Select Committee on European Union Fiftieth Report

Financial Management and Fraud in the European Union: Perceptions, Facts and Proposals

CHAPTER 1: Background—the budget of the European Communities and its audit

1.  From small beginnings in the 1960s, the budget of the European Communities (EC) has grown rapidly since the 1980s. Although still a small proportion of the total Gross Domestic Product (GDP) of the European Union (EU) (at around 1%), it is now a large absolute sum. For the financial year 2006, the EU budget allows for €121 billion in commitment appropriations (€112bn in payment appropriations)[1] and the recently agreed Financial Perspective for 2007-2013 makes total commitments of €843 billion[2] over the seven year period. Most of the spending (approximately 80%) funds the Common Agricultural Policy (CAP) and the structural and cohesion funds.

2.  Responsibility for reporting on the legality and regularity of the EU's revenue and expenditure lies with the European Court of Auditors (ECA). The Court was established in 1975 but since the Maastricht Treaty was signed in 1992 it has been required[3], in addition to conducting its annual audit, to provide a Statement of Assurance (or DAS from the French—Déclaration d'Assurance) on the income and expenditure of the EC budget for the outgoing financial year. However, in each year since 1994, the Court has not given a positive Statement of Assurance on the transactions underlying the expenditure side of the accounts.

3.  We argue in Chapters 2 and 3 that the annual audit of the European Commission itself should be kept separate from the broader remit of the post-Maastricht Statement of Assurance. Confusion between the two objectives and the lack of positive assurance has led many, including a number of those we spoke to during our inquiry, to be critical of the state of financial management in the European Commission and the effect that this is having on the Union. Ivan Lewis MP, then Economic Secretary to HM Treasury, told us that "as long as the accounts cannot be signed off appropriately then that sense of a lack of confidence and that unease over accountability for the way taxpayers' money is being spent by the European Union will continue to be there. It is part of the bigger picture about the great unease of the citizens of Europe with the institution that is the European Union at the moment" (Q 45). Similarly, former MEP Terry Wynn, who was chairman of the European Parliament's Committee on Budgetary Control, suggested that "those who want to knock the European Union will always be able to use the annual report of the Court of Auditors" (Q 268).

4.  We concur with the views presented to us that the lack of positive assurance from the European Court of Auditors in their annual Statement of Assurance is a serious problem for the European Union and the governments of its Member States. It was as a result of our concern over this that we decided to launch this inquiry.

Putting the lack of a positive Statement of Assurance in context


5.  The lack of a positive Statement of Assurance should, however, be seen in a broader context. Since the resignation of the Commission headed by Jaques Santer in March 1999 amid allegations of "fraud, nepotism and mismanagement"[4] the European Commission has been seeking to address the issue. The incoming Commission, headed by Romano Prodi, issued a white paper dubbed "the Prodi-Kinnock White Paper" together with an accompanying action plan in March 2000[5]. These set out a wide-ranging programme of internal management reform. Of the proposed 98 actions, 37 related directly to financial management, audit and control. Many of these were taken directly from the Sound and Efficient Management (SEM) 2000 reforms which had been put forward by the Santer Commission in 1995[6].

6.  However, although some 85% of all spending was and still is carried out by Member State agencies, rather than by the central European Institutions themselves, the Prodi-Kinnock reforms (in contrast to earlier SEM reforms) did not seek to address the issue of Member State involvement in the management of EU spending programmes. This is known as shared management[7] in the lexicon. Rather the reforms focused on the role played by the European Institutions.

7.  In spite of these reforms problems at both Commission and Member State level have continued to be highlighted by the Court of Auditors in its special and annual reports since 2000. In addition the 10 country enlargement of May 2004 has brought about even greater challenges for the Commission and the shared management system.

8.  Furthermore, the Commission's reputation for sound financial management and its commitment to reform was not enhanced by problems within one of its own long-established Directorates General. In 2003 serious financial irregularities involving the Commission's statistical agency, Eurostat, came to light. The case has raised questions about the strength of the internal control systems within the Commission, the efficacy of internal audit and OLAF[8] investigations and staff disciplinary procedures. Further concerns have been raised over the commitment to openness and transparency in relation to whistle blowing by officials. These and other issues have led some to claim that there is a "culture of corruption"[9] within the Commission. Our investigation was not presented with any evidence of a culture of corruption in the Commission.

9.  In addition to the Prodi-Kinnock reforms, the Commission began introducing a new accruals-based accounting system in January 2005 which is an essential prerequisite to implementing some of those reforms. At the same time, the European Commission, the European Parliament, the European Court of Auditors, and the Council of Ministers have made (or in the Council's case responded to) proposals to improve internal and external control systems, including through reform of the Statement of Assurance, indicating that the problems besetting EU financial management are still significant and substantial. Details of the proposals can be found in the boxes at the beginning of Chapter 2.


10.  What is indicated by a lack of a positive Statement of Assurance has been a matter of some dispute during our inquiry. This lack of a widely understood definition was recognised by Mr Josef Bonnici, the Member of the European Court of Auditors responsible for the Statement of Assurance. He told us that the Court's worry was that "it can sometimes be misunderstood" (Q 83). There was, however, unanimous agreement among those we took evidence from that, as Ivan Lewis MP put it, "it is wrong that it is presented as mainly being about fraud because that is not accurate" (Q 44).

