House of Commons

Session 2006 - 07
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General Committee Debates
European Standing Committee Debates

Financial Management

The Committee consisted of the following Members:

Chairman: Hugh Bayley

† Balls, Ed (Economic Secretary to the Treasury)

† Brown, Lyn (West Ham) (Lab)

† Buck, Ms Karen (Regent's Park and Kensington, North) (Lab)

† Cable, Dr. Vincent (Twickenham) (LD)

† Cunningham, Tony (Workington) (Lab)

† Evennett, Mr. David (Bexleyheath and Crayford) (Con)

† Gerrard, Mr. Neil (Walthamstow) (Lab)

Godsiff, Mr. Roger (Birmingham, Sparkbrook and Small Heath) (Lab)

† Goldsworthy, Julia (Falmouth and Camborne) (LD)

† Greening, Justine (Putney) (Con)

† Howarth, Mr. George (Knowsley, North and Sefton, East) (Lab)

† Scott, Mr. Lee (Ilford, North) (Con)

† Villiers, Mrs. Theresa (Chipping Barnet) (Con)

Emily Commander, Committee Clerk

† attended the Committee

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European Standing Committee

Monday 26 February 2007

[Hugh Bayley in the Chair]

Financial Management

4.30 pm

The Economic Secretary to the Treasury (Ed Balls): It is a great honour, Mr. Bayley, to appear in a Standing Committee under your chairmanship for the first time. I very much look forward to this afternoon’s proceedings.

This debate on European Union budget matters is timely because ECOFIN is meeting tomorrow in Brussels to decide whether to recommend—I am sure that it will—approval of the 2005 budget to the European Parliament. I welcome the opportunity of this annual debate to take stock of the EU’s efforts to improve the management of its spending and to counter fraud against its budget. I am sure that hon. Members will point out—I shall start by doing so—that the debate takes place against the somewhat disappointing and, indeed, depressing background that for the 12th year running the European Court of Auditors was again unable to give a positive statement of assurance on the EU’s budget. Although the Court has, with minor reservations, again been able to confirm the reliability of the accounts, the proportion of qualified spending—about two thirds—in 2005 was essentially the same as the previous year.

It is clear that more needs to be done to improve EU financial management, and I am sure that hon. Members on both sides of the House will suggest proposals for doing so and urge that it is done as speedily as possible. It is unacceptable that EU spending is qualified in that way year after year.

As I said when we debated the 2007 provisional budget in Committee in spring or early summer last year, the Government are determined to demonstrate the actions that can be taken to improve the budgetary position and to build on the real step forward that was taken during the United Kingdom presidency in autumn 2005. A plan of action, which was agreed with the Council, was followed up in 2006 with Commission action plans to try to improve the position.

As I said in a written statement to the House in autumn last year, we are determined not only to act at European level for Commission, Council and budgeting reform, but to accept responsibility at individual member state level. It is important that member states take responsibility for improving the management of EU funds because about 80 per cent. of EU spending goes on the common agricultural policy and structural funds, which are programmes with highly complex regulations and a huge number of beneficiaries, and the management of which is shared between the Commission and member states. Those programmes are inherently vulnerable to irregularity. There are many good reasons for radical reform of the CAP and structural funds, as we have proposed repeatedly in recent years, but improving EU

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financial management is one reason for making progress with wider reform of CAP and structural funds.

I shall return to the wider issue of EU spending reform, but I want first to set out how member states can do more to improve the management of programmes. That is why I announced in November that the UK would take a lead in demonstrating how EU funds can be better managed at national level and how national Parliaments can be more closely involved in scrutinising EU spending. From next year onwards, the Government intend to prepare and lay before the House an annual consolidated statement on the UK’s use of EU funds, which will be prepared to international accounting standards and, for the first time, audited by the National Audit Office. The statement and audit opinion will also be made available to the European Court of Auditors and the Commission.

Those arrangements will enhance audit and parliamentary scrutiny of our use of EU funds in the UK. They will also help us to detect and address any irregularities. By making ourselves open to greater scrutiny and taking more responsibility in Parliament and through the NAO, we might well throw up irregularities, but that is part of the process of scrutiny which we are accepting for ourselves to improve financial management. If that additional scrutiny unearths ways in which we can do better, so be it. The reason for the proposals is not only so that UK taxpayers have confidence that we are doing everything we can to take seriously our responsibilities as a member state for the spending of European money, but to enable the Court of Auditors and the Commission to take into account the NAO’s audit opinion when performing its own audit and controls.

We have had discussions not only with other member states, a number of which are interested in our proposals—the Dutch and Danish Governments are engaged in similar initiatives, our Swedish colleagues are considering a decision and other member states have expressed a great deal of interest—but with the European Court of Auditors here in the UK. I have also had discussions with Mr. Kallas, the vice-president at the Commission who is responsible for such matters. The initiative has also been warmly welcomed by members of the Commission and the European Parliament.

We expect, and hope, that other members states will come forward shortly with similar proposals. However, there will not be a single model that can be applied throughout the Union. Different countries have different parliamentary and scrutiny arrangements. It is clearly more complex to put such relationships in place in a federal system. Here in the UK, for instance, we have to take account of the different auditing processes in Scotland, Wales and Northern Ireland. However, although there is no single model, I am convinced that all member states can work with their Parliaments and national audit institutions to improve their management of EU spending. That will help to make a significant contribution towards securing a positive statement of assurance on the overall EU budgets.

I am sure that we will hear a lot about fraud and corruption in the debate. It is right and proper that there should be such scrutiny and that EU funds should be managed with zero tolerance of such behaviour. However, we should also be clear that corruption and overt fraud are not the main problems with which we

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are dealing. Indeed, that was a conclusion of a thoughtful report by the House of Lords last year called “Financial Management and Fraud in the European Union: Perceptions, Facts and Proposals”, which I welcomed when I made our UK proposals.

The Chairman: Order. The normal tradition in these Committees is to limit the opening remarks to about 10 minutes. The Minister will obviously have the opportunity to bring up further matters when we come to the substantive debate.

Ed Balls: I understand and assure you that I have studied transcripts of previous debates, Mr. Bayley. I know that it is also a tradition in such Committees for the Chairman to interrupt the Minister about two minutes before the deadline to remind him of the fact that he ought not to overrun. I shall ensure as far as possible that I do not do that, as I am sure has been the case with my illustrious predecessors.

One issue for debate is the balance between fraud on the one hand and irregularity on the other, and how we can improve our systems and controls to ensure that the audit process deals with those irregularities, where we are talking not about intentional fraud, but about how spending is audited and accounted for. It is also not simply how we manage and budget for EU spending that should receive proper scrutiny, but how the money is spent.

I am sure that we will want to debate the common agricultural policy structural funds and the wider budget review, which we are discussing with our European partners and which begin formally this year. There is a lot more to be done in terms of reform. We all have a responsibility—national Governments and Parliaments, the Commission, the Council and the European Court of Auditors. If we can get the budget reform processes agreed, implemented and enacted to improve the scrutiny of spending and have a genuine long-term strategic review of the European budget to ensure that it is fit for the 21st century, we will, I hope, rebuild confidence among UK and European citizens that European spending can work in both the national interest and the collective European interest. Those are the messages that I will give tomorrow in Brussels when the Council makes its recommendation to the European Parliament on discharge for the management of the EC budget. I shall go there informed by today’s proceedings.

