Select Committee on European Union Fiftieth Report


CHAPTER 7: Summary of Conclusions

Background—The budget of the European Communities and its audit

144.  We concur with the views presented to us that the lack of positive assurance from the European Court of Auditors in their annual Statement of Assurance is a serious problem for the European Union and the governments of its Member States. It was as a result of our concern over this that we decided to launch this inquiry. (paragraph 4)

CRISES AND DEVELOPMENTS IN THE COMMISSION

145.  Our investigation was not presented with any evidence of a culture of corruption in the Commission. (paragraph 8)

THE MEANING OF A QUALIFIED AUDIT OPINION

146.  We share the concern raised with us by the European Court of Auditors that their decision not to give a positive Statement of Assurance can be misunderstood. We recognise that the lack of a positive Statement of Assurance does not necessarily indicates that high levels of fraudulent or corrupt transactions have taken place. We do not seek to detract from the importance of the issue, nor from the evident underlying problems which have resulted in 12 successive qualified audit opinions. However, we consider that a more accurate reflection of the substance of the Court's annual audit and the Statement of Assurance would be achieved if these two functions were more clearly separated. In addition, the single Statement of Assurance should be split into a series of statements on each of the different spending categories. (paragraph 11)

The Statement of Assurance: its development and its weaknesses; proposals for reform

147.  We recommend that in future the annual examination and audit of all revenue and expenditure of the Commission should be separated from the broader objectives of the Statement of Assurance. (paragraph 17)

148.  We are pleased to see that the Commission and the European Parliament are actively addressing issues regarding European financial management which are raised by the Court of Auditors in their annual audits. (paragraph 20)

DAS Methodology

149.  Sir John Bourn, Comptroller and Auditor General at the UK's National Audit Office told us that, were he required to issue a single Statement of Assurance on the UK Government's accounts in the same way as the Court of Auditors does for Europe's accounts, he, like the Court, would be unable to do so (Q 192). This is because last year he issued a qualified opinion on 13 of the 500 accounts of the British Government which he audits (Q 190). (paragraph 22)

150.  We consider that the Court's decision to give a single Statement of Assurance on the accounts as a whole means that a positive Statement is difficult to achieve. We consider that it would be preferable for the Court to issue statements on each of the spending areas; in much the same way that the National Audit Office in the UK issues separate audits for each Government department. This would give a more accurate picture of the state of financial management in the Union and would make comparisons with other public bodies easier. (paragraph 23)

TRANSACTION TESTING AND THE DEVELOPMENT OF THE COURT'S METHODOLOGY

151.  We concur with the observation that the methodology employed by the Court still relies heavily on transaction testing. Due to the small number of transactions actually looked at each year we do not consider that this methodology can lead to an accurate picture of financial management. The Court should aim to improve the methodology behind the Statement's production so as to provide more accurate data. We consider that these weaknesses must be remedied as a matter of priority so an accurate picture of the error rate can be obtained. (paragraph 28)

152.  We are pleased to see that the Court has responded to calls from the ECOFIN Council and added additional auditing techniques over the years. In particular we are pleased to see that the Court now conducts an assessment of supervisory systems and controls; reviews the Annual Activity Reports and Declarations from each of the Directors General in the Commission; and evaluates of the results of other auditors. We consider that these need to be further developed to give a more rounded picture of performance over the year. In particular, greater use by the Court of the Annual Activity Reports could add positive pressure for their development into proper accounting tools. (paragraph 29)

THE MEANING OF AN IRREGULARITY

153.  We encourage the Court to put in place measures clearly to distinguish between irregularity and fraud and to publish separate figures for the level of fraudulent transactions and administrative mistakes. (paragraph 31)

154.  Whilst the distinction between fraud and other irregularities must be made clear, we consider that administrative mistakes could still indicate deficiencies in the control systems operated by the Member States or the Commission. Attention should therefore be drawn to both administrative mistakes and fraudulent activity. Sources of error, from whatever quarter and for whatever reason under current definitions should be taken into account when calculating material error rates. (paragraph 33)

Dividing the Statement of Assurance into categories

155.  We support the recent decision of the Court of Auditors to produce a Statement of Assurance giving details of each of the areas analysed. We recommend that this should be developed into a Statement which concentrates on an analysis of the audits conducted each expenditure category and Member State rather than on the single Statement of Assurance on all the accounts. (paragraph 35)

