Improving EU finances

On October 23, the President of the European Court of Auditors (ECA) presented the Court's 2005 Annual Report to the Committee on Budgetary Control (COCOBU) of the European Parliament and on November 14 the report was presented to the European Parliament, meeting in plenary.

As I have already had occasion to comment, the publication of the ECA's annual report represents the first step in the annual budget discharge procedure. This is the process through which the European Parliament examines the way in which the European Commission has implemented the previous year's budget.

It is within the remit of the European Parliament to approve or otherwise the way in which the Commission has managed the implementation of the budget. It is also its prerogative to highlight weaknesses, which need to be addressed, or measures, which ought to be implemented, to improve the management of EU funds.

In carrying out its pivotal role within the budget discharge function, the COCOBU holds a series of 'hearings' in which the individual EU commissioners answer questions on the implementation of the budget in their respective areas of responsibility.

These questions are generally prompted by the findings and comments within the ECA's annual report. For this reason, one or more ECA members are also present at these 'hearings' to provide additional information, if required, on the comments in the annual report.

A number of such 'hearings' have been scheduled and these will extend to next March. The first of these sessions was held on November 20 in Brussels and it concerned the two commissioners with responsibilities that pertain to the whole EU budget spectrum.

These are Dalia Grybauskaite, Commissioner for Financial Programming and Budget, and Siim Kallas, Commission Vice-President for Administrative Affairs, Audit and Anti-fraud. I was present at this session as the representative of the ECA designated to reply to questions on the Court's Statement of Assurance.

The proceedings are led by a member of the COCOBU, appointed as the rapporteur to follow the discharge process. The principal objective of the 'hearings' is for the rapporteur, as well as other members of the COCOBU, to submit questions to the commissioners present.

However, it is the rule rather than the exception that questions are also directed to the Court members present, for clarifications or comments. This is what happened in the session I attended.

Some questions concern the methodology that the ECA follows in its audits while others concern the actual findings. However, it is also possible to have questions about statements made by the Commission or other entities, on which the ECA is asked to comment.

Some questions are not questions at all but pronouncements, but these also require a reply.

Audit terminology may sound quite legalistic at times and, typically, a number of the questions put to the ECA members seek to obtain explanations that are easier to follow than the original text.

The danger here is that no response will be as precise as the text in the annual report but, in such situations where one can respond orally and there is an element of interaction with the person asking the question, it is generally possible to find a way to simplify matters while still remaining consistent with the original message.

Quoting concrete examples is one way this can be done. In many instances, explaining better the methodology followed by the Court already goes a long way to resolve the queries that are put forward.

A case in point is the relationship between the analyses of supervisory and control systems on the one hand and the results obtained from the direct audit of a sample of transactions. In audit jargon, this is called 'substantive testing'.

The ECA has been, at various times, accused of not paying sufficient attention to systems analysis and of deriving its audit conclusions exclusively on the basis of the samples that it audits. In actual fact, the two considerations are linked.

On the basis of what is called an "assurance model"; the auditor first analyses supervisory and control systems and seeks to establish the amount of 'assurance' that can be derived from them.

In simpler terminology, the auditor seeks to establish the extent to which existing systems can be expected to prevent errors from occurring.

If systems are found to be effective, then less substantive testing is required and vice-versa.

The directors general in the Commission are required, each year, to produce so-called 'activity reports' and 'declarations' that seek to identify the effectiveness of control systems in their areas of responsibility.

The ECA has often been accused of not giving due consideration to these reports. This is not the case.

First of all, not all of these reports are of the same calibre; some are less robust than others. But what is important to explain is that these reports constitute a submission by those who have direct responsibility in managing the subject that is to be audited.

In such a situation, on the basis of international audit practice, the auditor is expected to take such submissions into consideration but this must be on the level of "representations by management".

Such reports, therefore, provide an important insight into the analyses of systems but cannot be regarded as a substitute for the independent testing of a sample of transactions to be carried out directly by the auditor.

In the minds of some of those who put across such queries, all issues are linked to the ultimate objective of obtaining a "positive DAS"; i.e., a positive statement of assurance by the ECA concerning the legality and regularity of the transactions underlying EU expenditure.

Unfortunately, this objective is sometimes portrayed in an unrealistic way, as if it is an all or nothing result, leaving aside considerations of the changes necessary to make progress.

In one of my interventions during the COCOBU meeting I emphasised this point specifically.

Last year, in its 2004 report, the ECA had, for the first time, made a positive assessment of agricultural expenditure managed under the systems known as IACS.

This was an important achievement since this expenditure heading amounts to just over half the agricultural budget and about a quarter of the EU budget overall.

This positive outcome has been maintained this year and the ECA has confirmed its assessment.

At the end of the day, the path to a "positive DAS" must be the effective application of control systems that are appropriate for the intended task.

During the COCOBU hearings, questions are submitted by MEPs to both the Commission and the ECA. Some of these questions may be characterised by a fair level of consensus in the replies received from the two institutions; but other questions may give rise to contrasting reactions.

This last outcome is one which surprises some people but is, in fact, something to be expected.

Although they are all part of the European Union, the European Parliament, the Commission and the ECA have different functions and their perspectives will differ.

Not only because functions are different but also because the subject matter is vast and inherently complex.

Hence, the various institutions can and will often have different points of view. However, their ultimate objective is identical: to serve the citizens of the European Union.