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Court of Auditors: EUC Report
7.46 p.m.
Lord Grenfell rose to move, That this House takes note of the report of the European Union Committee on the European Court of Auditors: the case for reform (12th Report, Session 2000-2001, HL Paper 63).
The noble Lord said: My Lords, noble Lords may wonder how it is that a report which was published on 25th April 2001 must wait until 8th January 2002 to be brought to the Floor of the House for a debate. At least the debate is being held on a Tuesday rather than on a Friday. A general election, an 11-week Summer Recess and the events of September 11th of course must be taken into account. Nonetheless, I hope that the
Leaders Group, chaired by my noble and learned friend the Leader of the House, which has been looking into the procedures of the House, including its scrutiny role, will have fully recognised that where the report of an inquiry is deemed important enough to be brought to the Floor of the House for debate, business managers have a duty to ensure that the debate takes place before the passage of too much time renders it irrelevant.I am deeply grateful to every member of Sub-Committee A for the hard work put into a very complex inquiry. Some members had specialist knowledge and direct experience of working with the Court of Auditors, and this was of particular value to us. We took evidence from a wide range of witnesses: from eight of the 15 members of the court, from the European Commission, the European Parliament, from our own Treasury and from the National Audit Office, from our permanent representation in Brussels, to whom I wish to express my thanks for their great help in making arrangements for our visit, and from a number of individual experts well versed in the ways of the European Union's audit process.
I should like to pay special tribute to the Clerk of our committee, Anna Murphy. This was her first inquiry on becoming a Clerk. While I felt that truly we were throwing her into the deep end with such an inquiry, she took to it like a duck to water. Since we had no specialist adviser, her role in the drafting of the report was crucial and she played it with the skill of an old hand. We are very much in her debt.
Perhaps I may also thank the Government for their response to our report, even though I do not agree with all of it. Nonetheless, it is a thoughtful and comprehensive response and, as always, I am delighted that my noble friend Lord McIntosh of Haringey will be the Minister who is to reply this evening. By now I can scarcely imagine a debate on a Select Committee report prepared by Sub-Committee A without him, but I would not blame him if he thought otherwise.
Our inquiry was prompted by a growing concern that current problems relating to the structure, functions and methodology of the Court of Auditors would surely be accentuated by the enlargement of the European Union. Enlargement will pose many challenges for the court, not least among them the greater cultural diversity in its working environment and the substantially greater expenditures and revenues to be audited. For that reason, the court needs to be properly equipped to meet the challenge—and the court knows it. Changes are already under way. However, the question is whether they are the right changes. That is what we decided that we wanted to find out.
As reflected in the report, we set about examining the court's structure and organisation and evaluating their appropriateness. We looked at the complex inter-institutional system within which the court is expected to operate and to fulfil its audit functions. We explored its audit methods and its role in the prevention of fraud. We examined, and found compelling, the case for a one-off external management audit of the court
itself. Finally, we took a good look at the likely impact on the court of the internal audit reforms which Commission Vice-President Neil Kinnock was in the process of implementing within the Commission.A number of noble Lords who will be speaking in the debate will delve into more of the detail of this inquiry. I shall content myself with an overview of the principal conclusions that we reached.
Even if the enlargement of the European Union was not imminent, the present structure of the court needs an overhaul. One court member per member state is an unsatisfactory arrangement in a union of 15 states. With 20 states or more it will prove hopelessly unwieldy. National representation is a sine qua non for any EU institution, but to improve the court's efficiency that representation ought, as we state in paragraph 33, to be at the level of a part-time non-executive board to which a highly qualified chief executive, supported by a large audit staff, would report. In paragraph 34 we suggest how the present shortcomings in the method of recruiting audit staff should be addressed. The introduction of a "chambers" system, sanctioned in the Nice treaty, is not, in our view, radical enough to solve this problem. I believe that the noble Lord, Lord Sharman, a member of our committee, will be expanding on the need for the crucial reform we are advocating.
In their response, the Government have noted that there are other ways of combining the representation of all member states with a focused management structure and cite the example of another Luxembourg-based EU institution, the European Investment Bank. None the less, we feel strongly that the structure proposed in this report better responds to the EU's needs for improved audit efficiency. Of course I welcome the Government's statement that our proposal is,
- "an interesting one and a useful contribution to the wider debate on the effectiveness and legitimacy of the EU institutions which will lead to the IGC planned for 2004".