The Chairman: I thank the Minister for his opening statement. We have until 5.30 pm for questions to the Minister. I remind hon. Members that questions should be brief and address one topic at a time. I will come back to hon. Members more than once if they have more than one question.

Mrs. Theresa Villiers (Chipping Barnet) (Con): Given the substantial irregularities that have been identified in the bundle of papers before the Committee regarding the European Commission budget, will the Economic Secretary be voting against discharge at ECOFIN tomorrow?

Ed Balls: I will not be voting against discharge; I will join my colleagues in the Council in trying to build on

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the improvements of the past few years and in encouraging further reform in the coming months. I shall note that irregularities have been reduced in several areas. Indeed, the scrutiny and approval of agriculture spending has been improving. Taking a penal or punishing approach to the budget is not the right way to go, unless we want to signal that we are backing off from our desire for genuine engaged reform, and want to try to score political points instead. That will not be my approach tomorrow morning.

Julia Goldsworthy (Falmouth and Camborne) (LD): The Minister said that the House of Lords report was thoughtful. In his statement of 23 November, he said that he would respond to the report’s other recommendations in the usual way. Will he comment on the report’s concern that unless the statement of assurance gives a breakdown not only of country but of the different structural programmes, it will be difficult to sign them off? Will the Government’s consolidated statement of account break matters down further than merely into a national picture? Will it give a further breakdown of the different types of funding and how they have been administered?

Ed Balls: I gave an initial response to the House of Lords report just after it was published in autumn, and announced a number of areas in which we will take forward reform. We have since delivered to the Committee and to Parliament a full response to all the points in the report. Indeed, we were commended by the Lords for the serious and substantial way in which we responded to their inquiry. I shall ensure that a full copy of our response is sent to the hon. Lady.

I assure the hon. Lady that the statement of assurance that we produce for the UK, which will be audited by the National Audit Office, will be a full and substantial piece of work that will go considerably beyond the UK, Scottish or Welsh spend. It will get into the detail, but, as is consistent with the NAO’s approach, it will be about the process of spend and audit, rather than simply about trying to find and account for every bean.

Mrs. Villiers: The Economic Secretary said in response to my last question that he does not want to take a penal approach to the irregularities in the budget. If a public company had had its accounts qualified for the past 12 years, its directors probably would have been jailed by now. There has been a qualification of at least two-thirds of the budget and serious irregularities regarding 90 per cent. of it. If that is not enough to justify voting against discharge, what is?

Ed Balls: As I pointed out to the hon. Lady, there have been improvements in recent years regarding irregularities. The way in which we have raised the profile of the issues in the UK and with other member states, proposed substantive proposals for reform and taken on responsibility for action as member states, while allowing the EU to keep spending and therefore to keep delivering on its obligations, has been the right approach. I have no intention of breaking with the pattern of previous Governments of both parties over the past 12 years who have taken that approach.

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The difference compared with a decade ago is that the Government are proposing serious and substantive reforms that are winning support against other member states, rather than simply railing from the sidelines. In previous debates, the hon. Lady and I have had the opportunity to discuss whether it is better to be within the European debate or on its fringes, and I will not repeat some of the comments that I have made before. We have a difference of view, with the desire for constructive engagement on our part and a desire for either a withdrawal to the fringes or an entire withdrawal—I think that is the direction in which she would like to take us—on hers.

Justine Greening (Putney) (Con): Aside from disagreeing completely with what the Economic Secretary has just said, I want to know the Government’s assessment of the proportion of fraud and irregularity that comes from the poor systems of control in the EU, versus the extent to which people who engage with the EU deliberately commit fraud, which are possible reasons why fraud might be so high. To what extent is it the EU’s fault, and to what extent are other people trying to commit fraud against the EU?

Ed Balls: The important point, which I made earlier and which the hon. Lady might have missed, is that the amount of irregularity accounted for by fraud or intentional misuse of funds is low. For expenditure programmes under shared management, suspected fraud accounted for some 0.3 per cent. of spending. If we consider the overall reasons for qualification, the vast majority of concern relates to the process of accounting and auditing, not to intentional fraud caused by central or member state authorities. In a way, the point is misconceived. The real issue is about dealing with some of the irregularity in the process, which needs to be sorted out, rather than thinking that the problem is fundamentally about fraud. As I said, that point was made well by the House of Lords in its recent report.

Julia Goldsworthy: In the meeting tomorrow, will the Minister press the auditors to take into account money that is clawed back, which contributes to the irregularities at the moment, but is not taken into account in the following year? Does he agree that that is a way to try to bring greater transparency to dealing with the irregularities? Will he press such reform in the development of the road map that is under discussion?

Ed Balls: I remind the hon. Lady of our debates in Standing Committee on the 2007 budget. One of the points that we have made strongly this year and in previous years is that ensuring that the amount of money that is budgeted for is feasible and reasonable for Governments to spend is an important part of budget reform and that to over-budget beyond capability does no good at all. At the same time, we are trying to ensure that we minimise the amount of clawback, and we will definitely take that into account.

Mrs. Villiers: The Economic Secretary seeks to emphasise that we are talking about minor administrative mix-ups, not about fraud in every case. I acknowledge that we are

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not talking about fraud in every case. However, is he aware of the letter written by the president of the European Court of Auditors to Lord Grenfell, in response to the House of Lords European Union Committee report? That letter emphasises:

“In fact, as the Court’s annual reports have repeatedly made clear, most areas identified by the Court appear at the financial beneficiary level, in the amounts claimed from the Community budget.”

Does the Economic Secretary accept the president of the court’s explanation that we are talking about errors in relation to payments—people being paid public money when they are not entitled to it?

Ed Balls: The hon. Lady is right to reiterate a point that I made in my opening remarks: 80 per cent. of expenditure happens under the full or partial responsibility of member states, irregularities commonly arise at that point and member states must therefore take their responsibilities more seriously. I was not in any way trying to dismiss, belittle or underplay the importance of tackling those budget issues. In fact, I started by saying that they were an embarrassment, and I went further: I said that sorting them out requires member states’ determined action.

The continuation of such qualifications undermines the EU’s credibility. However, I should point out that the reason for that is the flaws, weaknesses and problems in auditing nationally—the hon. Lady is right to make that point—and not intentional fraud. The House of Lords Committee in its report, the European Court of Auditors in its report and I, in my opening remarks, all made that point. We note that there have clearly been problems in the auditing and accounting of the European budget over several years.

We have taken a number of steps to sort the problems out, and we are making progress. To give one fact: the number of irregularities that member states detected in the agriculture budget fell between 2004 and 2005 from 3,401 to 3,193, which accounts for 0.21 per cent. of the overall agricultural budget. However, 3,193 irregularities is an unacceptable number, and we must do better. We are making progress none the less, and we must ensure that we accelerate the rate of progress.