156.  We note with approval the achievements made by the Commission in developing a system for agricultural payments which led the Court to give a positive Statement of Assurance to this area for the first time in 2004. (paragraph 36)

National management of European funds

157.  We support calls for the European Court of Auditors to produce a list of those Member States demonstrating poor management of European funds. We consider that such a list would encourage all the governments of the Member States to take this issue seriously. Such a list should only be produced on the basis of accurate data and so will require the development of a sound basis for payment transaction sampling. (paragraph 38)

A COMMITMENT TO IMPROVEMENT

158.  We recognise the commitment which the Commission has shown to improving its accounting system, particularly with regard to the introduction of accruals based accounting. We were pleased to hear from the Accounting Officer that the Commission now respects internationally recognised rules; and from the UK Minister that the EU is now one of the leaders in public accounting terms. (paragraph 42)

Segregation of duties

159.  We therefore support the Commission's system of payment authorisation and execution as introduced by the Prodi-Kinnock reforms. We consider that segregating the authorisation and execution of payments is appropriate. (paragraph 46)

Continuing criticism

160.  During our inquiry we heard considerable evidence on the Commission's financial management. None of that evidence supports the allegation that there is a significant element of corruption within the Commission. (paragraph 49)

Double entry bookkeeping and the Commission's accounting software

161.  In spite of the improvements which have been made to the accounting system there are areas which remain in need of attention. We are concerned that there remains a question over whether local accounting systems in the Directorates General are indeed compliant with the standards needed for double entry book keeping. All accounting systems operated in the Commission should fully support double entry accounting. We expect the Commission to investigate these allegations and to publish a full account of its findings. (paragraph 53)

Internal audit and control

162.  In contrast to the progress reported to us in relation to the Commission's internal accounting system we are concerned that the Commission's system of internal audit is inadequate. We urge the Commission to review fully the procedures in place and bring forward proposals to make the system more robust. These proposals should not seek to create new audit bodies. Rather they should focus on requiring Commission officials and existing audit bodies to take responsibility for the systems and the accounts. (paragraph 61)

Devolved management in the Commission

163.  We are not convinced by the arguments for recentralising responsibility for financial transactions. Rather, we consider that the decentralised system introduced by the Prodi-Kinnock reform has allocated financial management responsibility to the appropriate level, so long as effective control systems are in place. (paragraph 63)

A SYSTEM REQUIRING COMMISSION OFFICIALS TO TAKE RESPONSIBILITY

164.  We are strongly in favour of a system of signing off whereby responsibility for accounts is shouldered first by the accountants and auditors in each Directorate General and then at more and more senior levels. This system should culminate in the requirement for the Secretary General of the Commission to sign an assurance that the Commission's annual accounts are true and fair. (paragraph 67)

Risk assessment

165.  We fully support the proposal in the Roadmap to introduce a common methodology for risk assessment. However we recognise that that the accounting system is not tailored to provide the data to which such a common methodology could be applied. We consider that efforts should be made to develop the accounting system to produce the necessary data. We endorse the use of qualitative methods to assess the risk in the meantime. (paragraph 70)

Debt recovery

166.  We are generally satisfied with the Commission's procedures and reporting requirements on debt waivers. We see no evidence of the "ruthless exploitation" of these procedures that some have suggested. (paragraph 73)

Who is responsible for financial management

167.  While the Commission should do its best to monitor the disbursement of funds we do not consider that the Commission can be held responsible for the regularity of the large majority of European transactions (over 80%) which take place within Member States. We are pleased to see that both the Maastricht Treaty and the recent Financial Perspective agreement recognised the role of the Member States in ensuring proper financial management. (paragraph 79)

Is the legislation too complex?

168.  It is of great concern to us that the regulations underpinning the spending programmes continue to be very complex and that this complexity can lead to errors. We are pleased to see that the Commission and the Council have committed to simplifying the rules. (paragraph 86)

DELEGATION RISK

169.  We share some of the concerns raised with us in respect of Member State management of EU funds. We consider it particularly unacceptable for the government of a Member State to treat European money with less care than national funds and urge the Council to make this clear. We are also concerned about the variability of control standards between Member States. We consider that all European expenditure should be subject to equivalent standard of control to ensure that the risk of fraud and error is minimised. (paragraph 90)

SUFFICIENT INTEREST IN THE COUNCIL?

