Auditing in the EU

Earlier this month, I had the opportunity to chair the first meeting of a working group on 'common auditing standards' that brings together officials from the European Court of Auditors (ECA) and the national audit bodies in the member states.

The precise term applied to refer to the latter bodies is supreme audit institutions (SAIs), given the fact that some of the member states have a federal system of government, such that there could be more than one public audit body to each individual country.

In the case of such federal countries, the working group is directed at those bodies, which have a mandate at the federal level. Effectively, this translates into one SAI per member state.

The ECA is the 'external auditor' of the European Union's finances; meaning that it is responsible for the independent audit of all the revenue and expenditure under the consolidated budget of the EU. This remit is derived directly from the treaties that have successively defined and established the EU.

It is these same treaties that indicate that, in carrying out its functions, the ECA is expected to co-operate with the national audit bodies of the member states. The treaties specify that the ECA and these entities shall strive to work together "in a spirit of trust, while maintaining their independence".

The question of "independence" is a crucial consideration. If an audit body is to carry out its role objectively and effectively, it must be free from any possible pressure from those that are the subject of its audits, or even from other entities that might seek to influence its deliberations unduly.

"Independence" is therefore of prime importance and also a sensitive subject. For this reason the permanent mechanism that has been established to facilitate contacts between the ECA and the SAIs has been named, simply, the Contact Committee.

A name that might appear uninspiring but which is also 100 per cent neutral; thereby highlighting the fact that all participants within the group are equal and totally independent from one another, without any one body enjoying the designation of lead organisation.

It was the express decision of the Contact Committee to establish a working group with the task "to develop common auditing standards and comparable audit criteria, based on internationally recognised auditing standards, tailored for the EU area".

The Contact Committee had also decided that this new working group would be chaired by the ECA and it was an honour for me that the College of Members of the ECA entrusted me with this particular task.

Seeking to establish common standards is clearly an important consideration for all entities that want to enhance the scope for dialogue between them. This is clearly desirable if the entities involved are to be in a better position to exploit opportunities for co-operation, as might become appropriate.

Such a reflection may be said to be universally valid but it acquires even more relevance in the audit context where any move towards closer co-operation requires not only the application of analogous standards but also a convergence concerning the methodology that is to be applied.

There are many ways in which audit institutions could profit from an enhanced dialogue with their counterparts elsewhere. I have myself had the opportunity to lead a delegation from the ECA on a fact-finding mission to the Government Accountability Office of the United States and to the Office of the Auditor General of Canada and, in both instances, there were clear benefits to be derived as a result of the insight gained from a discussion of similar remits, even if in different contexts. Hence, even simply exchanging experiences can be of significant value.

However, within the specific European context, the challenge is to see if it might be possible to develop the dialogue with the other audit bodies even further. For example, the ability to carry out joint audits could be one relevant objective but the biggest challenge lies in developing the level of co-operation to such an extent that it could become possible for one audit body to rely on the work carried out by another audit institution, in those circumstances where this might be deemed to be relevant and useful.

Such a goal is much more complex than it might first appear to be. Relying on the work of another audit body is not merely a question of being in a position to count on the professional competence and integrity of the other entity.

As it is established in the relevant international auditing standards: to use the work of another auditor it is necessary to have a prior agreement on a common methodology and on comparable audit criteria (e.g., such as concerns the definition and treatment of errors discovered during the audit).

It is also necessary for the audit bodies involved to have access to each other's work. In addition, there is also a vital timing constraint. The schedule followed by any single entity in carrying out its audit must be such that it effectively allows the other entities suitable time within which to refer to and make use of its work.

This is a challenging objective indeed, given the fact that all SAIs have, first and foremost, to contend with their onerous obligations in their respective member states, before they can consider devoting time, energy and resources to a possible closer involvement in initiatives intended to achieve an enhanced and more effective audit of expenditure at the EU level.

Nevertheless, it is an objective that is worthwhile to pursue, given the potential benefits that could be derived from a closer collaboration between the ECA and the SAIs in relevant aspects concerning the audit of EU finances.

A similar consideration was very aptly and ably put forward by the ECA in its Opinion on a Single Audit Approach, published in 2004. The objective was to establish the required parameters for a "single audit model applicable to the EU" in which "each level of control builds on the preceding one, with a view to reducing the burden on the auditee and enhancing the quality of audit activities, but without undermining the independence of the audit bodies concerned".

The ECA's opinion was formulated in the manner of a logical model that could be applied for the definition and organisation of control procedures and not as a set of prescriptive rules.

The focus of the ECA's 'Single Audit Opinion' was the internal control systems that must underlie the expenditure of EU funds, effectively the whole framework of control procedures from Commission down to the final recipients in the member states.

The ECA's opinion identified that these should be addressed as part of a uniform strategy, in the context of an 'Integrated Internal Control Framework'. On the other hand, the principal focus of the working group that I have been asked to chair is the collaboration between the ECA and SAIs in their external audit function.

SAIs may be called to provide their input within both processes, and this might present an additional challenge to the many that I have already mentioned.

However, it is a challenge from which it is not possible to shy away. The audit of EU funds must inevitably contend with circumstances that are, in many ways, unique due to the particular political and legal context of the union and to its scale and complexity.

The management of EU funds has to take place at many different levels and involves a multitude of bodies in the 27 member states that have to cover a large number of varied programmes, with millions of final beneficiaries.

The ECA has to perform its role as the external auditor of these funds effectively and efficiently while also, as stated in its mission statement, striving at all times to contribute to improving the financial management of EU funds at all levels to ensure improved value for money for the citizens of the EU.