Annual meeting between the Heads of the Supreme Audit Institutions in the Member States and the European Court of Auditors

A speech Terry made in Stockholm on 5 December 2005.

 

Madame President, Ladies and Gentlemen 

1.                               It is an honour for me to have been invited to the annual meeting between the Heads of the Supreme Audit Institutions in the Member States and the European Court of Auditors. 

2.                               I am grateful to have the opportunity to explain to this audience what the European Parliament thinks about the quality of financial management in the European Union as expressed in its 2003 discharge resolution, for which I was the rapporteur. I was hoping that between us we could move the issue forward on the basis of constructive and realistic arguments but after the decision of ECOFIN on the 8th of November I'm not sure how much progress can be made.  In fact after that ECOFIN decision I gave serious consideration to not attending this meeting since it could prove to be a huge waste of time.  Whether it is to be a waste of time or not we'll soon discover at the end of this session.  ALTHOUGH I have to admit to being cheered by Jack Straw's comments in the European Parliament on the 16 November when he said  

"My judgement is that where Member States have control of money, they ought properly account for it as well.  If they do not have control of it then the European Union will have to account for it, but I am with you on encouraging our finance ministers to get a grip on this".     

So what is a politician like me doing at a gathering like this? 

3.                               After all, I'm not a professional auditor. Then again, neither are some members of the Court of Auditors. 

You are the experts in your field and I like to think that I know what I'm talking about. I also believe that the discussion on the auditing of the EU budget is both a political and a technical one. 

After all it's the politicians who carry the can when things go wrong. 

4.                               It was interesting to note that even the European Convention which prepared the Constitution did not deal with the issue of how to control EU funds. The Constitutional Treaty regrettably contains little or no concrete reference to the principles of good governance and good accountability or to any changes to the ECA. 

5.                               In September I participated in a "Panel of Experts" organised by the European Commission and the Presidency.  No doubt some of you were there also. This Panel had a political mandate from ECOFIN to offer "technical solutions" with regard to the implementation of an integrated internal control framework.  

6.                               What I heard was a lot of political comments saying why nothing should change. However, I was thankful for the comments of the Dutch, Hungarians and Finns. 

I was reminded of Margaret Thatcher who once complained of being surrounded by people who kept telling her why things could not be done rather than finding solutions. 

7.                               In my view experts and politicians are both part of the problem and part of the solution. That is one reason for my being here. 

8.                               Another reason is that it is my job as a politician to take the initiative when I see a problem. And as the rapporteur of the 1994 Discharge which contained the very first Statement of Assurance I said then that it would never be positive.   11 YEARS LATER WE STILL HAVE THE SAME PROBLEM. After all this time we need to change things.   

What is the problem? 

9.                               The problem is that for 11 years the European Court of Auditors has indicated in its annual statement of assurance (DAS after its French acronym) that it has no reasonable assurance for the majority of payments. 

10.                           Usually portrayed by the media as "95% of the EU budget riddled with fraud", What the Court is saying is that it has no reasonable assurance that the supervisory systems and controls of these areas of the budget are effectively implemented by the Member States. Which the media still interprets as "95% of the EU budget riddled with fraud". 

11.                           When supervisory systems and controls are not working as they should there is no assurance that the risk as regards the legality and the regularity of the underlying operations is well managed. So does it mean "95%" of the EU budget is riddled with fraud?  Or because of improvements in the 2004 figures it's now only 65% of EU budget riddled with fraud.     

What are "supervisory systems and controls"? 

12.                           Let us be quite clear about what is meant by "supervisory systems and controls". It is not rocket science. It is something as ordinary as organisational units with adequate numbers of qualified staff having the means to ensure that methods and procedures are applied in accordance with generally accepted standards.  Of course "it costs money".  Is that why Member States try to reduce the importance of such systems? 

Why do we have this problem? 

13.                           Because transactions financed by the EU budget are subject to different management systems. 

14.     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). 

15.   The model which handles 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.  

16.   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).  

