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Session 2003 - 04
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Protecting the European Community's Financial Interests

Protecting the European Community's Financial Interests

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European Standing Committee B

Monday 23 February 2004

[Mrs. Marion Roe in the Chair]

Protecting the European Community's Financial Interests

[Relevant Documents: European Union documents No. 12090/03 Commission communication on the annual activity reports for 2002 of directorates-general and services; No. 14403/03 Commission report on the follow-up to the 2001 discharges; No. 14415/03, Commission report: fourteenth annual report on the implementation of the structural funds; and No. 15149/03, annual report on the cohesion fund 2002.]

4.1 pm

The Paymaster General (Dawn Primarolo): This afternoon we shall discuss several reports concerned with countering European budget fraud and improving the European Union's financial management. The reports are the European Court of Auditors' report for the 2002 financial year, the European Commission's fight against fraud report 2002, the third and fourth OLAF activity reports, and the OLAF triennial evaluation report. We are also considering the Commission's 14th annual report on the implementation of structural funds and the annual report of the cohesion fund for 2002. The documents cover a very important area of work, and I would like to make a few introductory comments before the question and answer session.

Each November, the European Court of Auditors publishes an annual report and we have the ritual of media headlines claiming that the Court has refused to sign off the accounts and billions of euros have been lost to fraud. Such reports do not accurately reflect the facts. It is worth looking at the chapter on the statement of assurance in the ECA's previous report. Under the heading ''Reliability of the Accounts'', it considers that the consolidated annual accounts of the European communities

    ''faithfully reflect the revenue and expenditure of the communities for the year and their financial position at the year end''.

The Court then lists four relatively minor qualifications and one significant qualification. The significant qualification is the need for a successful modernisation of the communities' accounting system. I will return to that in a moment.

The other side of the statement of assurance concerns the legality and regularity of the underlying transactions. Again the Court is of the opinion that the underlying transactions were:

    ''legal and regular in respect of revenue, commitments, administrative expenditure and pre-accession aid''.

The problem is with other payments—those concerning agriculture, structural funds, internal policies and external actions. They make up the bulk

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of payments, and in those areas the Court could not guarantee the complete legality and regularity of all the transactions.

This year there has been an important change in the way in which the Court assesses legality and regularity. As hon. Members will no doubt be aware, the Court used to base its assessment on the rate of errors from just a small sample of transactions—typically no more than about 300 among the tens of thousands of different transactions that communities undertake across all their policies. For 2002, the ECA introduced what it termed four pillars on which to base its statement. Those are set out in chapter 1, paragraph 1.4 of the annual report and include, alongside the usual sample of transactions, an examination of supervisory systems and controls, an analysis of declarations by director generals, and an assessment of the work of other auditors. We welcome the Court's change of approach because it moves away from reliance on a single indicator and closer to that favoured by the National Audit Office.

For now, the errors that the ECA discovered in the sample of transactions is the dominating factor in its decision. The error rate for 2002 was again deemed significant in the areas that I have mentioned. I should remind hon. Members that errors are not the same as fraud; I am sure that they can work that out. Errors are exactly that—errors. Although a small proportion of transactions will turn out to have been fraudulent, the Commission has control systems to deal with the overwhelming majority of mistakes in eligibility, additionality or on exchange rates. Therefore, many of them will be detected and the moneys recovered.

As the ECA increases its experience in the other three pillars, we expect that it will attach increasing weight to the effectiveness of control systems and the work of other auditors. If it does that, a positive statement of assurance might be achievable in the foreseeable future, although we should not expect it until the annual report of 2005 at the very earliest. That is mainly because all strands of the Commission's reform process, including the legislative changes, the reforms in internal auditing, the new anti-fraud office, the changes to career patterns for officials, the new financial rules and the modernisation of accounts should have come together by then.

In the introduction to its annual report, the ECA describes the reform processes as containing several ambitious and fundamental measures. They are fairly strong words for auditors, and the UK Government agree with them. The reforms have been fundamental and are trying to change long-established practices and internal management and control. However, we must remember that reform is a process, not an event; it does not happen on a set date with a White Paper or a new piece of legislation, but over time as people perform their new tasks, learn new ways of working and develop new skills and responsibilities.

The next big stage of that process will be the introduction of the modernised accounts system. It is a new framework that introduces accruals accounts with full balance sheet information and new IT systems to ensure the full capture of financial data. The reform is

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significant, implementing for European Union institutions in three years what the United Kingdom took almost a decade to achieve. Once it is successfully implemented, the European Union will be ahead of most member states in having accruals-based accounts.

Hon. Members will have noticed from paragraph 1.8 that the ECA has raised concerns that that reform is over-ambitious. The United Kingdom Government have similar concerns, but we were reassured recently by the Commission's chief accountant that following some additional difficulties, particularly in obtaining appropriate staff, the Commission is ahead of its original project timetable and confident of full implementation on schedule by 2005. The Commission has promised us quarterly progress updates, which we will continue to monitor carefully, and we will offer whatever support and expertise we can.

This year, budgetary management has its own chapter in the report, which we welcome. The Treasury has been working with other United Kingdom Departments and the Commission to address budget surplus. We have focused mainly on the structural funds in which surpluses have been highest, and we now regularly provide the Commission with expenditure forecasts in time for it to produce an amended budget and return at least part of the surplus to member states. In 2003, it returned 5 billion.

Although the new staff regulations are not on our list of documents for debate, I should mention them. They are another key part of the Kinnock reform process, and due for completion in May. They are important because they change the terms and conditions for European Union officials, introducing provisions to protect whistleblowers, and to create new career structures and a more performance-based promotional system.

The tri-annual OLAF report is one document under discussion today. I have to be honest: we do not think it a good piece of work. It lacks the data and analysis that we need to make an informed judgment about OLAF's work in its first three years. We said that in Council, when pushing for a proper audit. An audit has now been agreed, and I would expect it to be included in the documentation for next year's debate.

The main question that we want the audit to deal with is that of whether, compared with its predecessor, OLAF has made a material difference. However, we also need to know why it took so long for it to achieve a full complement of staff. We can get a partial picture by examining the annual activities reports—and, in contrast to the evaluation report, I note that they are good. The latest activity report shows a service that is getting to grips with the legacy of its predecessor. It is particularly welcome that the backlog of old and very old cases has been mostly eliminated. That will allow investigators to prioritise resources to new areas and rise to the challenge of enlargement.

The main conclusion that we draw from the various reports is that OLAF has become more effective, particularly over the past 12 to 18 months. The new directors for investigations and for intelligence have

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helped the drive for an increase in output and an improvement of focus. Indeed, I am sure that hon. Members will have spotted from page 306 of the documentation that not only is OLAF up to its full staff complement, but that the level of activity is such that extra desks are needed.

Most of the new, reformed legal framework is now in place. Accounting reform is on course, and OLAF is up to complement. However, as with any organisation, one can do only so much by changing the rules and the systems; we need to change the culture. That process is well under way, but it will take time to achieve it in full. Meanwhile, we look to the ECA and OLAF to help keep the reformers focused on their task, to work with member states to make whatever changes are needed, and to continue to provide their valuable contribution to safeguarding EU funds.

The Chairman: We have until 5 o'clock at the latest for questions to the Minister. I remind hon. Members that questions should be brief and should be asked one at a time. There is likely to be ample opportunity for all Members to ask several questions.


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Prepared 23 February 2004