170.  We are strongly in favour of a national Statement of Assurance on the monies disbursed in each Member State. As in the Dutch pilot project, such a Statement should be sent to national parliaments as well as to the Commission as we consider that this will encourage the Member States to take responsibility for the systems and controls they operate. Consideration should be given to ensuring the length of time the discharge procedure takes is not extended. (paragraph 105)

171.  In line with the system operating in UK Government departments, we do not consider that a national Statement of Assurance requires a political signature. (paragraph 106)

RESPONSIBILITY IN THE COUNCIL

172.  We consider this lack of Council level consideration to be a serious weakness. We consider that the Budget Council should be at least as concerned with the Union's accounts as it is with drawing up the Budget. We therefore consider that the Budget Council should to prepare a report on the annual audit and Statement of Assurance from the Court of Auditors. This would be debated by the European Parliament at the same time as the Court of Auditors' report. In this way the Council of Ministers would be drawn much more closely into consideration of the accounts and into the process of ensuring that the financial systems of the Union meet appropriate international standards. (paragraph 108)

RESPONSIBILITY IN NATIONAL PARLIAMENTS

173.  None the less we consider that there is a clear role for national parliaments: not least because in the UK, for example, there is considerable misunderstanding of the real position. We consider that this stems, at least in part, from the sporadic and sometimes capricious way in which this issue is debated in the two Houses and discussed in the press. (paragraph 109)

174.  There is a strong argument for a more consistent and regular approach to the audit and management of the European Union's accounts than may perhaps have been the case in the past in the European Committees of both Houses. This in turn might lead to a regular annual debate on the topic on the floor of each House as part of the annual political cycle. Similar debates could be held in the Welsh Assembly and the Scottish Parliament. (paragraph 110)

A single national account and auditing problems in devolved or federal states

175.  We are concerned that a single national European account would impose an additional layer of bureaucracy and would pose a number of difficulties in relation to devolved and federal states. (paragraph 112)

Sanctions for non-compliance

176.  We note that the Commission has existing powers of disallowance of expenditure and recovery of funds, and the power to certify paying agencies in the agricultural sector. In the context of the reforms outlined above we consider that the existing Commission powers are sufficient. (paragraph 115)

The role of the Court and its workings with national Supreme Audit Institutions

177.  We note the desire expressed to us by Members of the Court not to become "part of the political game". We consider that it would be highly inappropriate for the Court to promote a political agenda. (paragraph 118)

178.  We are pleased to see the work the Court has done to develop its relationships with the Supreme Audit Institutions in the Member States. We hope that these will be further developed in the future with a view to giving the Court a supervisory role over the audits of European expenditure conducted by the Supreme Audit Institutions in the Member States. (paragraph 123)

Value for money audit

179.  We call upon the Court to bring forward concrete proposals to extend the aspects of its work which are not directly concerned with the annual Statement of Assurance. We consider that developments in the value for money and performance auditing side of the Court's work would be particularly valuable. (paragraph 125)

The rate of fraud

180.  Any fraud committed against the European Budget is a problem which should be addressed seriously by the Commission and the Member States. We conclude that while the level of fraud is no higher than in comparable public expenditure programmes, including in the UK the fight must go on. We consider that efforts should be made to convey these messages to Europe's citizens more effectively. (paragraph 131)

PROBLEMS ESTIMATING THE RATE OF FRAUD

181.  We are concerned that estimates of the level of fraud rely on self-reporting by the Member States. We consider that the Commission should bring forward proposals for a new, more objective, method of determining the rate of fraud. (paragraph 133)

OLAF's powers and activities

182.  We are content with the extent of the investigations which OLAF has undertaken. We consider that OLAF should conduct a survey of the uses to which Member States put its reports. On the basis of the results of this survey OLAF will be able to improve the relevance of the information it passes relevant authorities in the Member States. (paragraph 138)

OLAF's independence

183.  We are convinced by the arguments presented in favour of keeping OLAF administratively within the Commission. On the basis of the evidence we have received we emphatically refute claims that OLAF is too close to the Commission or that the Commission seeks to divert and influence OLAF's investigative activities. (paragraph 143)


 
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