Court's audit report

On Wednesday, the President of the European Court of Auditors (ECA) presented a copy of the ECA's Annual Report for 2005 to the President of the European Parliament. Later in the evening, he delivered a speech in front of the Budgetary Control Committee of the European Parliament, meeting in Strasbourg, to introduce the main contents of the report.

The following morning the ECA held a press briefing, also in Strasbourg, to mark the publication of its annual report, which was, at that point, made available on the ECA's Website in all the official languages of the EU, including Maltese.

The main content of the ECA's annual report is the Court's Statement of Assurance (in French, Declaration d'Assurance, or in brief DAS). The EU Treaties impose quite a demanding task on the ECA, which goes well beyond the normal remit of external auditors in the private sector.

It is a remit that is also, in some important ways, more complex than that of the 'national audit offices' in the individual countries. First of all, the audit by the ECA covers EU expenditure in the 25 member states.

In addition, the ECA must not only give its opinion on the reliability of the EU accounts but also on the legality and regularity of the underlying transactions, and the DAS covers both.

Some clarification of the relevant terminology is necessary. The opinion on the reliability of the accounts sets out to establish the extent to which the final annual accounts for 2005 completely and accurately report i) the cash flows and financial results for the year; and ii) assets and liabilities at year end.

On the other hand, the opinion on the legality and regularity looks at the underlying transactions to establish whether these have been made in conformity with the relevant rules and regulations.

Although both opinions seek to establish whether EU money has been spent properly, the perspective adopted and consequent focus is quite different. The first (reliability) is looking at the consolidated accounts to establish whether they provide a complete and truthful picture of revenue and expenditure, both as a flow during the year as well as in terms of the assets and liabilities at the end of the year.

The second (legality and regularity) looks at the underlying transactions to see if expenditure has been made according to the relevant rules. Both perspectives are relevant. Cash flows, etc., could be recorded correctly in the accounts but the transactions underlying them might have not respected the relevant regulations.

Transactions could be legal and regular, but they might still be recorded inaccurately in the accounts.

The ECA's annual report represents a significant investment of the Court's resources over the preceding 12 months. It is the culmination of extensive audit investigations carried out at all the levels that are relevant for the proper administration of EU funds.

That is to say: at the Commission and within the other EU institutions; within member and other beneficiary state administrations, which may include both national and regional entities, and at the level of the final beneficiaries and recipients of EU funds, in all their variety.

This year's audit has been particularly challenging because it covers the first year since the change-over to accruals-based accounting, on the part of the Commission and the other EU institutions. This has been a very important development.

The introduction of accruals-based accounting has shifted the focus of EU accounts from the simple registration of cash transactions to the recording of inflows and outflows of resources as soon as these take place or even at the point where a commitment has been made for them to take place.

The ECA recognises the great effort made by the Commission towards the successful introduction of accruals-based accounting and this is clearly acknowledged in the Court's annual report. The ECA's assessment on the reliability of the accounts is a positive one, albeit with some qualifications.

More specifically, the Court concludes that the 2005 consolidated accounts of the EU general budget present fairly, in all material respects, the financial position of the European Communities as at December 31, 2005, and the results of their operations and cash flows for the year then ended, but qualifies this opinion with some very specific observations. For this reason, the exercise cannot, as yet, be said to have been completed and additional efforts will be required, in the coming years, to consolidate further what has been achieved to date.

The position concerning the question of legality and regularity is much more problematic and, as in previous years, the ECA has been able to provide an unqualified opinion only on part of the total expenditure. For more than half of the expenditure budget, namely for agriculture outside of IACS system, structural measures, internal policies and external action, the Court has again been obliged to report continuing high levels of error.

This situation underscores deficiencies in internal control systems, in particular those in member states for expenditure in agriculture and structural measures, but also within expenditure directly managed by the Commission, such as internal policies.

In his address to the EU Parliament's Budgetary Control Committee, Hubert Weber, the ECA's president, explained this point: "The legality and regularity of underlying transactions continues to be of concern. However, this does not mean that all or even the majority of payments from the EU budget are affected by errors, nor can it be interpreted as an indication of fraud.

"What it does signify, however, is that, based on the results of the Court's detailed audit work, errors with a financial impact are found too frequently for the Court to conclude that all is well. The underlying reason that most errors occur is because beneficiaries - farmers, local authorities, project managers - claim for more than to which they have the right.

"Explanations range from simple neglect or error, through poor knowledge of the complex rules up to presumed attempts to defraud the EU budget. However, it is the responsibility of the Commission to administer the budget in a way that reduces the risk of irregularities through preventive measures and effective controls."

This has been a pivotal year with the change-over to a new accounting system. However each year is important in its own right and there can be no room for complacency. The good effort that has been made for the successful implementation of accruals-based accounting will need to be sustained further: to address the weaknesses identified by the ECA in its audits, to follow-up the observations made in the annual report and to consolidate the supervisory and control systems that have been put in place.

One must not underestimate the challenge. Managing EU funds is a very demanding task because of the many diverse facets to the EU budget and because of the complexity of the context in which it has to take place.

Equally challenging is the audit task that has to be covered by the ECA, and this has been particularly so this year. This role of the Court is a fundamental one, providing an independent assessment and a critical insight into what needs to be done better, for the ultimate benefit of EU citizens.