Budget Control

"Is it true that the accounts of the EU have not been signed-off for 10 years?"

The simple answer is no.  What follows tries to show why.  

The Statement of Assurance 

Introduction 

The financial management of the European Union is a complicated matter and the way in which the European Court of Auditors (the ECA) reports on how good or bad it is, is not easily understood by many people. And further: the way in which the press interprets and presents the information from the ECA is certainly not fostering any kind of understanding with the general public.  (The same applies to the way the UK's own budget problems are reported, as outlined in the addendum at the end of this paper). 

One way of getting information on the quality of the financial management of the Union is the ECA's annual Statement of Assurance (or the DAS as it often is called after the French "Déclaration d'assurance"). The DAS is a central part of the ECA's Annual Report which itself is an important element in Parliament's analysis of the accounts. That is why Parliament attaches importance to the DAS. 

The legal base of the DAS 

With the Treaty of Maastricht the ECA was required 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 (...)". 

Before the obligation to provide a statement of assurance the Court reported on the most serious findings in its audits of the accounts or of a limited number of underlying transactions. At that time the Court organised its controls periodically so that it would cover the most important areas of the Community's interventions every four years. With the obligation to provide a statement of assurance the Court had to give an annual opinion regarding the budget as a whole. 

The content of the DAS 

The DAS has two components. One gives information on the reliability of the accounts and another one gives information on the legality and regularity of the underlying transactions of the accounts. 

The objective of the component "reliability of the accounts" is to obtain sufficient evidence that all transactions, assets and liabilities have been completely, correctly and accurately recorded in the accounting records and presented in the financial statements.

The objective of the component "legality and regularity of the underlying transactions" is to obtain sufficient evidence that underlying transactions and related community funds have been accurately calculated and received or spent in accordance with regulations and/or contractual conditions. 

The main questions the auditor puts in this context will typically be

- does the underlying transaction exist?

      - is the recipient and/or beneficiary eligible?

      - do the costs and/or quantities claimed exist?

      - are they accurate and eligible?

The overall results of the DAS 

The major questions raised by the Court do not concern the regularity 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 this statement, 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.

·           Underlying transactions concerning revenue are legal and regular.

·           Underlying transactions concerning commitments are legal and regular.

  Underlying transactions concerning administrative expenditure are legal and regular.

·           The level of errors and irregularities concerning payments are too high.  

NB.  The first 3 being the responsibility of the Commission, whilst more than 80% of the 4th, i.e. PAYMENTS, are done at member state level.   

It is of course of interest to clarify whether the level of errors and irregularities in the underlying transactions has an impact on the accounts given that recoveries of the money concerned is possible afterwards. 

The problems concerning the legality and regularity of the underlying transactions are (too) often presented as equal to fraud and corruption. It is in the interest of all parties that this confusion be brought to an end. It would be helpful if the Court expressed itself in a way which was less prone to public misunderstanding and if a bigger part of the press would avoid simplification of the message.

The initial DAS methodology 

In the first phase, financial years 1994 to 1997, the ECA based its statement of assurance entirely on a statistical method.  

According to that method the ECA would draw a representative sample from the Commission's book keeping system SINCOM and then test the transactions, from authorising officer down to final recipient, for reality and eligibility of activities, the accuracy of quantities, costs and calculations, as well as the legality of decisions. 

On the basis of the testing of the transactions in the sample, the ECA would then calculate an error rate extrapolated for the whole budget. 

Error rates 

For the financial years of 1994, 1995 and 1996 the ECA published the results of its audit work as "error rates". On the basis of a statistical approach the ECA was able to say that the most likely error was situated somewhere between a lower error limit and an upper error limit 

 

Lower error limit

(A)

Most likely error

(B)

Upper error limit

(C)

1994

2,9

4,0

5,0

1995

4,3

5,9

8,5

1996

3,5

5,4

8,3

 The error rate was only published in the early years of the DAS. The Court found that the "most likely error" was misleadingly interpreted by the press as an absolute fraud rate and therefore stopped the publication of error rates.  