Mr. George Howarth (Knowsley, North and Sefton, East) (Lab): Chapter 5 of table 1 draws attention to the fact that, on sheep and goat premiums, Italy has over-claimed by 10 per cent. and Slovenia by 24 per cent. The report puts that down to poor record keeping, but over-claims by those amounts might point to something rather more than poor record keeping. Will the Minister comment on that?

Ed Balls: I am happy to look into that detailed point and to write back to the Committee as a whole, or to the individual Member as he would prefer. I do not have evidence to suggest that the problem goes beyond irregularity into outright fraud or manipulation, but I accept that the numbers are strikingly different. They may reflect the different nature of the budgetary process or the budget spend in the application of the structural funds for that member state. However, I am happy to look into the detail and to write to my right hon. Friend.

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Mr. Lee Scott (Ilford, North) (Con): If the irregularities had occurred in a local authority in this country, whoever the Government were, serious action would have been taken against that local authority over such irregularities—I am not referring to fraud. What is likely to happen? We have heard that there has been improvement year on year, but what action will be taken to ensure that irregularities do not exist? They would not be accepted in this country.

Ed Balls: The hon. Gentleman is right that such things would not occur in this country, partly because of the nature of our budgeting and auditing framework, our clear accruals-based accounting system, which has been in place for many years, the way in which our accounting officer system works and the National Audit Office’s process-oriented approach to audit. Everybody must consider the way in which they approach such matters, and the audit system is part of the reform process and it must be considered. A risk-based approach to regulation is the right approach across the piece and in the case of budgeting, and we have not had enough of that in recent years.

I agree with the hon. Gentleman that, if the UK system had a history of irregularity, that would point to a serious problem. The fact that this degree of irregularity exists in the European context is concerning, and it is why we have been proposing such a wide range of reforms over a number of years, to try to improve the situation. As I said, simply voting against the budget would not be the right way to go.

Mrs. Villiers: We are not talking about voting against the budget in this instance. The question that we are considering is whether to vote against the discharge of the budget.

Ed Balls rose—

The Chairman: Order. I probably made a mistake, because I am not supposed to allow interventions during questions. Perhaps the Minister should reply to the question asked by the hon. Member for Ilford, North, and I shall then call the hon. Lady to ask her question.

Ed Balls: In the spirit of openness, transparency and proper scrutiny with which we would like to approach the European budget, I shall respond. As I have said, given that 80 per cent. of European spending happens under the responsibility of member states, it is right that our parliamentary processes should be attuned and should keep Ministers properly on their mettle in accounting for that spending. If that requires deviations from the process, I am sure that they can be accommodated. The hon. Lady is right in what she says, but I have explained to her clearly the reasons why her approach would be the wrong one for Europe.

Mrs. Villiers: I shall re-emphasise what I said before. One option, which we should seriously consider, is voting against the budget as whole. There is a separate vote on discharge of the budget. I find it difficult to understand why not only the Government but Labour

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Members of the European Parliament vote year in, year out to discharge the budget, despite its being qualified by the auditors.

The Minister tried to focus on member states’ administration of EU funds. That matter needs to be examined, but it seems that the reforms that he is proposing do not go to the heart of the matter. That issue was raised by the president of the Court of Auditors in response to the House of Lords report.

The Chairman: Order. Will the hon. Lady ask a question rather than make a statement?

Mrs. Villiers: Yes, Mr. Bayley.

Emphasis was put on the fact that the real problem that we must tackle is not the process of audit by member states but the improvement of financial controls in the European Commission. Why will the Minister not focus on that? Why does he solely focus on the process of audit by member states?

Ed Balls: As the hon. Lady has studied these matters in great detail, I am sure she will be aware that the reforms that we proposed, and which were agreed, during the UK presidency in 2005 focused precisely on the issues of financial controls in the Commission.

Let us consider what has happened over a number of years: the establishment of the European Anti-Fraud Office in 1999; the work that Commissioner Kinnock did in Commission reform; the shift to activity-based budgeting; the integrated audit and control system; the strengthening of the role of the Court; the shift to accruals accounting; and the Commission action plan following the UK presidency of 2005. All those measures focused on improving the system of budgeting and financial control in the Commission and at European level.

As I have pointed out, the majority of problems that are arising in terms of irregularities are occurring not at the centre but within member states. That is why, in addition to that range of issues, we are focusing and will continue to focus on the responsibilities that member states can take to improve budgetary management.

ECOFIN will discuss those matters tomorrow. As the hon. Lady will know, it will not be a decision-making body tomorrow—it will make a recommendation to the Parliament and it will be for the Parliament to make the decisions. ECOFIN’s conclusions will be strong ones and they will make clear the need for further operational steps to be taken to improve the position.

The 2005 budget discharge, which will be debated tomorrow, concerns a budgetary year before a number of the reforms that followed our presidency in autumn 2005 and the Commission action plan in 2006 came into effect. Fifty new measures resulted from those 2006 Commission proposals, and they will affect the 2006 budget, which we shall debate in a year, but not the 2005 budget, which we shall consider tomorrow in ECOFIN.

We are making progress. If one looks at the facts, the European Court of Auditors gave a positive statement of assurance for all revenue commitment and administration payments, cleared pre-accession payments and, in 2004,

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agricultural payments managed under the integrated administrative and control system. That is happening for the first time and covers almost 60 per cent. of agriculture. We now have an assurance on about 35 per cent. of total EU budget spending. That has happened because the UK did not pull its punches in debate, was not shy of making strong recommendations on the need to act, and has not shirked its responsibilities to improve our position—what we are doing with the enhanced role for the National Audit Office shows that. Our view in this as in many other areas, whether financial management, financial regulation or wider European reform, is that we are much more credible as a country if we take a hard-headed view of our national interests and European interests at the table rather than withdrawing to the fringe. The hon. Lady laughs, but as many people in the Conservative party and among MEPs in Brussels agree with me as strongly disagree. There is a real divide in the Conservative party on European policies, not between parties on either side of the Committee—[Interruption.]

The Chairman: Order. I remind hon. Members that this is a question session and not a debate, so there should not be interventions.

Julia Goldsworthy: On progress and the measures that have been taken, one of the key elements of the road map that the Government helped to develop is the commitment to achieve a positive statement of assurance, which has not been given to the budget for the past 12 years. That contrasts starkly with the comments of Siim Kallas, the EU Administration Commissioner, who said:

“If this methodology continues we will never have a positive DAS”—

declaration d’assurance, or statement of assurance. Does the Economic Secretary agree that there should be more wholesale reform and that some of the incremental measures do not go far enough to deal with some of the irregularities that we continue to see?

Ed Balls: As the hon. Lady knows, the goal is to achieve a positive statement of assurance by 2009, and that is what the Commission is working towards. It is absolutely what we want, and we believe that a number of reforms in recent years, not least those that we are proposing for member states, are necessary so that we can achieve that statement of positive assurance. I cannot give a guarantee that that will happen by 2009, and I am sure that Mr. Kallas cannot. However, we believe that it is a deliverable goal if others, as well as the UK and the Commission, take their responsibilities seriously. I do not accept that it cannot be achieved, but I accept that it cannot be achieved without the changes being instituted. It is still too early to tell whether the reforms that are being put in place will be sufficient, but they are not incremental or trivial. A proper shift towards the improvement in the budgetary process that we propose is achievable.