11.  We share the concern raised with us by the European Court of Auditors that their decision not to give a positive Statement of Assurance can be misunderstood. We recognise that the lack of a positive Statement of Assurance does not necessarily indicate that high levels of fraudulent or corrupt transactions have taken place. We do not seek to detract from the importance of the issue, nor from the evident underlying problems which have resulted in 12 successive qualified audit opinions. However, we consider that a more accurate reflection of the substance of the Court's annual audit and the Statement of Assurance would be achieved if these two functions were more clearly separated. In addition, the single Statement of Assurance should be split into a series of statements on each of the different spending categories.

Our past involvement and this inquiry

12.  We have taken a close and continuing interest in these matters. In addition to our annual reports on the EC budget, we have published a series of reports since 1988-89 on financial management and the fight against fraud (1988-89, 1992-93, 1993-94 (twice) and 1998-99), the European Court of Auditors (1979-80, 1986-87 and 2000-01), the future financing of the EU (2004-05), and OLAF (2003-04)[10]. This report builds on a substantial body of work that we have carried out over the years.

13.  We launched this current inquiry in February 2006 in response to the Court of Auditors' report on the 2004 Budget[11]. During our inquiry we have taken account of a number of other documents and proposals. We are currently maintaining the Parliamentary scrutiny reserve on the following documents as we consider them to be relevant to this inquiry:

  • EM 5509/06: Commission Action Plan towards an Integrated Internal Control Framework
  • EM 8630/06: Member States' replies to the European Court of Auditors' 2004 Annual Report
  • EM 10480/06: Annual Report to the Discharge Authority on Internal Audits carried out in 2005
  • EM 10562/06: Synthesis of the Commission's management achievements in 2005—Communication from the Commission to the European Parliament, the Council and the European Court of Auditors
  • EM 11399/06: Progress report as at 31 March 2006 on modernising the European Commissions' accounting system
  • EM 9628/06: Modified proposal for a Council Regulation amending Regulation (EC, Euratom) No. 1605/2002 on the Financial Regulation applicable to the general budget of the European Communities
  • Unnumbered EM submitted by HM Treasury on 10 October 2006: Report of the European Anti-Fraud Office—Sixth Activity Report for the Period 1 July 2004 to 31 December 2005

14.  Our investigation has been informed by a large amount of both written and oral evidence. A full list of those who contributed to the inquiry is printed at Appendix 2. The written submissions we have received and the oral evidence we have heard are published in the volume accompanying this report. We would like to record here our thanks to Professor Roger Levy from the Caledonian Business School for all the help and advice he provided us in his role as Specialist Adviser.

15.  We make this report to the House for debate.

1   The accounting procedures for the EC budget distinguish between commitment and payment appropriations. Commitment appropriations are the total cost of legal obligations which can be entered into during the current year, for activities which will lead to payments in the current and future years. Payment appropriations are actual transfers of cash from the Community Budget to creditors during the current year, resulting from commitments made in the current or previous years. Back

2   Notice 2006/C 139/01, Inter-institutional agreement between the European Parliament, the Council and the Commission on budgetary discipline and sound financial management, Official Journal C139, vol 49, 14 June 2006, Annex 1. Back

3   Under Article 248. Back

4   Committee of Independent Experts, 1999. First and Second Reports on Allegations Regarding Fraud, Mismanagement and Nepotism in the European Commission. Brussels. Back

5   White Paper: Commission of the European Communities, 2000. Reforming the Commission: A White Paper-Part I: Communication from Mr Kinnock in agreement with the President and Mrs Shreyer. Brussels, European Commission. Commission of the European Communities, 2000. Action Plan: Reforming the Commission: A White Paper-Part II: Action Plan: Communication from Mr Kinnock in agreement with the President and Mrs Shreyer, Brussels, European Commission. Back

6   Commission of the European Communities, 1995. Sound and Efficient Management. SEC (95) 1814 Final, Brussels: European Commission. Back

7   Where management of funds is shared between the Commission and the authorities in the Member States. Back

8   Europe's anti-fraud body-from the French Office Européen de Lutte Anti-FraudeBack

9   Q 249. Back

10   On EU financial management and financing see European Union Committee, 5th Report (1998-99): Fraud against the Community (HL 27); European Union Committee, 13th Report (1992-93): The Fight Against Fraud (HL 44); European Union Committee, 6th Report (1993-94): Fraud and Management in the Community's Finances (HL 34); European Union Committee, 12th Report (1993-94): Financial Control and Fraud in the Community (HL 75); European Union Committee, 6th Report (1998-99): Future Financing of the EU: who pays and how? (HL 36); European Union Committee, 9th Report (1998-99): Prosecuting fraud on the Communities' finances-the Corpus Juris (HL 62); European Union Committee, 6th Report (2004-05): Future Financing of the European Union (HL 62). On the Court of Auditors: European Union Committee, 2nd Report (1979-80): EEC Budget (HL 17); European Union Committee, 6th Report (1986-87): Court of Auditors (HL 102); European Union Committee, 12th Report (2000-01): The European Court of Auditors: The case for reform (HL 63). On OLAF: European Union Committee, 24th Report (2003-04): Strengthening OLAF, the European Anti-fraud Office (HL 139). Back

11   The Court's report and Statement of Assurance on the 2005 budget has now been published. We reprint this Statement of Assurance at Appendix 4. Back

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