Problems with the initial DAS methodology 

The hundreds if not thousands of authorities in the Member States doing the payments are very different and there are significant quality differences between the multitude of systems and sub-systems involved in the management and control of transactions.  

Because of that no general conclusions can be drawn from, say, an error found in an animal premium claim in one region in one Member State and another found in an export refund from another Member State. 

A global error rate calculated on a sample from a budget as complex as the EU budget will never have any analytical value. It will never give an answer to the following fundamental questions:

"Who is committing the errors?"

"What kind of errors are being committed?"

"Why are those errors committed?"

"How can they be avoided?" 

A global error rate will only give the information that something is wrong, that the patient has fever, but not what the problem is. The statistical method was not providing useful information to the Parliament.  Instead of indicating where to go to find the origin, frequency, nature and financial impact of errors and what action should be taken in order to prevent new errors in the future it merely gave ammunition to those who had an interest in creating a negative picture of the Union.

The reform of the DAS 

The users of the Statement of Assurance - the Commission as auditee, the Council as the body giving a recommendation to the Parliament and the Parliament as discharge authority (i.e. discharging the Commission of its responsibility) - were not satisfied with the initial DAS approach. Whilst recognising that it was of some value to know that "something was wrong", that the patient had a fever, they also stressed the need for information on what was wrong, i.e. why the patient had a fever. 

So the ECA initiated a reform process of the DAS approach which is still going on. 

For the financial years 1998 to 2001, the statistical method was progressively broadened to give more importance to systems evaluation and to take more account of audit work outside of the global sample. It was the very first cautious move towards a segmental auditing of each of the broad fields covered by the budget. However, the overall DAS was still primarily based on the results of the testing of the global sample. 

For the period 2002-2004 the ECA based the DAS audit on four sources of information instead of just one. These four sources are 

       - evaluation of the supervisory systems and controls

       - substantive transaction testing

  - annual activity reports and declarations of the Directors-General at the Commission

- the work of other auditors 

This approach was later extended to cover 2005 as well so as to allow the ECA to take account of Parliament's recommendations in its discharge to the Commission for the financial year 2003. 

Due to the very approximate character of the "error rate approach" it should be welcomed that the ECA has abandoned the results of the sample-based testing as the only source of information for drawing up its opinion.  

By establishing four sources of information the ECA is moving towards a more solid and professional qualitative approach which will allow for more precise results and a better identification of sources of error than the mechanical, quantificative statistical approach used in the early years.  

The speed of reform in the Court 

Having regard to the fact that the usefulness of the initial statistical approach was questioned from the very beginning of the DAS (1994) it is rather surprising that the real reform did not take off before 2002. 

This raises the question whether there is between the 25 Members of the Court a common understanding on what the Court shall do in order to "provide a statement of assurance". It is recalled that the legislative authority did not prescribe which criteria and method the ECA should use. That decision was left to the discretion of the ECA itself. 

Having regard to the fact that the role of the Court of Auditors is to "assist the European Parliament and the Council in exercising their powers of control over the implementation of the budget" (Art. 248, 4) it would seem useful that discussions on the Court's criteria and method take place in public and with full transparency.  

Parliament has repeatedly defended the independence of the ECA. The keen interest Parliament shows in the future development of this audit reporting instrument has to be seen against the background that Parliament is one of the main users of the DAS. It is evident that Parliament wants an instrument that can help it in its work on the discharge. It will find no help in an instrument detached from reality. 

Hopefully the future development of the DAS will turn it into a precise instrument concentrated on the analysis of the functioning of supervisory and control systems. Only by improving will it be possible to identify the origin of weaknesses and errors. 

It is not the accounts that are the problem but how to monitor every Euro that is spent by shared management in the Member States.  A positive DAS may show if the spending is "legal and regular", it doesn't show if it is being spent wisely or achieving value for money.   

So how to solve the problem?

