Select Committee on European Union Fiftieth Report


CHAPTER 4: Shared management—the allocation of financial management responsibilities between the Commission and the Member States

Who is responsible for financial management

74.  Since the creation of the European Community and the adoption of the Treaty of Rome in 1957, the Commission has been responsible for implementing the Budget. Based on the original Article 205, the current Article 274 states that "the Commission shall implement the Budget, in accordance with the provisions of the regulations made pursuant to Article 279[43], on its own responsibility and within the limits of the appropriations, having regard to the principles of sound financial management". The final phrase was added in the Maastricht Treaty in order to underline the need for value for money.

75.  A model with the Commission playing such a central role was appropriate for a time when the Community was made up of only six members and spending programmes such as the CAP and the structural funds did not exist. However, the Community has become a very different organisation: the implementation of the CAP in 1969; the development and then exponential growth of the structural and social funds from the late 1970s; and the series of enlargements to 25 and in the near future 27 members. In real terms, the EC Budget quadrupled in value in the quarter century from 1977 to 2002. Its main spending programmes are claims based with complex eligibility criteria and need detailed management. This complexity, along with a need for accountability and transparency in programme delivery and financial management, has meant ever more management responsibilities falling on the Commission and the implementing agencies in the Member States.

76.  In recognition of these changed circumstances, and in deference to the subsidiarity principle upheld by Maastricht, Article 274 now also includes the provision that "Member States shall cooperate with the Commission to ensure that the appropriations are used in accordance with the principles of sound financial management". Furthermore, the recent Interinstitutional Agreement on Budgetary Discipline and Sound Financial Management which gives force to the Financial Perspective 2007-2013 includes the requirement that "as part of their enhanced responsibilities for structural funds and in accordance with national constitutional requirements, the relevant audit authorities in Member States will produce an assessment concerning the compliance of management and control systems with the regulations of the Community. Member States therefore undertake to produce an annual summary at the appropriate national level of the available audits and declarations"[44].

77.  Particularly since the first reform of the structural funds in 1983, shared management between the Commission and the Member States in the big spending programmes has been a reality. However, for some we spoke to, rather than being helpful, adding the obligation to Article 274 requiring cooperation between Member States and the Commission introduced a new element of confusion and inconsistency. This is the view of shared management taken by Ashley Mote MEP who argues that "the net effect of the current process is that we see neither the Member States nor the Commission itself taking ultimate responsibility" (Q 218).

78.  Among those we spoke to there were marked differences of view over who is ultimately responsible for sound financial management under Article 274. Some adopted a strict interpretation: Ms Andreasen, the Commission's former Chief Accountant, observed that while irregular payments may occur in the Member States "the control starts with the Commission … because the Commission is given the responsibility by Treaty but it also has the power" (Q 393). In her view, where Member States are implementing programmes, "the European Commission can add no other value than the adequate control and accurate accounting of the proper use of the European Budget" (p 102). As we have seen in the previous chapter, Ms Andreasen takes the view that the Commission's ex ante expenditure approval system, whereby all transactions were authorised in advance by a central department, should be reinstated. However, under the current system she argued that the Commission should ensure that documentation is adequate to guarantee the legality and regularity of payments made, through its power to demand supporting documentation and to suspend advance payments.

79.  While the Commission should do its best to monitor the disbursement of funds we do not consider that it alone can be held responsible for the regularity of the large majority of European transactions (over 80%) which take place within Member States. We are pleased to see that both the Maastricht Treaty and the recent Financial Perspective agreement recognised the role of the Member States in ensuring proper financial management.

80.  Many of those we spoke to pointed out the disallowance and recovery procedures which the Commission currently operates. In practice the Commission both withholds advance payments and fines Member States in instances where it discovers eligibility rules have been breached. Mr Meadows, the Director General of DG REGIO[45] told us that in a single case in Greece the Commission has "clawed back 518 million euro which is a sizeable sum of resources" (Q 553).