Justine Greening: The Chief Secretary said that the sort of fraud and error that occurs in the EU does not happen here. It does. The Department for Work and

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Pensions’ accounts have been qualified because of inability to quantify fraud and error for a number of years.

Will the Minister give us more details on the consolidated statement and intention for auditing? For example, in which year will that begin and when will the audit take place? Will it be a substantive audit with individual transactions checked, or will it be a broad-brush review of financial processes? What sort of audit opinion will be given by the National Audit Office? Will it be based on “true and fair”, or will it be something else? Can the Minister make that information available in the coming weeks so that we can see in advance what statement the National Audit Office will make?

What will the Minister do if that statement turns out similarly to be a qualified one, as we have seen at the European Union level? What actions will he take? Will he bring the matter to the Floor of the House for debate? It will be extremely helpful if he can give us more detail on that.

Ed Balls: Those issues are important and deserve proper scrutiny in the House in advance of the introduction of the new reform in the UK. I welcome the hon. Lady’s questions. The issues that she raises are exactly the ones that we are discussing with the NAO and the European Court of Auditors, and we shall also discuss them with the relevant interested parties in the House. Our plan is to be ready to make a statement in the spring of 2008, which will cover EU finance spending for the financial year 2006-07.

It is ambitious to move that quickly. There are a number of technical and logistical challenges to overcome, including consolidating data from different Departments and devolved Administrations. The Dutch initiative, which was announced before ours, will also not be operational until 2008. There are a number of things that we need to think through. The Treasury will be responsible for compiling the consolidated statements of the UK’s EU receipts and how they are spent, but the relevant Departments and devolved Administrations are still responsible for accounting to Parliament that funds have been used correctly. We therefore need to think through the process of bringing together and auditing that consolidated statement carefully.

The hon. Lady is also right that we shall not achieve perfection in any system. However, in our NAO statement of EU spending we are trying to focus less on a detailed, micro box-ticking approach, and instead on how decisions are made and on how processes are audited, rather than on individual spending—as we do in the reporting to Parliament of our national spending, through the NAO and other processes, and as we believe ought to happen more at the European level. The NAO goes about auditing not simply by shining down a ray of light and looking for irregularities in one particular area, but by looking at how funds are spent and the processes through which that happens. If our audit process throws up weaknesses in how we spend and account for EU spending, we shall need to take action. We cannot be in a position at the EU level where there is never a problem or a failure, just as we are not in that position at the UK level. However, the question is whether those problems are identified and acted on.

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I assure the hon. Lady that we shall ensure that there is proper time for discussion. I shall certainly make that time available to discuss the issue with interested parties before we make proposals to Parliament on how we implement the commitment.

Mrs. Villiers: I am grateful to the Minister for his reply. It strikes me that if his announcement in November is going to have any significant impact in the long run, he will have to persuade other member states. The Netherlands and Denmark were already supportive before the announcement was made and the Minister said that Sweden is expressing an interest, but that is only three member states. What progress is being made with the rest of the European Union?

Ed Balls: I am happy to keep the hon. Lady in touch as we make progress, step by step. As she knows, the nature of European discussions is that we try to achieve a critical mass behind an idea. When I am in ECOFIN in Brussels tomorrow, I shall speak to individual member states, as well as the Commission, to urge them to follow the lead that we and other countries are taking.

However, it would be fair to say that more attention and scrutiny is given to such matters in the UK than in some other member states. That is a matter for regret, because we will not be able to build support more broadly for the kind of European spending and outputs that we want to achieve as a community unless we persuade publics that we are spending money well and accounting for it properly. We are trying hard to persuade other European leaders to give those issues the same priority as we do. After our initiative last November, I sent a copy of the House of Lords report to every other Finance Minister in the Union, urging them to read it, to look at our proposals for the UK and to consider whether, in a modified way, they could take them up in their countries.

Julia Goldsworthy: In the addendum, which provides the Government’s response to the specific reference to the UK by the European Court of Auditors, there is a table that shows whether the Government fully agree with the Court’s remarks. In about half the cases, the Government do not agree with the irregularities that the Court outlines. Is that standard for other European countries? Will the Minister comment on how the UK compares with other countries, based on the number of irregularities for which it is singled out and on the proportion that the Government contest?

Ed Balls: I shall find out whether I have details of the number of contested irregularities throughout the European Union. However, it is standard for member states to contest some irregularities that the Union throws up. The UK is in discussion with the Commission about alleged irregularities in structural fund spending in England through the European Regional Development Fund. The Government, local government officers and the Department for Communities and Local Government are of the strong view that the way in which we spent those ERDF expenditures was proper and that we used the flexibility that we thought it right and proper to use. There is ongoing discussion with the Commission about that.

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In improving the way in which resources are spent and accounted for, there is a responsibility on all sides—not just on member states, but on the auditors and the Commission—to ensure that we achieve the right balance between flexibility and proper accounting for expenditure.

Justine Greening: I want to return to a previous answer that the Chief Secretary gave to one of my questions. He said that we would not make progress by having the National Audit Office shine a light on individual transactions. Perhaps I should declare an interest. I am a member of the Institute of Chartered Accountants, and after many years in the auditing profession I can tell him that that is exactly how one carries out an audit. One carries out a combination of analytical review, considering high-level trends for figures and picking out individual transactions and following them through the process. Will he confirm that the NAO’s work will be more than a cursory review of high-level figures, involving substantive testing of individual transactions throughout the system to find out where fraud and error and other irregularities may be taking place?

Ed Balls: I can certainly give the hon. Lady that assurance, and although I let her get away with calling me the Chief Secretary once before, I must now urge her to stop, because I am only the Economic Secretary.

The hon. Lady knows that the NAO reports to this Parliament, that it is independent of the Executive, that it is held in high regard in the UK and in Europe, and that it values its independence closely. Independent of any assurance that I can give her, she can be assured by those facts that the NAO will not do anything that puts its standing, integrity and independence at risk. That is true of the area under discussion, too. I am sure that it will not adopt slipshod practices.

My point was that the NAO, in its accounting to Parliament for UK expenditure, does not simply shine a light on one area and look for irregularities; it looks at processes and the way in which the system as a whole operates, and it does so in a risk-based way. What we are trying to achieve with our NAO audit of European spending in the UK and with the reform direction in which we are encouraging others to go, is not to stop shining the spotlight on a particular set of transactions, but to balance that with more emphasis on systems controls and risk than there currently is in the auditing of European expenditure. I have discussed that in detail with the European Court of Auditors.

Spot checks are part of the audit process, but it is important that they are put into a wider context regarding process and identifying where risks are likely to arise. That balanced approach, which we achieve in the UK, is what we hope the NAO will deliver for us in our EU spending. We will then encourage others to consider it. I hope that I have given the hon. Lady a full assurance.

Mrs. Villiers: Would the Economic Secretary be happy to invest his own money in a company that had had its accounts qualified for 12 years? If not, was it responsible of the Prime Minister to sign away another £7.2 billion of our money to an institution that cannot get its accounts signed off by its auditors?