For Starters: 

The Commission has undergone an in-depth administrative reform (new financial regulation, assignment of responsibility to Directors-General as line managers, establishment of an Internal Audit Service, etc.) which may have had a positive effect on the quality of Commission management. 

It is, however, clear that those measures taken in the context of the administrative reform of the Commission cannot have any impact on that part of the budget which is directly administered and controlled by national administrations i.e. over 80% of the budget.  

It is a fundamental characteristic of the European Union that transactions financed by the EU budget are subject to different management systems.  

The Financial Regulation (Art. 53) distinguishes between four different models:

§           centralised management (used for administrative expenditure and internal policies),

§           shared management (EAGGF-Guarantee and Structural funds),

§           decentralised management (pre-accession aid) and

§           joint management (cooperation with international organisations) 

Shared management 

The model which transmits most money is "shared management". This means that implementation tasks are delegated to Member States. The management and control of measures under the CAP and the Structural Funds involve not only a considerable number of Commission departments but also hundreds of national, regional and local offices and departments in the Member States. Around 80% of the budget is implemented in this way.  

While Member States are in charge of the implementation of the majority of the EU budget, it is the European Commission that bears ultimate responsibility for such implementation and for control measures within Member States (Article 274 of the Treaty). 

It follows that strong and efficient Community controls of how EU money is spent become the logical consequence of a system in which projects and programmes are mainly managed by national or regional authorities. If the Union is not able to gain sufficient insight into the national management of EU programmes and projects, those programmes and projects will lose their Community character.  

For several years the European Court of Auditors (the ECA) has clearly stated that the way in which national authorities in the Member States do their part of the job is not good enough. 

The main problems, says the Court, as regards the legality and regularity of the underlying transactions are first and foremost located at Member State level. 

Delegation risk 

The distinction between the financing of a Community policy and the implementation of the same Community policy gives rise to the so-called "delegation risk". The Commission's delegation of implementing powers to the Member States is not without risk for the Commission, which has ultimate responsibility.  

The risks faced by the Commission include, inter alia, the following: 

·     the risk that Member States and beneficiaries do not always pay the same degree of attention to the spending of EU money as to the spending of national money, 

·     the risk deriving from the different quality of Member States' control standards, 

·     the risk stemming from the ex-post nature of recovery mechanisms, which diverts attention from the need for remedial action to be taken as early as possible and in many cases allows errors to be repeated over too long a period, 

·      the risk which derives from the lengthy chain of events leading from budget commitment to receipt by the final beneficiaries. 

In its 2003 discharge resolution Parliament took the clear view that, after 10 years with a negative Statement of Assurance on payments and the ECA's unequivocal indication of the origin of most of the errors as regards the legality and regularity of the underlying transactions, new instruments were needed in order to enhance the Commission's insight into the Member States' management and control systems, thereby mitigating the delegation risk. 

Parliament found that the time had come to base the relationship between the Commission and the Member States' administrative authorities on principles of good public administration such as transparency and accountability. Legal definitions of control mechanisms had proved to be inadequate to enable the Commission to fulfil its obligations under Article 274 of the Treaty.

New instruments 

In order to close the gap between what the Treaty requires the Commission to do and the Commission's ability to do this in the real world, Parliament presented the principles of two new instruments, one to be used before any payments were effected and the other to be used after payments had been made. The ex-ante instrument was called a Disclosure Statement and the ex-post instrument was called a Statement of Assurance. Both 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.  

The Disclosure Statement should include: 

·      a description of the control systems by the managing authority of a Member State,

·      an assessment of the effectiveness of the design of those control systems,

·      where necessary, a remedial action plan , drawn up by the managing authority of the Member State in consultation with the Commission,

·      confirmation of the description by a national audit institution or another external auditor. 

Parliament further found that the Commission should have the right to verify the Disclosure Statement as well as clear authority to impose penalties affecting the overall funding of the Member State concerned, in the event of inadequate disclosure. 