With regard to the court's published output, we were impressed by the number of witnesses who saw greater value in the court's special reports on specific sectors—recognising, of course, that there are variations in their quality—than in the court's annual reports. The court itself acknowledged to us the past deficiencies of the annual report, and we were pleased to note that more attention is now being paid in them to the follow-up of previous court observations.
Nevertheless, the court remains reluctant to get into political battles with other Community institutions or member states. This will continue to inhibit it from really throwing the book at those who take no action after errors have been identified. If there are counter pressures on court members—and we have evidence that there were—that is one more cogent argument for moving towards an entirely professional and independent court executive.
We share the view of many that the major problem with the court's annual report has been with that component known as the "DAS", the French acronym for the statement of assurance on the reliability of the accounts and the legality and regularity of the underlying transactions. This was based on the audit of a representative global sample of underlying transactions. The problem was that the methodology used to arrive at an opinion, which we fully describe in paragraph 51, produced an error rate estimate which was invariably taken to be a precise enough measure of irregularities—which in fact it was not—to allow definitive conclusions to be drawn and recovery action by the Commission to be triggered. Worse still, it gave the media the opportunity to trumpet inaccurate and exaggerated claims of massive fraud against the Community budget.
Starting with the 1997 annual report, the court has progressively supplemented the DAS with more detailed and specific assessments of each category of the EU's financial perspective. What was once a "top down" system of assessment is becoming, as the court and the Commission disaggregate, a system which can provide far more, and far more useful, information, with a consequent enhancement of public accountability. We welcome this in our report, as indeed do the Government in their response.
As noble Lords will know, the responsibility for approving the accounts of the preceding financial year relating to the implementation of the budget—known as "granting the discharge"—rests with the European Parliament, acting with the aid of a recommendation from the Council and the court's annual report. The court will have discussed its audit findings with the audited bodies in a procedure known as the procedure contradictoire. Both this and how the recommendation to the Parliament is eventually reached are described in paragraph 56. We shared the view of the noble Lord, Lord Williamson of Horton, that a major advantage of the procedure is that it ensures that the Parliament, through its budgetary control and the plenary sessions, can play its proper financial role.
But we and almost all witnesses, including the noble Lord, Lord Williamson, were agreed that the procedure was too protracted, that it alienated the Parliament and that it could lead the public to believe that the long drawn-out process merely served to give time to the parties to fudge the audit. The Government share our concern over too protracted a procedure but warn against speeding it up too much for fear of a botched job. My noble friend the Minister will no doubt refer to some possible alternative remedies.
Although 80 per cent of the budget is administered by member states, the Commission still has to take responsibility for its implementation. Even so, Ministers in Council ought, in our view, to manifest a greater interest. The almost perfunctory Council recommendations for discharge tend to leave the impression that the Council wants to avoid being accused of using the Commission as a whipping boy for the failings of the national administrations in their administering of 80 per cent of the budget. My noble
friend the Minister will, I hope, explain why he feels that we are being less than fair to the Council in this regard.But that is only one aspect of our concern about the Council's attitude. The court president sought to assure us that dialogue between the court and Council officials had, in his words, "increased enormously", but we remain deeply unhappy with the Council's seeming indifference to the whole process at a time when the public's perception of the management of Community funds is as low as it is.
The internal audit reforms under way in the Commission, particularly the tightening of control mechanisms and the simplification of regulations to reduce errors and irregularities, can reduce the potential for fraud and prompt more robust follow-up through the system on the court's observations. At the same time, the Council, at ministerial level, would do well, to put it politely, to focus more seriously on the court's progressively more informative and authoritative annual reports before reaching for the discharge recommendation button.
Given what we call the "80 per cent paradox", the need for minimum standards of financial control in the member states is paramount, as our report insists. Differences between systems can be justified as long as each is effective. But that said, we prefer the delegated financial control system as used in this country, and we welcome the Commission's move to embrace it.
With respect to audit methods, the court, of course, has to cope with a cultural diversity, which enlargement can only increase. The solution seemed to us to lie in getting the national supreme audit institutions—the SAIs, as we call them—to share as far as possible with the court and each other a common audit methodology, similar competences and equal statutory rights of access, the last being a matter on which the UK has lagged behind but on which my noble friend the Minister is in a position now to reassure us. In general, however, we are encouraged that the SAIs are now much more attentive to the way national administrations implement the Community budget.
We found to our consternation, which is also the Government's consternation, that the member states and the Community's institutions share no common definition of fraud and irregularity. This needs to be, and can be, quickly resolved.