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Ed Balls: I feel as though we have been here before.

Justine Greening: For 12 years.

Ed Balls: As the hon. Lady says, this is the 12th year of qualification. That period stretches over Governments of both parties. We are trying to sort out the situation. No one can be confident that the current system is good enough for the long term, but that is why we are trying to reform and improve it.

As for resources, the Prime Minister went to the European Council just over a year ago and struck a deal that protected the UK abatement, but in the context of an EU that is expanding its borders and enlarging to the east. The deal that he achieved was right for the UK. It is not a question of investing my money, but I am a UK taxpayer and, like everyone else, I want there to be reform in the EU budget. However, I also think that it is right for us to sign up to the EU and achieve the gains in investment, employment and political and economic stability that come from our membership. The fringe protests that the hon. Member for Chipping Barnet keeps trying to lure me to endorse would be damaging to the UK’s national interests and to European interests, but when it comes to Conservative party policy on Europe, the national interest has never figured very highly.

Julia Goldsworthy: Let me bring the Minister back to the administration of structural funds. My constituency is part of an objective 1 area. Before I was elected to Parliament, I helped local community groups and small businesses to access some of the structural funds, and there was undoubtedly a very bureaucratic process. My experience, and those of some of the people whom I assisted, was that confusion arose over additional requirements being made by the Government, sometimes in areas such as environmental audit, which could then have an impact on whether there was considered to be an irregularity under, I imagine, the ECA’s reports. In addition to the measures that he has announced on national statements of accounts, will the Minister look at internal processes and the Government’s involvement to ensure that they are not adding to the confusion?

Ed Balls: The NAO audit process that we are putting in place will enable us to answer such questions even better in future. If we can improve the auditing and operation of European expenditure in ways that help payment to be made more effectively, we should definitely do so. Part of the problem in the case to which I referred was that far from there being overly bureaucratic engagement by the UK authorities, local government officers and disbursing authorities tried to approach matters flexibly, to ensure that match funding could be achieved sensibly, and ran into some difficulties with the Commission’s views of how rules and processes should be implemented. We are discussing that in detail with the Commission, as it is important that we get it sorted out. It is also important that we ensure that the money continues to flow, and that we do so with proper assurance of budgetary probity. I believe that we will achieve that. An overly bureaucratic or inflexible UK approach has not been the problem in the case that I highlighted.

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Mrs. Villiers: Mary Keegan, a senior Treasury official, and Sir Peter Gershon both recently emphasised the importance of having professional and qualified accountants play a larger role in accounting and financial control in government in this country. Is the Minister concerned that so few of the Commission’s financial controls are carried out by people who have accountancy qualifications? Marta Andreasen was the first chief accounting officer of the Commission to have such a qualification, but when she was fired, her successor did not have one.

Ed Balls: I carry many facts around with me, but I cannot claim to know offhand the precise number of qualified accountants employed by the Commission in the budget and auditing process. I have always got on quite well with accountants, so I am in favour of more being involved.

In November, I made a speech to the Institute of Chartered Accountants in England and Wales in which I said:

“The role of the accounting profession is critical to many aspects of my Ministerial role”.

I also touched on the importance of accounting for London’s role as a global financial centre and in taking forward issues of international regulatory co-operation, the difficulties and challenges that we face in the convergence or otherwise of accounting standards between Europe and the United States, and the important role that accountants play in reform of the EU budget. It was to that audience of accountants that I discussed the EU budget and it seemed very interested—staggeringly—which may suggest that the accounting profession is keen to play a greater role. If it can do so in the UK and other European countries, that is all for the good.

Several hon. Members rose—

The Chairman: Order. I do not want the Committee to stray beyond its remit. We are here to consider the Commission’s budget and not the regulation of the accountancy profession in the UK more generally.

Justine Greening: The Economic Secretary has talked about a risk-based approach, and I agree with him. What is his assessment of where the key flaws and key risk areas are in the EU budget in terms not just of the programmes that are most at risk of being accounted for incorrectly, but of the countries where most of the incorrect payments take place? What is his assessment of the geographical and remit risk?

Ed Balls: It would be invidious of me to start identifying individual countries, but it is clear that the CAP and structural funds budgets make up the large majority of the European budget. They have a particular geographical coverage, thus it would not be surprising if the kind of irregularities that we see and deal with arose more in countries that were greater recipients of CAP and structural funds expenditure. It would also not be surprising if countries that had a less long-lived tradition of national parliamentary audit and scrutiny had further progress to make in ensuring that their national systems of accounting and audit

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were fit for purpose. An overlap or correlation between countries receiving more structural funds and countries where more irregularities occur would not surprise me.

The question is whether we can make progress in helping those countries, the Commission and the European authorities to reduce the number of irregularities. As I said, the fact that the number of irregularities in agricultural spending is falling is an encouraging sign.

Mrs. Villiers: Was Neil Kinnock right to fire Marta Andreasen for speaking out about the inadequacy of the financial controls used by the Commission, an inadequacy that is confirmed year after year by the European Court of Auditors?

Ed Balls: I shall follow the usual practice of Treasury Ministers, Economic Secretaries, Financial Secretaries and Chief Secretaries and not stray into commenting on individual cases and people. It would be invidious of me to do so, and those are matters to do with the employment relationship between the Commission and those individuals. It is important that whistleblowers are properly protected, and when the Kinnock whistleblower’s charter, which was launched as a reform and then incorporated into staff regulations, came into force on 1 May 2004, the changes allowed staff to inform senior Commission officials or OLAF of any concerns and provided statutory protection for officials who acted reasonably and honestly in blowing the whistle. The Government strongly support the principle of allowing people to do that and supporting them when it is reasonable for them to do so, but I cannot comment on individual cases.

The Chairman: I should say that the individual case cannot have had any bearing on the accounts of the financial year which we are considering, although the wider issue of whistleblowing is, of course, relevant.

Julia Goldsworthy: I agree that the national statements will play a huge role in encouraging member states to raise their game provided they agree to participate, but does the Minister agree that that needs to be done continuously to ensure that the Commission does the same internally? Reports are still outstanding that add into the accounts, and the synthesis report is not signed off because some of the internal reports have not been signed off. A huge amount remains to be done.

Does the Minister agree that responsibility in national Parliaments must extend beyond the national statement? Does he agree with paragraph 173 of the House of Lords report, which states that at least in part there is a

“sporadic and sometimes capricious way in which this issue is debated in the two Houses”.

The way in which we are drawing from many different reports illustrates that weakness and it needs to be resolved, too.

Ed Balls: A number of reforms are being enacted. The Commission’s action plan, which was published in January last year, proposed a number of changes with a clear timetable for implementation around the simplification

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of the management of EU funds, the strengthening of audit assurance, the development of a single audit approach, and the determination of the costs and benefits of controls. We are also bedding down and trying to approve the operation of accruals accounting. We have a new financial regulation that, in revised form, came into effect only in 2007. I have talked about the national initiatives and we know, too, that the European Court of Auditors needs to focus more on risk and value for money and to ensure that it does not adopt a box-ticking approach. A wide range of actions need to be taken by a number of actors. As I said in my statement last November, we all have a responsibility to raise our game.