81.  Some of the evidence we have received suggests that in practice shared management is even more complex than Article 274 suggests because the implementing regulations of the CAP and the structural and cohesion funds are based on different principles. In the case of the CAP, there is no shared financing. All of the financing comes via the EC Budget, and the regulations prescribe very detailed standards with which the national agencies must comply (for example, levels and types of sample tests on grains, eligibility for the grubbing up of vines, payments of sheep and beef premiums, etc.). In the case of the structural and cohesion funds, the financing is shared between the EC Budget and the national authorities concerned. Whole area programmes are drawn up by the Member States[46] and then approved by the Commission. Programmes are made up of numerous local joint (EU-Member State) funded projects, which must comply with the general eligibility criteria concerning state aids and such stipulations that are contained within the relevant structural fund regulation. A local programme management committee is appointed, with day to day management residing at local level to a much greater extent than is the case with the CAP.

82.  However, for those we spoke to from DG REGIO, the operational "difficulties flowing from shared management are not confusion as to who does what, the difficulties flowing from shared management are the extent of operations which one is trying to audit and to control" (Q 543). Mr Nicolas Martyn, director of the audit directorate in the Directorate General, told us that the Commission has the ultimate responsibility under the Treaty. In the day to day relationships between the Commission and the Member States this takes the form of a "supervisory role to make sure that system is working properly" (Q 543). On the audit front, DG REGIO operates a multi-annual strategy deciding on a risk basis how audit resources should be allocated. First a risk assessment is conducted at a global level. Then within each Member State a more detailed risk analysis takes place to identify high risk programmes. The Commission seeks to audit, as a priority, the riskier programmes (Q 548).

Is the legislation too complex?

83.  One of the observations made by the Court of Auditors both to us and in its published reports is that the legislative framework of control in these sectors is generally too complex and needs to be simplified. Mr da Silva Caldeira, one of the Members of the Court, told us that "we should aim to simplify the regulations which govern the different policies and programmes. The more complex the rules you have to follow, the higher the risk, at the end of the day, that you will have irregular transactions" (Q 106). That the regulations are too complex was acknowledged by the Commission both in Vice President Kallas' written evidence to us and in numerous reform initiatives including the Prodi-Kinnock white paper and the 2005 Roadmap.

84.  In oral evidence Mr Meadows of DG REGIO acknowledged that complexity can contribute to errors. He pointed out that although there will always be a certain degree of complexity associated with implementing regional policy programmes the Commission was aware of the obligation to "work constantly to try to make sure that … you do not get unnecessary complexity" (Q 556). However, according to Mr Gray, the Commission's Accounting Officer, the Commission's work in this area was not always popular with the Member States: "it is one thing to design regulations and another thing to get them adopted by the Member States" (Q 356).

85.  At a more general policy level, some of the complex eligibility criteria on which the main spending programmes rest are a major source of errors in the payment accounts. For Mr da Silva Caldeira this happens because "there is a tendency to break rules to simplify things" (Q 104).

86.  It is of great concern to us that the regulations underpinning the spending programmes continue to be very complex and that this complexity can lead to errors. We are pleased to see that the Commission and the Council have committed to simplifying the rules.

The role of Member States in shared management

87.  This takes us to the other side of the argument, which says that in varying degrees it is the Member States rather than the Commission who are failing in their responsibilities. We have received evidence in support of this view from a number of sources including Commissioner Hübner, the Commissioner responsible for regional policy, as well as from the Dutch Senate, the European Court of Auditors and Mr Terry Wynn. The basis of their argument is that the overwhelming majority of irregularities found by the Court occur in the Member States.

DELEGATION RISK

88.  According to Mr Wynn, that the majority of irregularities occur in the Member States results from "delegation risk"[47]. He argues that delegation risk has four aspects:

  • Member State (or sub-national authority) carelessness with EU funds compared to national funds;
  • the variable quality of control standards between (and within) Member States;
  • ex-post Commission recovery mechanisms diverting attention away from the need for early remedial action; and
  • the lengthy chain of management from budget approval to final commitment[48].

