Written evidence submitted by Mr Terry Wynn Member of the European Parliament
on 10th March 2006
to the House of Lords European Union Committee
Economic and Financial Affairs, and International Trade (Sub-Committee A)
for the Inquiry into the Management and Audit of EC Expenditure and Accounts
The question needs clarification. The Treaty of Maastricht required the European Court of Auditors (ECA) to "provide the European Parliament and the Council with a Statement of Assurance "as to the reliability of the accounts and the legality and regularity of the underlying transactions (...)". (Article 248 of the Treaty).
The major questions raised by the Court do not concern the reliability of the accounts but the legality and regularity of the underlying transactions.
In broad terms, the ECA has concluded every year since 1994, which was the first year it had to produce a Statement of Assurance that the accounts are reliable - although criticism has been raised of the accounting system leading to the reform which was concluded by the installation of a new accounting system on 1 January 2005.
It is therefore not correct to say that for 11 successive years the accounts have not been given a positive statement of assurance. The qualified Statement of Assurance concerns mainly the underlying transactions.
In 2004, the Statement of Assurance was positive for transactions relating to administrative expenditure, pre-accession aid and that part of agricultural expenditure subject to the Integrated Administration and Control System (IACS).
For other underlying transactions - that part of agricultural expenditure not subject to IACS, structural measures, internal policies including research, and external actions - the level of errors and irregularities were too high to enable the Court to issue an unqualified Statement of Assurance.
Having clarified the difference between accounts and underlying transactions let's turn to "the fundamental problems" as to why the Statement of Assurance on the underlying transactions have been qualified for 11 years.
Although under Article 274 of the Treaty the Commission is responsible for the implementation of the budget, it is not itself implementing on a daily basis a substantial part of the budget. The fact that transactions are financed by the EU budget does not automatically imply that they are also implemented by EU bodies. The way in which implementation is carried out varies between the different management systems. "Shared management" (Article 53 of the Financial Regulation) is the model which handles the most money.
All actions under the Common Agricultural Policy and all Structural measures (about 80 % of the budget) are implemented under "shared management". This means that implementation tasks are delegated to Member States and that Member States are responsible for the controls on funds in shared management as described and defined in sector regulations.
It is important to note that Member States are free to organise these controls in the way each considers best, given its institutional and administrative structure. In practice, responsibilities are allocated to a large number of different bodies reporting to Ministries of the national government or to regional governments.
Article 274 of the Treaty requires Member States to cooperate with the Commission to ensure that appropriations are used in accordance with the principles of sound financial management.
However, the Commission does not have sufficiently effective means at its disposal to request assurance from each Member State that its control responsibilities have been fully shouldered, and in particular that the risk of error in the underlying transactions is being adequately managed.
The fundamental problem that has led to qualified Statements of Assurance as regards payments in shared management is, therefore, weaknesses in Member States' control systems and the absence of adequate accountability at Member State level.
Are the mechanisms which have been suggested by the Commission to improve management of the budget appropriate?
Not only the Commission but also the Court of Auditors and the Parliament have proposed measures to improve management and control of the budget.
The Court published in March 2004 a proposal for a Community internal control framework. This document together with Parliament's 2003 discharge resolution inspired the Commission to publish first its communication on a "roadmap to an integrated internal control framework" in June 2005 which in January 2006 was followed by its "Action plan towards an integrated internal control framework".
In its 2003 discharge resolution Parliament put emphasis on what it considers to be the main problem - weak implementation of control systems in Member States and absence of adequate accountability at Member State level - and presented a proposal to remedy this fundamental weakness.
Parliament took the view that the Commission's insight into Member States' management and control systems could and should be enhanced by an ex-ante Disclosure Statement and an annual ex-post Declaration of Assurance.
The ex-ante Disclosure Statement should confirm that the organisational structures put in place by the Member State comply with the requirements of Community legislation and are expected to be effective in managing the risk of fraud and error in the underlying transactions.