Role of the Commission and Member States under the Treaty 

17.   The role of the Commission and the Member States as defined in the Treaty is - in theory - perfectly clear. The Commission implements the budget on its own initiative. This is the first part of Article 274 and the best known:  

The Commission shall implement the budget, in accordance with the provisions of the regulations made pursuant to Article 279, on its own responsibility and within the limits of the appropriations, having regard to the principles of sound financial management. 

18.   WHO KNOWS WHAT THE SECOND PART SAYS? MEMBERS STATES NEVER QUOTE IT. The second part of Article 274 says this: 

"Member States shall cooperate with the Commission to ensure that the appropriations are used in accordance with the principles of sound financial management". 

19.   This is the theory. Reality is different. 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. 

20.   The Treaty gives one job to the Commission and another to the Member States. Member States cannot continue hiding behind the first part of Article 274 and failing to do their job. 

21.    If they don't cooperate as they are required to do we face a continuing problem and at this point an operational problem turns into a political problem which requires political action. 

Delegation risk 

22.   When the Commission delegates implementing powers to the Member States it clearly runs a risk. The risk is that the Member States do not "cooperate" in the sense of Article 274 because:   

                                                      they do not always pay the same degree of attention to the spending of EU money as to the spending of national money, 

                                                      of the differing quality of Member States' control standards, 

                                                      of the risk stemming from the ex-post nature of recovery mechanisms,  

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

23.   In its 2003 discharge resolution Parliament took the clear view that, after 10 years with a negative Statement of Assurance on payments and with the ECA's unequivocal comments as to where the blame lay for most of the errors, new instruments were needed in order to mitigate the delegation risk

24.   Parliament found that the time had come to base the relationship between the Commission and Member States' administrative authorities on principles of good public administration such as transparency and accountability.  

New instruments and an enhanced role for national audit institutions 

25.   In order to close the gap between what the Treaty requires the Commission to do and the Commission's ability to do it, Parliament presented the principles of two new instruments, one to be used before any payments were effected - an ex-ante disclosure statement - and the other to be used after payments had been made - an ex-post assurance statement. Parliament further found that the national audit institutions could play an important role in relation to these two instruments

Ex-ante Disclosure Statement 

The ex-ante Disclosure Statement should include: 

                                              a description of the control systems given 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. 

In other words: the ex-ante disclosure statement should confirm that the organisational structures in place comply with the requirements of Community legislation, and that they are expected to be effective in managing the risk of error in the underlying transactions. 

Ex-post Statement of Assurance. 

26.   The ex-post Statement of Assurance should be an annual statement from the national manager

27.   Just as the EU manager (the Director-General of the Commission) has been required to draw up an Annual Activity Report and to give his/her declaration, Parliament took the view that the national manager should also be required to do the same. 

Who should sign these statements? 

28.   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.  

29.   It seems that this proposal has caused a lot of concern in some Member States.  

Is the Finance Minister the right person to sign? 

30.   The panel of experts certainly thought not. But quite frankly I think they missed the point. It has been said that the proposal would imply that national Finance Ministers would be responsible to the European Parliament instead of their national parliaments, and that the next step would be that the European Parliament would require national Finance Ministers to come to Plenary and defend themselves! 

The European Parliament has never said such a thing. It is not in any text adopted by the EP. I have never mentioned it or discussed it with anybody. It is an argument taken out of the blue. 

31.   It has also been said that the proposal would change the balance between the Commission and the Member States and that it would in fact be a transfer of responsibility from the Commission to the Member States. "They want us to do their job". 

I don't agree. The proposal does not take responsibility away from the

Commission. It merely underlines Member States responsibility as stated in the second part of Article 274. 

32.   Nervous Member States insist that such a declaration would transfer responsibility from managers to politicians. 

In my view it is clear that any Finance Minister would never sign anything like this unless he/she could do it on top of declarations from managers at the administrative level. The signature from the Finance Minister should of course not be the only one. It should be the final one which confirms all other signatures lower down in the administrative chain. 

It would be the signature by which the accountability of the State would be recognised. 

I agree that it is important to draw the line between political responsibility and management responsibility very carefully. This might even be difficult to do.

But this is certainly not an argument against the principle as such. 