Mrs. Villiers: Page 611 of the bundle of papers before the Committee is page 29 of the OLAF report which refers to the dismantling of the EUROSTAT team, which was put together to investigate what the Commission admitted was

“a vast enterprise of looting”

at the EU statistical office. The report states that it recommended disciplinary action to the Commission. What disciplinary action has been taken and what criminal proceedings are under way in relation to the £3 million that went missing at EUROSTAT?

Ed Balls: I have obviously read the document in full. On the particular point that the hon. Lady raises, when I am in Brussels tomorrow I shall ensure that I get the extra information that I need to give her a full reply. I believe that the matter is currently before the courts in France, Luxembourg and Portugal. Perhaps opportunely for me, therefore, it would be quite wrong to comment on a matter that is being scrutinised by the proper judicial processes. However, I shall ensure that we are fully apprised of the up-to-date situation as of tomorrow. If there is any additional information, over and beyond what is in the document, I shall ensure that it is communicated to her.

Motion made, and Question proposed,

That the Committee takes note of an unnumbered explanatory memorandum from HM Treasury dated 28th November 2006, European Court of Auditors’ 2005 Annual Report, European Union Documents No. 11399/06 Commission Communication: Report on the progress at 31st March 2006 on modernising the Commission’s accounting system, No. 11660/06 and Addenda 1-2 Protection of the Communities’ financial interests: Fight against fraud: Annual report 2005; unnumbered explanatory memorandum from HM Treasury dated 10th October, European Anti-Fraud Office: sixth activity report for the period 1st July 2004 to 31st December 2005, No. 14431/06 and Addendum 1 Commission Report to the European Parliament on the follow-up to 2004 Discharge Decisions (Summary)—European Parliament Resolutions, No. 14630/06 and Addendum I Commission Report to the Council on the follow-up to 2004 Discharge Decisions (Summary)—Council recommendations; and supports the Government’s promotion of measures to improve the level of assurance given on the Community budget.—[Ed Balls.]

5.30 pm

Mrs. Villiers: It is scandalous that, for the twelfth year in a row, the EU’s own auditors feel unable to give the Commission’s accounts a clean bill of health. Yet again, the accounts have been qualified, and yet again, the Court of Auditors does not have sufficient

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confidence in the Commission’s financial controls to give the positive statement of assurance that is necessary. If the Commission were a private company, its directors would probably have been jailed years ago for irregularities on such a scale and for such a protracted period.

Let us remember that we are not talking about insignificant sums. In the 2005 budget that we are considering, the figure was around €109 billion—£73 billion of taxpayers’ money that has not been properly accounted for. To make matters worse, our contributions will increase over the coming years, because the Prime Minister has given away £7.2 billion extra of our rebate.

According to Her Majesty’s Treasury figures, which many people believe are an underestimate, the UK taxpayer contributed £3.6 billion for the year under consideration. Even on the Treasury’s cautious estimate, our net contribution is set to rise to £4.7 billion this year and to £6.8 billion by 2013. It is a matter of grave concern that the Government do not take more seriously the Commission’s inability to keep proper track of the money with which the British taxpayer has entrusted it.

Let us consider some of the reasons why the Court of Auditors has denied the declaration d’assurance. Serious irregularities mean that, for a large part of the budget, the auditors simply cannot be certain what has happened to the money in question. SAPARD was singled out for particular criticism. There were only a few problems with administrative expenditure, and although there were significant risks in relation to pre-accession programmes, serious irregularities were limited. Those programmes make up only 10 per cent. of the budget, however. For the rest of the 90 per cent., the court could not provide an unqualified opinion. Payments to beneficiaries were still “materially affected by errors”, in relation to the CAP, structural funds, internal policies and external actions.

In relation to structural programmes, the court concluded that the Commission did

“not maintain effective supervision to mitigate the risk”

of incorrect payments. In internal policies, weaknesses were revealed

“in the supervisory and control systems which led to a material incidence of errors in payments to beneficiaries.”

Again, we are talking about money being paid out, not people filling out the form wrongly. Material errors were also prevalent in the Commission’s external programmes.

I concede that the report contains some encouraging news in relation to the CAP, regarding the new integrated administration and control system. There is some progress there. However, the court expressed significant reservations about non-IACS spending, where clearance systems and checks did

“not provide reasonable assurance as to compliance with Community legislation.”

In addition, the CAP was

“still materially affected by errors.”

The report also contains the usual staples about non-existent sheep and fictional olive groves, which have characteristic of such reports for the past decade.

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Farmers in new member states have been getting in on the act, with inflated claims for sheep and goats being made by Slovene farmers, for example. Farmers in Slovenia were also enterprising in their claims in relation to imaginary suckler cows. We need to address the concern that came across strongly in the question and answer session—namely, how much of that is due to fraud, how much to substantive mistakes and how much to mere administrative glitches?

The Minister and apologists for the Commission like to point out that not all the irregularities referred to in the documents are fraud. That is certainly true, but it is a mistake to underestimate the significance of those irregularities, which relate largely to public money being paid to the wrong person. In many instances, they may well have involved fraudulent schemes, but as the president of the Court of Auditors, Mr. Weber, recently pointed out, it is often difficult to prove fraud in such cases.

In his letter to Lord Grenfell, to which I have referred several times, in response to the House of Lords Select Committee, Mr. Weber pointed out that reference to administrative mistakes understates the problem because, as I said in questions, the problem relates to payments of the wrong amounts of money being made to the wrong people. It relates to taxpayers’ money being used for purposes for which it was not intended.

In January, Mr. Weber expanded on those comments to the European Parliament and made clear the distinction between substantive errors and formal errors. Substantive errors impact on the amount of money that is paid, whereas formal errors may well be about the wrong form being filled out or the deadline being wrong. Mr. Weber told the European Parliament, regarding the report that we are discussing, that there were substantive errors in 22 per cent. of the CAP programmes that he had looked at, 54 per cent. of structural programmes, 32 per cent. of internal policies and 21 per cent. of internal actions. Only pre-accession and administrative actions were substantially free of that kind of serious error. Therefore, we cannot dismiss the lack of a statement of assurance simply as officials failing to dot the i’s and cross the t’s.

Some have suggested that the reason why there is no single statement of assurance is that the ECA is considering the whole budget and that a number of UK Departments have had their accounts qualified, including, notoriously, the Department for Work and Pensions for many years. The Home Office had disastrous problems with its accounts a few years ago, and, embarrassingly, the Treasury’s accounts have now been qualified because of significant problems in the tax credit system.

The fact that we have our own problems with which to deal should not make us complacent, but, frankly, the Minister seems to be complacent about the problems with financial controls at the European Commission. President Weber pointed out to the House of Lords that it is not accurate to compare the situation at the Commission with the problems that there have been at the DWP for many years. In his letter, he said:

“The NAO quotes an error rate of 2.2 per cent., which it judges to be substantial and of serious concern. In the case of agriculture expenditure (outside IACS), structural measures,

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internal policy and external aid the audits of the Court have identified 1evels of irregu1ar or illegal expenditure which are significantly higher than that. These results are derived on the basis of similar statistical techniques to those applied by the NAO...They are not one off results but, rather, have been consistent over a number of years. There is sufficient and compelling evidence that public funds are not being spent according to the regulations and the intentions expressed by the legislator.”