The Statement of Assurance should be an annual statement from the national manager (in principle also the Finance Minister) in which he/she would give a declaration similar to that given by the EU manager (the responsible Director-General of the Commission) in the annual activity reports introduced as part of the administrative reform of the Commission. 

It is recalled that the Director-General of a DG in the Commission, in his/her capacity as authorising officer by delegation, declares that the information in the DG's Annual Activity Report "gives a true and fair view" and that he/she has "reasonable assurance that the resources (...) have been used for their intended purposes and in accordance with the principles of sound financial management, and that the control procedures put in place give the necessary guarantees concerning the legality and regularity of the underlying transactions". 

The Director-General's Annual Activity Report and Declaration is an important element in the Court of Auditors' audit work and has since 2002 been one of the four elements on which it bases its Declaration of Assurance.   

The overall objective of the administrative reform in the Commission was to give those in the Commission who use the money the responsibility for how the money was used. The same principle should apply when the money is used in the Member States. 

Just as the EU manager (the Director-General of the Commission) has been required to draw up an Annual Activity Report and to give a declaration, it would be logical to require the same from the national manager. The national manager's Annual Activity Report and the following declaration could be a valuable further source of information for the Court's DAS.

The role of national audit institutions  

The role of the national audit institutions in controlling how EU funds are used has so far been very little visible. This is in spite of the fact that, with the introduction in the Treaty of Maastricht of the requirement to provide a Statement of Assurance, it was already clear that the task could not be fulfilled without close cooperation between the Court of Auditors and the national audit institutions (sometimes also called Supreme Audit Institutions - SAI). 

To quote the former President of the Court of Auditors Mr Fabra Vallés in order to show that the level of cooperation is still insufficient: "In the case of the Supreme Audit Institutions (SAIs), and despite the evident interest of all concerned and the resources that have been provided by them, we should not be content with the results of the existing collaboration."[1] 

It seems that the necessary revitalisation of cooperation between the ECA and the SAIs could be based on the two new instruments proposed by Parliament. The SAIs could audit the national Disclosure Statement as well as the national Statement of Assurance. First, the national manager will give his own representation of the financial situation, and then the national audit institution will perform an external audit of the statements given by the national managing authority. The national audit institution will then inform the Commission and the Court of Auditors of the results of its audit. 

The question remains as to who should take the initiative to get the process started. In recognition of the fact that both the ECA and the SAIs are independent bodies it seems unlikely that they will be able to take such an initiative. In its 2003 discharge decision Parliament invited the Council to give the creation of a comprehensive control and audit framework the priority and political momentum it requires by establishing a high level panel of experts which would: 

                       i.          bring together a number of leading figures with experience of the EU institutions, national audit authorities and finance ministries as well as experts from international audit bodies, 

                       ii.          prepare a draft action plan for the creation of a coherent internal control and external audit environment, with particular reference to the challenge of shared management, 

                       iii.          identify possible constitutional, political and administrative obstacles which would need to be overcome in order for national audit bodies to be active players in the process of safeguarding taxpayers' money channelled through the Union's budget, 

                        iv.          report to the Council, Commission and Parliament as soon as possible.  

The Response of the Member States  

The Council and Commission co-chaired a Panel of Experts meeting on the 21st and 22nd September 2005 in Brussels where many member states defended the status quo and saw no need for any changes and certainly not for any political interference.  They had been given a mandate from ECOFIN to find a solution to the problem of negative DAS but instead the majority who spoke found every reason to block Parliament's proposals. 

Then on 8th November 2005 ECOFIN took the advice of COREPER and rejected the idea of a Disclosure Statement and a Statement of Assurance from the member states, despite the efforts of the British Presidency.

The ability of the ECA to give a positive DAS on payments will therefore be severely handicapped. 

POSTSCRIPT

The above was written at the end of 2005. The Budget Control Committee and the Budget Committee of the European Parliament then decided to make this a priority for agreeing with the Council of Ministers on a new Financial Perspective for the years 2007 to 2013.