89.  Commissioner Hübner also refers to the failure of Member State authorities to assess and manage the risk of irregularity adequately (pp 178, 179).

90.  We share some of the concerns raised with us in respect of Member State management of EU funds. We consider it particularly unacceptable for the government of a Member State to treat European money with less care than national funds and urge the Council to make this clear. We are also concerned about the variability of control standards between Member States. We consider that all European expenditure should be subject to equivalent standards of control to ensure that the risk of fraud and error is minimised.

A national DAS

91.  While the two sides of the debate may disagree on how the Treaty apportions responsibility, they need not necessarily disagree on measures for remediation. Thus, the proposals from the Dutch Senate call for more powers for the Commission as well as improvements within the Member States (p 176). Furthermore we consider that there is nothing in Ms Andreasen's proposals for strengthening the Commission's role with which the European Parliament would disagree. As we shall see, the European Parliament's proposal for a national Statement of Assurance includes these elements.

92.  At the invitation of the European Parliament, the Commission put forward the Roadmap to an Integrated Internal Control Framework in June 2005[49]. This has been supplemented more recently by a 16 point implementation action plan[50] for 2006-07. The Roadmap proposed new responsibilities for the Member States including:

  • The provision of annual ex ante Disclosure Statements and ex post Declarations of Assurance signed off at the highest level—by the Finance Ministry;
  • A requirement that each operational agency make similar statements and declarations backed up by independent auditor opinions;
  • A request that the appropriate Supreme Audit Institutions (SAIs) exercise oversight and report on design and operational weaknesses; and
  • A request that the appropriate Supreme Audit Institutions audit the ex post declarations of assurance and report the results to national legislatures.

93.  On the disclosure statement the European Parliament has suggested that it include four elements:

  • A description of the Member State managing authority control systems;
  • An assessment of their effectiveness;
  • A joint Commission—managing authority remedial action plan if required; and
  • A confirmation of the accuracy of the descriptions by an external auditor or the national audit institution.

The European Parliament has advocated that the Commission should have rights to verify the Disclosure Statement, and impose penalties "affecting the overall funding of the Member State concerned"[51] if necessary.

94.  The European Parliament went further than the Commission's Roadmap proposals for a declaration of assurance in a number of respects, arguing for:

  • A global Statement of Assurance from the Commission signed off by the Accounting Officer and the Secretary General;
  • Basing the national Statement of Assurance on a national annual activity report signed by the Finance Minister level;
  • Annual audits of all paying agencies by an external auditor;
  • The establishment of (unspecified) performance indicators; and
  • The facility to suspend payments to agencies, or whole agencies themselves, and to impose financial penalties where agencies make mistakes or fail to reach targets[52].

95.  In oral and written evidence, the idea of a national Statement of Assurance has been supported by many witnesses including representatives from the UK Government and the National Audit Office. However, a national Statement of Assurance as conceived above is not without its problems and opponents, the latter including the ECOFIN Council which effectively rejected a national Statement of Assurance at its meeting in November 2005[53]. One of the reasons for this rejection was an objection to giving a political signature to such a declaration.

96.  Mr Muis observes that the Supreme Audit Institutions have a "cold water fear in co-signing" (p 119) such a national Statement, while Terry Wynn admits that getting either the Supreme Audit Institutions to take the initiative or a sign-off at finance minister level are unrealistic expectations because the Supreme Audit Institutions fear being taken over and there is a hard core of opposition from some Member States to the whole idea of a national statement of assurance per se (Q 277).

SUFFICIENT INTEREST IN THE COUNCIL?