33.   It is somewhat difficult for me to understand why it would be so terribly difficult for a Finance Minister to sign such a declaration. It is nothing more than that which the United Nations Development Bank requires Finance Ministers in developing countries to do! Why should this sound principle not also be applicable to our own part of the world? 

Some more substantial considerations for further discussion 

34.   However, when I presented this idea of a signature from a high ranking national authority it was a clear objective but it wasn't set in stone. The important thing is to find a way of identifying the weaknesses in the current control and supervisory systems and to undertake appropriate remedial action with a view to achieving better financial management of EU funds. 

35.   In this respect the content is more important than the form. It is therefore relevant to discuss which authority would be the best for this purpose. 

36.   The signature of the Finance Minister would be appropriate for a declaration covering all funds. 

37.   The signature of other Ministers could be more appropriate if declarations were made for each fund.   

38.   If Finance Ministers cannot be convinced of this then an alternative might be a declaration from the Head of the Ministry concerned. This would turn the initial national level approach into a sector level approach. 

39.   What we need is a national declaration from a high level authority. "High level" meaning higher than the current signatures on current reports. As it is now we have many signatures on many different reports. The problem is that the signatures are in many cases worthless. 

40.   Generally speaking I believe we can build on already existing information such as IACS, but the signature should be put on a higher level than now. We need a signature from a level which has the authority to say to the managerial steps below: "Get your control systems in place, or I don't sign". 

41.   In many Member States regional governments have full responsibility for the implementation of EU funds and national authorities have very little if any power to verify the use of these funds. 

42.   However, this does not mean that a national declaration is impossible. The concept of a national 'Coordination Body' as developed in the EAGGF Guarantee could be a model. The wording of the regional and the national declarations should be adapted to reflect each level's powers and responsibilities. 

43.   Federal structures should not be used as an obstacle to improving Member States' control systems. And certainly not as an excuse for being satisfied with the status quo.

The role of national audit institutions in relation to the proposed instruments 

44.   I think national audit institutions could play an important role in relation to the proposed instruments. However, let me start by acknowledging that national audit institutions have been put into the world in order to serve their national parliaments. 

45.   National audit institutions have very different audit cultures and different audit mandates. They are independent, they are not part of the internal control framework of the EU and they report to their national parliaments. 

46.   I also recognise that EU-funds are relatively small compared to the total national budget which national audit institutions have to audit. 

47.   All this is true. It is also true that the EU is a union of 25 Member States and that Member States bear responsibility when EU funds are spent in shared management. 

48.   I am fully aware that we are talking about a very sensitive issue. It was obvious from the "Panel of Experts" meeting that there was a fear that the proposal was to make SAI's subservient to the ECA. 

49.   This is not what is being proposed. But I do think that national audit institutions could play a role in relation to the proposed national ex-ante disclosure statements and national ex-post assurance statements - even if their methods may differ. 

50.  If we ever do arrive at a system which includes these two national statements it is clear that the statements should be externally audited. This would, in my view, be an obvious thing for the national audit institutions to do. 

51.   First, the national manager will give his own representation of the financial and managerial situation, and then the national audit institution will perform an external audit of the statements given by the national managing authority.  

52.   It could, however, also be done by another external auditor. It is up to the Member State to decide. One criterion to take into account could be the mandate of the national audit institution. 

53.   As many of you are aware this proposal has been met, and is still being met with some scepticism by some Member States (and their national audit institutions) as they conveniently forget  their own responsibility and accountability for EU funds according to the second part of Article 274.   

Agreed upon procedures 

54.   Common guidelines on how the external audit of the national statements should be carried out will be of fundamental importance. In order to add value, national declarations as well as their auditing will have to be subject to common standards and agreed procedures..  

55.  But will national audit institutions be able to work in accordance with "agreed upon procedures" or is such an approach contrary to their independence? 

56.   It should also be added that international standards mainly cover the audit of financial statements of private companies or public entities. Only in a few cases do we have international guidelines for auditing the legality and regularity of the underlying transactions. 

57.   Someone has to set these common guidelines. Should it be the Commission?  If not, then you had better start making your proposals now. 

