Auditing the EU budget

On November 14, the 2005 Annual Report by the European Court of Auditors (ECA) was discussed by the European Parliament, meeting in plenary in Strasbourg.

The session opened with statements by Hubert Weber, president, of the ECA, and by Slim Kallas, Commission vice-president, responsible for Administrative Affairs, Audit and Anti-fraud, who were then followed by short interventions by a number of MEPs, in representation of the main political groupings in the European Parliament.

As with all debates in plenary, given that the many speakers generally deliver prepared speeches within very tight time constraints, the session could hardly be said to have provided a structured debate. Nevertheless, some very relevant points were made, although there was no opportunity to develop them further.

This should, hopefully, happen on November 20 and in subsequent meetings of the European Parliament's Budget Control Committee, which will discuss the contents of the ECA's annual report in greater detail within the scope of a number of 'hearings' in which the various Commissioners are present to reply to questions from MEPs, as part of the 2005 Budget discharge process. In his intervention, Mr Weber sought to set the scene by dispelling some possible misconceptions on the Court's audit work. In the introduction to his speech, he therefore made it a point to emphasise:

"Each annual report of the Court is a culmination of complex and detailed audit work carried out on the spot by our auditors during the previous 12 months at all levels of administration of EU funds. "Following the principles of international auditing standards and as confirmed by external experts, the Court's audit evidence is based on the detailed testing of samples of transactions from each budgetary field and on assessments of the functioning of the internal control systems covering the expenditure.

"Only serious formal errors and errors with financial impact - such as over declarations, ineligible beneficiaries and expenditure - provide the basis for the Court's Statement of Assurance."

There have been, at various times, detractors of the ECA, who have tried to argue that the Court's assessment is influenced unduly by trivial errors that its auditors uncover during their audit work. However, this is certainly not a fair representation of what actually happens.

The Court does not base its conclusions on trivialities. Mistakes "in filing forms" are not automatically taken up as errors but only if the analysis of the audit evidence collected indicates serious concerns about the legality and regularity of the relevant expenditure, and only if the expenditure involved is material. The Court's conclusions are based on identified system weaknesses and concrete failings in operational programmes which are brought to light during its audits. These are communicated to the Commission and to the pertinent member states and are extensively discussed with the Commission in a series of meetings, commonly referred to as the contradictory procedure. This process serves to confirm the facts and provides the basis upon which an opinion is formed by the Court. This ECA's audit opinion is a 'professional assessment', made on the basis of the available information and in line with accepted audit practice based on international audit standards.

The subsequent interventions by the MEP's, who spoke during the plenary, touched upon a number of relevant issues which merit further consideration, especially because, in most instances, the relevant context is bound to be much more complex than the initial perception is likely to suggest.

In brief, the following are some of the points raised (in italics), together with an initial reflection on my part concerning each point.

When describing its audit findings, the Court should distinguish between 'mistakes' found and actual cases of 'fraud' uncovered. Although it is easy to understand the logic behind it, what is being requested is much more difficult to do than what one might initially think.

In his investigation, an auditor might uncover a number of irregularities, such as expenditure that is not supported by an invoice, or an over-declaration of the area under cultivation on which a subsidy has been claimed, or requests for reimbursement of overhead expenses, which appear excessive, etc.

In all these cases, it is the normal practice for auditors to classify these findings as 'errors' since it is only a much more detailed investigation that could possibly shed light on the underlying motivation. The concept of 'fraud' is ultimately a juridical one, something that has to be established by a court of law.

In fact, it is the practice for the ECA to report to OLAF, the office in charge of investigating fraud, those cases where its audits suggest a strong suspicion of serious fraud.

The ECA should name and shame individual member states. Again, the request is a logical one but much more difficult to implement in practice than might initially appear to be the case. In its annual report, the ECA provides details of the specific projects in which its audits have uncovered irregularities. However, although the Court bases its audits on samples which are sufficient for it to draw conclusions on the budget area in question (e.g., agricultural spending) these same samples are not designed to draw conclusions on the individual countries.

For this to be possible, much larger samples would need to be drawn, effectively one for each member state and this would require many more resources than are currently available.

There should be better indication of improvements from year to year. This is a desirable objective but very difficult to address. It is enough to reflect on the fact that, in any one year, the auditor is checking transactions made in the previous year, whereas the auditee will be implementing measures which are likely to take more than one year before their effect can be felt.

Furthermore, such measures might not be implemented as effectively or as quickly within all the member states, with the result that most improvements are likely to happen piecemeal and their overall effect will only become discernable over a suitable length of time. The ECA's annual report seeks to assess the legality and regularity of EU spending but does not say anything about how effective this expenditure has been or whether objectives are being met. This comment reflects the wish to have so-called value-for-money audits in addition to the conventional financial audit, which is the basis for the ECA's statement of assurance.

However, the way in which this wish has been, at times, expressed is quite unfair to the ECA since the Court already conducts, on a regular basis, a number of such value-for-money audits, and covering diverse aspects of the EU budget.

These are typically then the subject of 'Special Reports', which are published distinctly from the Court's annual report but which are, nevertheless, equally available for consultation by those who want a broader perspective from the strictly financial one.

For example, I was myself the rapporteur for a 'Special Report' that assessed the ex-post evaluation of structural fund programmes and which presents a number of recommendations on how this process could be enhanced and made more effective in future.

In conclusion, the various comments made, which I have sought to summarise in this short article, cannot be perceived and should not be projected as being criticisms of the ECA.

What these comments do is to reflect the highly commendable wish of the members of the European Parliament to be provided with a more complete picture of EU finances so that they may achieve a better understanding of where improvements can and need to be made.