The negotiations between the European Parliament, Council and Commission concluded in April 2006 and within the new Inter-Institutional Agreement which sets out the terms of the Financial Perspective from 2007 to 2013 is included the following:-

Part III - Sound Financial Management of EU Funds

A. Ensuring effective and integrated internal control of Community Funds

44. The European Parliament, the Council and the Commission agree on the importance of strengthening internal control without adding to the administrative burden for which the simplification of underlying legislation is a prerequisite.  In this context, priority will be given to sound financial management aiming at a positive Statement of Assurance (DAS), for funds under shared management.  Provisions to this end could be laid down, as appropriate, in the basic legislative acts concerned.  As part of their enhanced responsibilities for structural funds and in accordance with national constitutional requirements, the relevant audit authorities in Member States will produce an assessment concerning the compliance of management control systems with the regulations of the Community.

Member States therefore undertake to produce an annual summary at the appropriate national level of the available audits and declarations. 

Whilst not perfect, and aware of the resistance from 20 of the 25 member states, it is the best that can be gained so far.  The Dutch have promised to do voluntary Declarations in the hope that others will follow.  It still remains a priority for the European Parliament.

 


[1] "Public Expenditure Control in Europe", edited by Milagros García Crespo, Foreword, page xii.

Addendum

Comments on UK public spending by the National Audit Office

Ministry of Defence: Departmental Resource Accounts 2002-2003

Sir John Bourn, Head of the National Audit Office, was unable to confirm the accuracy of some £1,128m adjustments to operating costs relating to movements in RAF consumable stock and capital spares. This is because the MOD has many old stock management systems which are not entirely suited to producing accruals based financial information.

(Report by the Comptroller and Auditor General, National Audit Office Press Notice, 30 October 2003)

Department for Work and Pensions Resource Accounts 2003-2004

Head of the NAO Sir John Bourn reported to Parliament today that he has qualified his opinion on the accounts of the Department for Work and Pensions. This is because of substantial levels of estimated losses from fraud and error in benefit expenditure, a significant limitation in the evidence made available to the NAO during the audit of expenditure on Incapacity Benefit, and material uncertainties over the completeness, existence and accuracy of amounts recorded in the accounts for benefit overpayment debtors. (Source: Sir John reports that, according to the Department’s own estimate, the amount lost from payments in all benefits in 2003-04 because of fraud and error is approximately £3 billion. This is the same estimate as reported in 2002-03 and 2001-02 and represents some 2.8 per cent of the £109 billion of gross expenditure by the Department on a wide range of benefits, employment programmes and associated administration costs.

(Report by the Comptroller and Auditor General. National Audit Office Press Notice, 18 January 2005) 

Revenue Trust Statement

The Comptroller and Auditor General continued to note major reservations concerning tax credit application errors, and this led to a further qualification of his audit opinion on the Revenue’s trust statement for 2003-04. In 2000-01, the Revenue had identified tax credit applicant error rates of 10-14 per cent by value, equivalent to overpayments of £510-£710 million per year. While improved controls in the new tax credit system are planned to reduce the incidence of such overpayments, the Revenue will not know the effect these controls have had on the error rates until an ongoing review is completed in July 2005.

(General Report of the Comptroller and Auditor General 2003 – 2004. Executive Summary)

Inland Revenue Standard Report 2004-2005.

Sir John Bourn, head of the NAO, today published a report on the Inland Revenue’s accounts for the year 2004-2005. The Inland Revenue collected some £256.9 billion in the year. Sir John confirmed that overall the Inland Revenue continued to secure an effective check over the assessment, collection and allocation of tax during the year. However, he has qualified his opinion in respect of Tax Credits for the third year running because of the likely level of claimant error and fraud.