As to who should receive the declarations and the audit opinions? 

58.   The proposed national management declarations should be sent to the European Commission and the European Court of Auditors. They should also be sent, for information, to the national parliaments. 

59.   The reports from the external auditor - be it the national audit institution or another auditor - should be sent to the national parliament and the national government. Then the national government would be responsible for sending the audit report to the Commission and the European Court of Auditors.  

The role of national audit institutions in the current set up 

60.   Let me say that even if we don't obtain a system with national declarations (and after the ECOFIN decision on 8th November I'm less confident that we will) I believe that national audit institutions could still play a bigger role in the current system. 

61.   As external auditors the national audit institutions audit the way in which national governments use national budgets. The national budget may or may not include EU funds. In sectors where the national budget does include EU funds the national audit institution could, if it so wished, audit the internal control systems set up by the government

62.   An audit of the set up and efficiency of internal control systems might be considered an activity that by strict definition does not qualify as an audit. Maybe, but it will certainly contribute to improving financial management of EU-funds in the Member State.  

63.   Such an audit - focused on purely national activities - would probably show that we have only very little insight in the effects of EU-policies as well as into the cost of implementing EU-policies.  HOW SUCCESSFUL ARE THEY IN YOUR MEMBER STATE, DO THEY MAKE ANY DIFFERENCE OR NONE?  

64.   So far and to my knowledge only the Dutch Court of Auditors is doing this in their EU Trend Report. I praised this initiative in my discharge report and I am happy to do so here as well. 

Simplification 

65.   It would probably be much easier to introduce the two new instruments and get Member States to do their part of the work if the regulations were simpler, and here is where I do agree with ECOFIN, I tend to believe that one part of Member States' resistance can be explained by the existence of too many unmanageable regulations. We do need simplification. Someone at the Panel of Experts said that the current rules are all too risky for having a positive DAS. He might be right.  

66.   Perhaps we should analyse whether we have too many relatively small Commission programmes and projects which would be better implemented and controlled under subsidiarity.  

67.   And perhaps we should go down the route of ultimate simplification.  Not many of my colleagues would support me when I say that such programmes and projects might be better supported by the EU in earmarked lump sum allocations to be used as complementary resources to the Member States' own budget resources.  

68.   Earmarked EU resources would follow the Member States' own financial management procedures. Clear achievement targets could be set but it would be Member State bodies - not European institutions - which would be responsible for implementation, audit and accountability. 

69.   Instead of channelling EU funds through specific complicated EU financial management systems which are hard to audit, all EU funds could go through the national budgets and consequently be audited according to national - that is local and therefore more efficient - control systems.  IS THAT THE WAY ECOFIN WANTS TO GO WHEN IT TALKS OF SIMPLICITY?  

Budget support 

70.   Allow me to take this thought a step further.  At present the European Court of Auditors is telling us that Member States supervisory systems and controls are not good enough. So these systems either have to be improved or they have to be made redundant. And why should the European Parliament agree a new F.P. if it is not satisfied that proper controls are in place? 

71.   If Member States don't want to improve their systems we should consider making the systems redundant by stopping the money flow which they are supposed to supervise and control. "if you can't control it, you ain't having it." 

72.   We need to ask what the EU budget is for. Is it merely a mechanism for EU inter-governmental redistribution of wealth, (with France getting a 25% share of the agricultural budget), or is it there to play a federal role by funding policies and programmes? Whatever it is, it needs to be simple, transparent and effective in meeting its objectives. 

73.   Would it not be simpler to decide that funds available should be redistributed

- in function of the economic strengths/weaknesses of Member States

- within the context of agreed overall EU policy objectives with clear EU added value and,

- via the national budgets?

This is exactly what we already do with the European Development Fund (EDF), where we give Budget aid and it gets a positive DAS. 

74.   EU Member States are shareholders in multilateral development banks. As such they have for many years been convinced that budget support provides a good model for developing countries. Why should it not be good enough for the EU Member States? 

75.   But that is straying well outside my remit of the 2003 Discharge report. It could, however, help to solve the problem considerably.

Thank you for your attention

 

 


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