97.  In its statement of 8 November 2005, ECOFIN did take a position on the Statement of Assurance which argued in favour of the Court of Auditors 2004 Opinion on internal control[54]. However, the ECOFIN conclusion included a rejection of the national Statement of Assurance concept in favour of an incremental improvement of the existing Statement. The conclusions also expressed support for more reforms within the Commission's control environment, and for Commission-Member State "assessments of the present controls at sector and regional level and the value of existing statements and declarations"[55].

98.  The ECOFIN Council conclusions also encouraged the Member States to proceed with so-called Contract of Confidence arrangements with the Commission in the area of structural funds. According to Mr Meadow and Mr Martyn of DG REGIO these Contracts of Confidence denote that the Commission are "sufficiently satisfied with the way things are done" (Q 559) in a Member State or region that the Commission's own audit activity is reduced. The Contracts of Confidence can be at national or sub-national level and require that the Commission is persuaded that the system functions properly and, in particular, that the work of the competent audit body can be relied on. The first of these Contracts has now been signed with Wales.

99.  Whilst these Contracts require a strengthened relationship between the Commission and the competent national or sub national auditing body, ECOFIN wished to go no further than the current framework of cooperation between the Court of Auditors and the supreme audit institutions. In contrast to the view expressed by European Parliament, ECOFIN reasserted the strict distinction between internal and external audit which it concluded was "not part of the internal control framework"[56].

100.  In his oral evidence, Ivan Lewis MP, the former Economic Secretary, outlined the reasons why ECOFIN has taken this position against a national Statement of Assurance. First, there are legal difficulties in many Member States for a Minister to sign such a declaration. Second, there would be constitutional difficulties in federal states were one minister required to sign. Third, the Court of Auditors had not expressed support for the idea of a national Statement of Assurance; and finally it would be up to the Court to judge how any proposed changes would impact on the level of assurance it could give.

101.  Nevertheless, in common with the Dutch government, the UK Government supported the Commission's Roadmap and is broadly sympathetic to the idea of a national Statement of Assurance so long as it matches national procedures of departmental permanent secretaries (rather than ministers) signing off the annual accounts (Q 5).

102.  Not content simply with expressing support for the idea, the Dutch government has gone one step further and unilaterally decided to provide a national Statement of Assurance. According to the representatives of the Dutch government we spoke to this was the decision of the finance minister who sought to introduce a national Statement as a pilot for other Member States to consider and follow (Q 520). Under the proposed Dutch scheme (which is expected to receive cabinet level approval in November) the finance minister will issue a national Statement on the use of European funds subject to shared management in The Netherlands. This Statement will be based on a number of sub-declarations from the ministers of the departments responsible for implementing the various programmes. The national Statement will be sent to the national parliament and to the national court of auditors who will conduct an audit of it. The national Statement and its corresponding audit will then be sent to the Commission (Q 511).

103.  In spite of their intention to give the national Statement a political signature, there was recognition that this might not be possible in some other Member States. According to Mr Peter Bartholomeus, from the Dutch Ministry of Finance, "We do not think it is necessary for a minister to give the national declaration" (Q 527). He continued that it would remain a very good system were another body, possibly a civil servant or the Dutch court of auditors, to give the national declaration.

104.  In his evidence to us Mr Wynn MEP, appeared to propose watering down the European Parliament's proposals, conceding that the ministerial sign off is negotiable. He told us that it was not important whether the signature was from a politician "as long as someone is taking the responsibility for that and actually saying to the Commission, 'we are happy that this money has been spent correctly'" (Q 279).

105.  We are strongly in favour of a national Statement of Assurance on the monies disbursed in each Member State. As in the Dutch pilot project, such a Statement should be sent to national parliaments as well as to the Commission as we consider that this will encourage the Member States to take responsibility for the systems and controls they operate. Consideration should be given to ensuring the length of time the discharge procedure takes is not extended.

106.  In line with the system operating in UK Government departments, we do not consider that a national Statement of Assurance requires a political signature.