The ex-post Declaration of Assurance should take into account the multi-annual dimension in the accountability process and the multi-annual nature of most Community programmes while at the same time giving assurance that the control systems have worked effectively during the year in question.
Parliament further proposed that both the ex-ante Disclosure Statement and the ex-post Statement of Assurance should be signed by each Member State's highest political and managing authority. As a general rule, Parliament found that this role would normally be performed by the Finance Minister.
Both instruments as well as the political signature were rejected by the Council at its meeting on 8 November 2005. This is obviously a problem for some Member States. However, even if a majority of the Member States are opposed it is encouraging that the Dutch government has announced that it will present the results of a study on the feasibility of a national statement on the expenditure of EU funds in the Netherlands before Summer 2006.
The Commission is in favour of the principle of national management declarations at "operational" level and has included it in the list of 16 actions which should lead to an integrated internal control framework as proposed by the Court in its Opinion 2/2004.
It seems that the proposed actions in the action plan are "appropriate", but it is not possible to say if they are adequate. First the actions have to be implemented which is not possible without the active participation of the Council and the Member States
Are these mechanisms likely to lead to a positive statement of assurance on a set of accounts by the end of the tenure of the Barroso Commission?
As regards shared management it seems unlikely that the Commission will be able to achieve its results alone as regards the legality and regularity of the underlying transactions. The active cooperation of Council and the Member States is required. The speed of reform in this area is mainly in their hands.
Are there further steps which need to be taken?
On the basis of the findings of the audit work the Commission already carries out in the Member States as well as of the quality of the information presented by Member States (including the quality of the proposed national management declarations) the Commission should produce indicators with which the quality of Member States' administrative systems as regards EU accountability can be measured. The results should be published.
Further to this measure the Court of Auditors should include in its observations concerning the Statement of Assurance an evaluation of the correctness of the information presented by the Commission and the individual Member States. On this basis it should be evaluated whether progress has been achieved in each sector and by each Member State.
Such a benchmarking would also allow for insight into the complexity of the regulations. If there would be a low score in the same sector in many Member States it could indicate that legislation was (too) complex.
National certifying bodies (CAP and SF):
The Court of Auditors is not convinced that the mandate of these bodies is adequate in so much as they do not provide direct assurance that the information supplied by claimants and used by paying agencies to calculate the payment due, is correct and therefore that payments are legal and regular. The certifying bodies' mandate, their independence and quality of work should therefore be evaluated.
Commission internal control system:
Five years on from the administrative reform, the Commission's Internal Audit Service concluded in its 2004 Annual Report to the Discharge Authority (COM(2005) 257 page 14):
"Despite important progress in internal control, important weaknesses still exist in areas such as grant management and tendering, management supervision and ex-post controls. These weaknesses should be addressed with urgency."
Therefore, an independent evaluation of the Commission's internal control system and the role and mandate of the main actors should be undertaken. At the same time it should be looked at whether the reform has brought about a more effective management of EU programmes.
Can lessons be learnt from the accounting procedures and practices in other countries?
Yes and no. The European context is in many ways different from national practices. "Shared management" does not exist in a national context where, on the other hand, the accountability structure seems to be more direct (and efficient). It could well be that many EU procedures - i.e. the discharge procedure - are cumbersome and relatively inefficient because they have been "copied" from national practices and not developed specifically in the European context. However, lessons could perhaps be learnt from new Member States where "financial management procedures" and "internal control systems" have been set up from scratch with the assistance of international and professional organisations.
Are the working methods, staffing and organisation of the European Court of Auditors appropriate?
It seems evident that if the Court should be invented today it would be very different from what it is today. A working group of international experts to look at the Court's mandate, working methods, staffing, organisation and whether it should have a body of 25 (soon 27) members should be set up.
Opinion 2/2004 on http://www.eca.eu.int/audit_reports/opinions/docs/2004/04_02en.pdf
 COM(2005) 252
 COM(2006) 009
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