The figures that I just gave—54 per cent. for structural funds and 22 per cent. for CAP—show significant irregularities.

Little has happened since the Economic Secretary’s November announcement. We have not had a report from the NAO, and there is no indication that other countries are coming on board. There is nothing to show, so far, for the November reform proposals. It has been pointed out that the proposals address only part of the problem. They do not go to the heart of why the COA continually refuses, year after year, to sign off the accounts and give them a clean bill of health.

The point was well made by Christopher Dickson of the accountants joint disciplinary scheme in a letter to the Financial Times, in which he accused the Economic Secretary of having “missed the point” with his proposals. In his letter, he said:

“What is needed is not more vetting of the EU accounts (the Court of Auditors has shown itself to be perfectly competent to undertake that task) but rather a proper accounting system with effective controls within the Commission...This will not happen because the vested interests in maintaining the status quo are too powerful. When Marta Andreasen was appointed to be the EU’s first chief accountant, she found an Augean stable of untraceable payments and myriad bank accounts with no ascertainable controls or signatories”.

The problems highlighted in the papers before the Committee will never be resolved until the Commission addresses the points raised by Marta Andreasen, and until it starts to treat whistleblowers better. Mrs. Andreasen was shocked by what she found. Apart from concern about taxpayers’ money, her professional standards drove her to speak out. As a professional, she felt unable to sign off the accounts because they were

“an open till waiting to be robbed".

Large amounts of money could be transferred without using an electronic footprint, and for daring to speak out, Mrs. Andreasen was subjected to a campaign of harassment and fired from her job. It was Andreasen who first highlighted the fact that the Commission—

The Chairman: Order. I remind the hon. Lady that that dismissal took place some years ago, and it cannot be relevant to the accounts that we are considering. Some wider issues concerning proper scrutiny of European expenditure are relevant to today’s discussion, and I hope that the hon. Lady will confine her comments to the accounts that we are looking at this afternoon.

Mrs. Villiers: Absolutely, Mr. Bayley. I am grateful to you for that guidance. I was not going to refer further to Mrs. Andreasen’s dismissal, but I will, if I may, talk about some of the issues that she raised, because they are still relevant to the accounts that we are debating.

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It was Mrs. Andreasen who first brought to public attention the issue of double-entry bookkeeping. I raised the matter with the Economic Secretary in the Committee last year when I expressed my concern that the Commission was not using double-entry bookkeeping. The Economic Secretary said at the time that it was. The House of Lords Select Committee looked at recent Commission accounts and said that his view was not shared by former senior officials at the Commission. That includes not just Marta Andreasen, but Jules Muis.

Paragraph 51 of Select Committee’s November report notes:

“In her evidence, Ms Andreasen claims that in the Commission, the introduction of a transaction at Directorate General level ‘does not require a debit and a credit’”.

The Select Committee went on to conclude:

“Both Mr Muis and Ms Andreasen argue that the records entered by the Directorates General into the general accounts are inadequate for genuine double-entry bookkeeping.”

Their Lordships concluded in paragraph 53:

“In spite of the improvements which have been made to the accounting system there are areas which remain in need of attention. We are concerned that there remains a question over whether local accounting systems in the Directorates General are indeed compliant with the standards needed for double entry book keeping. All accounting systems operating in the Commission should fully support double entry accounting. We expect the Commission to investigate these allegations and to publish a full account of its findings”.

Justine Greening: I am listening with interest to my hon. Friend’s comments. It is shocking that something as fundamental as double-entry bookkeeping is not used in EU accounts. Does she agree that private companies in all EU countries are capable of double-entry bookkeeping and use it? There is absolutely no reason why the EU and all member states cannot use double-entry bookkeeping to produce accurate accounts, as happens in the rest of their economies.

Mrs. Villiers: Absolutely. In the smallest corner shop and the largest multinational double-entry bookkeeping has been in regular use since it was invented by the Venetians during the renaissance.

Ed Balls: Does the hon. Lady accept that the House of Lords Select Committee report also says of double-entry bookkeeping that

“On the question of double entry bookkeeping...there is a genuine divergence of opinion among the professionals at the very top of the Commission’s financial management hierarchy. According to Mr Gray, the current Accounting Officer, the Commission has always had a double entry system for the general accounts.”?

The current accounting officer believes that there is a double-entry bookkeeping system, and we should put the matter into its proper professional context, rather than continuing with this low-grade political point scoring.

Mrs. Villiers: It is not low-grade political point scoring to express grave concerns about the scandalous systems in place in the European Commission or about the completely inadequate financial controls that are illustrated graphically by the conclusions of the Court of Auditors and by the documents under discussion.

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President Weber, in his response to the House of Lords report on the matter, emphasised that the court’s concern about the inadequacies of the financial control systems are at the heart of why it has refused to provide the positive statement of assurance. If we are to return to Parliament in a year’s time to congratulate the Commission on having had its accounts signed off, it is vital that we consider those financial controls.

I asked the Minister several questions about EUROSTAT, which is discussed in the OLAF report in the bundle before us. Some £3 million went missing at EUROSTAT, the statistics agency, squandered on staff perks, including a riding school and a volleyball team. However, so far, all that has happened to the people in charge of EUROSTAT at the time is that they have been shifted sideways.

I suspect that, when the Minister investigates the position of whoever was responsible at EUROSTAT, he will find that neither disciplinary proceedings nor criminal charges have been brought. I should be only too delighted if the Economic Secretary wrote to me to prove me wrong, but I am gravely concerned that there has been insufficient follow-up to the fraudulent activities that occurred at EUROSTAT. The EU will never receive the positive statement of assurance that it wants unless it starts not only to treat its whistleblowers better, but to crack down on the wrongdoers. Over EUROSTAT, the only person who had their house raided was the journalist who broke the story in the newspapers.

The problems that the Court of Auditors identified are not just a few technical and administrative errors; they provide compelling evidence that significant sums of taxpayers’ money are being paid to people who are not entitled to it. After the Santer Commission resigned in 1999, the Prime Minister promised us root and branch reform of the system, but eight years later, very little seems to have changed, as illustrated by the fact that the Commission cannot get its accounts signed off by its own auditors.

No one has been fired over the Santer scandal and no effective disciplinary action taken has been against any Commission staff over it. In light of those concerns and in light of the hundreds of pages of reports about the inadequacies of the Commission’s financial controls, how can we trust it with another £7.2 billion of taxpayers’ money or with decisions about our currency, which it would make if the Economic Secretary’s policy of joining the euro were adopted?

The Chairman: Order. We are not here to discuss whether the UK should join the euro.

Mrs. Villiers: It is time for serious and concerted action to clean up the European Commission’s accounts. I urge the Economic Secretary to take that action forthwith.