The Inland Revenue distributed some £15.8 billion in 2004-05 on Tax Credits. The high level of overpayment under earlier Tax Credit schemes led Sir John to qualify his audit opinion on the Trust Statement for 2002-03 and 2003-04. The Inland Revenue told the Committee of Public Accounts in January 2005 that they were undertaking work to provide more information on the level of claimant fraud and error under the new Tax Credits. This exercise is not due to be completed until Spring 2006. In July 2005, however, the Department produced interim results which indicated that it had overpaid 3.4 per cent because of claimant fraud and error in 2003-04 (some £460 million).

The Department believes these interim results are subject to a wide margin of error because they are based on work that had been completed by May 2005 and it is likely that these cases were more compliant. The final results are likely to show an increase in the proportion of cases involving claimant fraud and error.

Sir John concluded that, while the interim work suggests that the level of claimant fraud and error is lower than with the previous Tax Credits, it remained unacceptably high in both the amount and percentage terms. Sir John has therefore qualified his audit opinion on the 2004-05 Trust Statement account. .

(National audit Office Press Notice, Report by the Comptroller and Auditor General. 10 October 2005)

 

Financial Auditing and Reporting: 2003-2004 for Northern Ireland.

 

Mr John Dowdall, the Comptroller and Auditor General for Northern Ireland, and Head of the Northern Ireland Audit Office today reported the results of Financial Audit work undertaken over the last twelve months.

Mr Dowdall was again unable to form an opinion on the financial statements of the Department. The main reasons for this were:

  • Estimated losses of £112.3 million in Income Support, Jobseekers Allowance, Disability Living Allowance and Housing Benefit as a result of errors by officials and customers and fraudulent claiming of benefits. This represented 3.2 per cent of the Department’s total expenditure on benefits. This area has been qualified and reported on for a number of years.

  • Weaknesses in the financial control and monitoring of grants paid to Registered Housing Associations.

  • Significant weaknesses in financial control and monitoring of urban regeneration and community development grants to voluntary and community bodies.

The report refers to the lack of progress by the Department on the recovery from providers of irregular expenditure on the Individual Learning Accounts scheme. An earlier report on the 2001-02 accounts had identified potentially irregular expenditure of between £1.3 million and £2 million over the lifetime of the scheme. Mr Dowdall says “it is a matter of considerable concern that almost three years after the closure of the scheme providers have not been contacted and recoveries actively pursued. This sends the wrong message to those involved in fraudulent activity and represents a missed opportunity to draw out the lessons learnt from this scheme with the provider network”.

The report also refers to overpayments of up to £460,000 on the LearnDirect e-learning programme. The legal assessment is that only £30,000 of this is recoverable. Mr Dowdall says “I see this as a major deficiency in the scheme rules that only £30,000 of the £460,000 can be recovered. These providers received £430,000 that they may not be entitled to and which cannot be recovered as the scheme guidelines had not been subject to adequate legal scrutiny at the outset”.

(Press release July 2005. General Report by the Comptroller and Auditor General for Northern Ireland)

 

What the papers say about waste with UK budget:

Online college 'a disgraceful waste'

A FAILED Government scheme to offer British university degree courses over the internet was today condemned as a "disgraceful waste" of public money after it attracted just 900 students at a cost of £50 million.

Studying at the UK e-University, which folded last year just six months after the launch of its first courses, cost an average of £44,000 per student - more expensive than going to Oxford or Cambridge - a report by the influential House of Commons Education Committee found.

Committee chairman Barry Sheerman said: "UK e-University was a terrible waste of public money."

NEWS.scotsman.com

03.03.2005 

UK slips in world competitiveness league

RISING levels of waste in government spending and deteriorating public finances have helped to drag Britain downwards in a worldwide league table of competitiveness published yesterday.

The UK came thirteenth in the competitiveness index compiled by the World Economic Forum (WEF), down from eleventh place last year and considerably below the fourth place achieved in 1997.

Britain fell to 73rd in the world on a measure of the health of the public sector finances, while on a reckoning of the Government’s success in cutting waste, the country fell to 27th place, from 22nd the year before.

The Times  - September 29, 2005


Back to Budgets