifies the accounts, the departments responsible must catch hell until they sort it out.
 
I would prefer to see the EU adopt a style of audit closer to the British approach, but failing that it would help considerably if Members of the European parliament give the Commission a really hard time about each and every failing discovered by the ECA when they are not able to give a clean "Declaration of Assurance."

Unfortunately although the European Parliament has the power to sack the entire European Commission, it does not have the power to pick off individual commissioners. I have no doubt that there is significantly less waste and corruption in Brussels because the European Parliament actually did effectively sack the Santer Commission in 1999. However, it is difficult to get a majority to take such a "nuclear option"  and it would be more effective if the parliament could target individual commissioners who are clearly failing without having to also sack those who might be doing a better job.

Indeed that is what should have happened in 1999. Essentially the Court of Auditors and the European Parliament had found damning evidence of financial mismanagement and obstruction against two or three Commissioners, and particularly against the French socialist Edith Cresson. Paris refused to recall her, and the only way to remove Cresson and one or two others who clearly had to go was to remove the entire commission. When it became clear that there was a majority in the parliament to do this, the Santer Commission resigned.

The awful spectre of what happened to the Santer Commission undoubtedly casts a long shadow, which even fourteen years later is of value in reminding Eurocrats that there is a limit to what they can get away with. However, the fact that audit reports like the one I quoted above are still being written proves only too clearly that this is not enough.

I am convinced that if MEPs could sack individual commissioners there is a much stronger possibility that this power might actually be used more often, and thus the ability of the Court of Auditors and the European Parliament to check waste and fraud would be far greater.

Until such a reform can be agreed it is critical that MEPs use their existing powers more effectively. The European parliament has quite enough power to make life very difficult for the Commission when the Court of Auditors refuses to give an unqualified declaration of assurance or otherwise finds failings. Britain and Europe both need MEPs who will make more use of those powers whenever the accounts are qualified. 

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