5.48 pm

Julia Goldsworthy: All hon. Members present think that whether the issues are fraud, error or irregularity, every one of them must be taken very seriously. We all also accept that there will be no improvements without a robust but constructive exchange. Just by saying that the accounts will be signed off in 2009, does not mean that they automatically will be. The fact that the

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Administration Commissioner has expressed grave doubts about that shows how much further there is still to go.

It cannot be acceptable that for 12 years in succession, the EU accounts have not been signed off with a positive statement of assurance. However, today’s exchange has highlighted the difficulties of doing so within the current structures, and the Administration Commissioner himself said that unless there are significant changes in the methodologies, it will not happen. The methodologies partly damage the Commission’s reputation even further. Sir John Bourn said in his evidence to the House of Lords Select Committee that were he required to issue a single statement of assurance on the UK Government’s accounts, he would be unable to do so because he had qualified 13 of the 500 accounts. That is exactly what we see before us. That does not mean that the significance of the problems in some areas is undervalued, but it can be used to give a misleading impression that every aspect of the EU accounts is problematic, and that is categorically not the case.

We have heard how steps have been taken in the integrated administration and control system. Where it has been properly applied, it has been effective in limiting irregular agricultural expenditure, but the fact that new member states have less effective administrative procedures highlights again that the issue is not only about structures but about ensuring that all member states can enforce those administrative structures to the highest possible standards. The road map will be a way forward in achieving that, but the case is the same as that with the national annual consolidated statement. The fact that some states will be able to take it on is to be welcomed, but, although it does not necessarily have to be replicated identically in every state, unless its principles can be applied in every member state, and even if only one aspect has to be qualified, we will end up with the fundamental problem that there will not be a positive statement of assurance on all the accounts in 2009.

I welcome the Government’s commitment to producing the annual statement of accounts, not only because they are improving standards but because it is a way other than the road map for us to pressurise other states into taking forward the agenda and taking steps to improve their accounting measures. I hope that a precedent will follow, but there are still big questions to be raised about the way in which parliamentary scrutiny in this place goes ahead. We have a bundle of papers that have done an excellent job of building up my muscles as I carried them to and from my office and to the Committee—I did not feel quite strong enough to take them all the way down to Cornwall over the recess week to go over them there. There are issues about the way in which we have so many fragmented accounts and the way in which we are dealing with the subject in Committee the day before it is taken before ECOFIN. If there is a vote today, whatever its outcome, what impact will that have on the comments that the Minister makes at tomorrow’s meeting? The House of Lords was right to say that we sometimes debate such matters in a capricious way, and it is not necessarily even consistent from year to year. Simply laying a statement of accounts before the House will not overcome some of our other problems with the processes here.

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There is much we can do to improve things at our end. The Commission—partly through the road map, but also by going further than that—ought to consider improving its internal procedures. Everybody should take responsibility, including the new member states. It is important not to overstate the problems. Not all the irregularities that are reported are frauds and the problems do not extend evenly to all areas of the budget. However, it is not acceptable to allow this to continue year on year, most importantly because of its impact on the wider credibility of the European Union. As a pro-European, that is my greatest concern. Reforms such as those that we have suggested must be pursued and applied uniformly. We must continue with this robust exchange, and must press and extend the willingness to go beyond what is already in place to restore the reputation of the EU in this important respect.

5.54 pm

Ed Balls: This has been a useful and timely debate. I shall ensure that the points that have been raised are properly incorporated into my comments in Brussels tomorrow. I have some sympathy with the hon. Lady’s views. It is important that we use the parliamentary scrutiny process in this House properly when it comes to European decision making, and I take her point seriously.

I am a firm supporter of the Government’s policy on the euro and am strongly supportive of a hard-headed and constructive engagement in Europe more widely. I am not an apologist for the European Commission on budget irregularity. I am in no way complacent. I do not dismiss the matter as simply about dotting the i’s and crossing the t’s.

I appreciate that the hon. Member for Chipping Barnet may not read the proceedings of the Institute of Chartered Accountants in England and Wales regularly, but had she read my speech of last autumn, she would not have made the comments that she did. It is clear that we are strongly committed to acting. Indeed, my predecessor, the Under-Secretary of State for Health, set out during the UK presidency a clear agenda for Commission reform. We have followed that up not only by keeping the pressure on but by taking the lead in trying to persuade other member states to follow our example of strengthening national parliamentary audit. I completely reject the idea that we are complacent or not taking things seriously. Comparison of the range of action in the past two or three years with that in the two or three years before the Government came to power makes it clear where leadership on European matters has been; it has not come from the hon. Lady or her party.

What depresses me about the hon. Lady’s comments is that, while she has made valid points about the importance of proper audit process and accounting procedure, she cannot resist resorting again to the peddling of the kind of myths that the House of Lords, in a cross-party report, tried to encourage us to avoid. She cannot fail to try to claim, implicitly or explicitly, that the issue is fundamentally one of fraud.

Mrs. Villiers: I said that fundamentally the issue was about public money being paid to people who were not entitled to it. Significant amounts of that might be due

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to fraud; it is difficult to prove. However, whether the cause is fraud or error, it should not be happening.

Ed Balls: I agree completely, but I think that when, as I am sure they will, members of the public scrutinise the Hansard record in the next few days and read our debate, they will conclude that the Government, in a hard-headed and sensible way, are pursuing serious reform in Europe, to improve the accounting for the European budget. The hon. Lady’s speeches have resorted to the same old tired anti-Europeanism to which we have become used from the Conservative party. There is a continual attempt to insinuate that the issue is fundamentally one of fraud.

Mrs. Villiers: Is it anti-European to want the Commission to introduce proper financial controls over taxpayers’ money?

Ed Balls: As I said to the hon. Lady, and repeat now, it is the Government, in the past two years, who have, step by step and action by action, argued for, obtained agreement for and implemented in the UK serious and long-overdue reforms that should have been in place when we came to government in 1997. The important thing is that we build on the solid record of achievement of recent years. The only way to do that is to be at the centre of the debate, and not to be a spectator. The wrong thing to do would be to return to

“a time when this country was just a spectator and not a participant in shaping the future of Europe”.

Those are not my remarks, but those of Caroline Jackson, a Conservative MEP talking about the Conservative leader’s proposals to withdraw to the fringes of Europe. As she said:

“you can’t move to the centre ground at home and move to the extreme right abroad. That just doesn’t make sense at all”.

It was her colleague in the European Parliament, Mr. Struan Stevenson, who said that to move from the mainstream right-of-centre group in the European Parliament would mean

“we would have to sit round the table on a weekly basis with these fascists and nutters that nobody else will sit with”.

My conclusion is that the only way to make serious constructive progress on reforming the European budget is in a hard-headed way, standing up for the national and European interest, but making serious proposals for reform. That is the only way to make progress, and we have demonstrated it in the past two years. That is what we shall continue to do in the next year, so that we can get the positive statement of assurance that we all seek. We shall do that only by being at the centre of the debate, not on the extreme fringe. I fear that that is where the hon. Lady wants to take us.

Question put:—

The Committee divided: Ayes 7, Noes 4.

Division No. 1 ]