RESPONSIBILITY IN THE COUNCIL

107.   Within the Council of Ministers the Budget Council participates in the process of drawing up the Budget. However neither the Budget Council nor any other Council formation focuses to an equivalent extent either on what happens to the money once it has been spent, or on the report of the European Court of Auditors.

108.  We consider this lack of Council level consideration to be a serious weakness. We consider that the Budget Council should be at least as concerned with the Union's accounts as it is with drawing up the Budget. We therefore consider that the Budget Council should to prepare a report on the annual audit and Statement of Assurance from the Court of Auditors. This would be debated by the European Parliament at the same time as the Court of Auditors' report. In this way the Council of Ministers would be drawn much more closely into consideration of the accounts and into the process of ensuring that the financial systems of the Union meet appropriate international standards.

RESPONSIBILITY IN NATIONAL PARLIAMENTS

109.  There remains the question of what role National Parliaments should play in the annual audit process. Under the principle of subsidiarity this is for the parliaments themselves to determine. None the less we consider that there is a clear role for national parliaments: not least because in the UK, for example, there is considerable misunderstanding of the real position. We consider that this stems, at least in part, from the sporadic and sometimes capricious way in which this issue is debated in the two Houses and discussed in the press.

110.  There is a strong argument for a more consistent and regular approach to the audit and management of the European Union's accounts than may perhaps have been the case in the past in the European committees of both Houses. This in turn might lead to a regular annual debate on the topic on the floor of each House as part of the annual political cycle. Similar debates could be held in the Welsh Assembly and the Scottish Parliament.

A single national account and auditing problems in devolved or federal states

111.  In his evidence Sir John Bourn commented that it would make administrative sense if all European money being paid into a Member State were channelled through a single bank account. We understand the logic behind this idea, but are concerned that the political and practical consequences of this could pose problems.

112.  We are concerned that a single national European account would impose an additional layer of bureaucracy and would pose a number of difficulties in relation to devolved and federal states.

113.  On the issue of single audit within federal or devolved Member States, if the national Supreme Audit Institution is not the appropriate auditing institution the account or part thereof should be passed to the competent sub-national body for audit. Sub-national audits would be examined and collated by the national audit body before being sent to the European Court of Auditors.

Sanctions for non-compliance

114.  On the issue of sanctions on Member States for non-compliance with programme regulations, the European Parliament has been very strong. They have proposed overall penalties on Member States, penalties on individual agencies and suspension of agencies by the Commission. However, neither the ECOFIN proposals nor the Commission's Roadmap have much to say on the subject.

115.  We note that the Commission has existing powers of disallowance of expenditure and recovery of funds, and the power to certify paying agencies in the agricultural sector. In the context of the reforms outlined above we consider that the existing Commission powers are sufficient.


43   Article 279 enables the drawing up and implementation of a financial regulation (the most recent version dates from 2002: Council Regulation (EC, Euratom) no. 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities, Official Journal, L 248, 16.9.2002). Back

44   Official Journal of the European Union (2006/C 139/ 01) Article 44. Back

45   Directorate General for Regional Policy responsible for European measures to assist the economic and social development of the less-favoured regions of the European Union under Articles 158 and 160 of the Treaty. Back

46   This may include sub-federal authorities in federal states. Back

47   http://www.terrywynn.com. Back

48   European Parliament, Elements of the system of financial management in the European Union Part II: Shared management, delegation risk and the role of national audit institutions, Committee on Budgetary Control working document 7 September 2005. Back

49   Op.cit. Back

50   Op.cit. Back

51   Op.cit. Back

52   Resolution of the European Parliament, on the discharge for implementing the general budget of the European Union for the financial year 2003, Official Journal of the European Union, L 196 27 July 2005 Back

53   ECOFIN conclusions, 8 November 2005, 13678/05 (Presse 277) Back

54   See Box 1. Back

55   ECOFIN conclusions, 8 November 2005, 13678/05 (Presse 277). Back

56   Ibid. Back


 
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