With further reference to fraud, we came down strongly against relying on the court's work to be the main line of defence against it. The potential for fraud will best be reduced by a much greater simplification of the systems and regulations relating to expenditures of Community funds. We warmly welcome in our report the attention being paid to this by the Commission in the areas of structural and agricultural funding. We fully understand the European Parliament's frustration at having no official figures on which to assess the extent of error, irregularity and fraud. If the court has them, and their accuracy can be vouched for, it should publish them.
Much of what we learnt in this inquiry led us to the conclusion that the time was ripe for an external management audit of the court to help determine how appropriate its structures are as it enters its second quarter-century. I am pleased that the Government feel that such an audit could provide a useful contribution to the debate in advance of the 2004 IGC. I hope it is more than just a useful contribution to the debate; it is something that really needs to be done.
I come finally—and I apologise for the length of this introductory speech—to the changes in the Commission which should make the internal audit more effective. We welcome these changes—they are reviewed in paragraphs 97 to 103—and were reassured by Commissioner Kinnock's determination to see that the functional independence of the Internal Audit Service and the audit capability within each directorate-general would be inviolate.
We encountered differences of opinion on whether the removal of the system of prior financial approval by a financial controller was sensible. With certain provisos, we come down in favour of a move away from the ex ante system of control. We agree with the Government that responsibility for financial management is better delegated to those who decide on how the money is spent—namely, to the directors-general.
A few witnesses feared that the reforms would enable the Commission to keep the Court of Auditors at a distance. We are sure that these fears will prove unfounded. The court remains treaty-bound to carry out the external audit of the Commission, and we see these reforms as a means of improving working relations between them, not least through the sharing of best practice so that the Community's financial management is improved overall.
This was a long and complex inquiry, but I believe that we came to a set of conclusions which make sense. Some of them are radical—notably our conclusions on how the court could, and should, be better structured, staffed and governed. As I said at the outset, the court's current structural and functional problems can only be accentuated by enlargement. Time is therefore not to be wasted. I am glad that Her Majesty's Government are taking these and our other proposals seriously. The opportunity afforded by the 2004 IGC to equip the court to meet the challenge must not be missed. I beg to move.
Moved, That this House takes note of the report of the European Union Committee on the European Court of Auditors: the case for reform (12th Report, Session 2000-2001, HL Paper 63).—(Lord Grenfell.)
8.2 p.m.
Lord Bruce of Donington: My Lords, I congratulate the chairman of the Select Committee and its members on the considerable amount of work, some of it tedious, that they have undertaken. If it is possible to agree with a Select Committee report on a matter of this kind, I am in full agreement with it, and indeed congratulate all the committee members on their work.
Your Lordships will recall that I have had reservations in the past about the presentation of Community accounts and their audited approval. I have often criticised the way in which the audit report of the Court of Auditors has, for some obscure reason, to be published with the Commission's replies to it, as distinct from having the audit report made directly available publicly. It is not the practice in this country. It should not be the case that a report can be published only when those who are perhaps criticised in it are given an opportunity to reply in advance to questions raised. I repeat that it is not the British practice. That in itself does not make it undesirable, but from an auditor's standpoint it puts the auditor in an impossible position.
The functions of the European Court of Auditors have been dwelt upon in the report that is before the House. They have aroused a certain amount of interest—not as much as they ought to have done, but some nevertheless. I was, therefore, intrigued to find that a government response to the Select Committee report had been published on 16th July 2001 among Government Responses to House of Lords Paper 13. I refer to pages 33 to 38 of the Government Responses. I thought that I should take a look at them before taking part in this debate.
I find overwhelming involvement of the domestic Civil Service in the response—which is in the form of a letter from Ruth Kelly MP, who was appointed Economic Secretary to the Treasury some months ago. It was published 37 days after her appointment. I refer to the response because I am a little troubled by the position of political Ministers in dealing with their own Civil Service.
This is a document of some importance and warrants critical ministerial attention at political level. It is not sufficient that it should be so dominated by the Civil Service as to be virtually ignored by the political establishment. I have good reason for saying this. At page 35 of the Government Responses, in the middle of a sentence, there is a queer little insert in brackets:
- "(I sent a copy of this document to the Scrutiny Committees of both Houses on 9 May this year)".
- "We urge Her Majesty's Government to give this, and our other proposals, serious consideration in light of the opportunity afforded by the Inter-Governmental Conference, now set for 2004, to equip the Court to meet the challenge".
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