Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 190-199)

Sir John Bourn, Ms Caroline Mawhood and Mr Frank Grogan

6 JUNE 2006

  Q190Chairman: Welcome, Sir John. I have had you in front of me before actually, when I was on the Treasury Select Committee. It is very good of you to take the time to come and answer our questions. As you know, we are doing this investigation, this inquiry into the management and auditing of EU funds. What is your view of the European Court of Auditors and the fact that for very many years they have not been able to give what is called the déclaration d'assurance to the European funds?

  Sir John Bourn: Chairman, thank you for your welcome, but of course, I and my colleagues are delighted to have the chance of serving your Committee and doing everything we can to assist your inquiry. You ask me what I think of the European Court of Auditors and I suppose my first point is to recognise that the Court comes out of a different tradition from the National Audit Office; it does come out of the Roman law tradition, a tradition which sees auditing as essentially about legality and regularity rather than a tradition which looks at the accounts and asks whether they give you a true and fair view. Of course, my second point would be to say that, in many ways, over time the procedures of the European Court of Auditors have come closer to those of the United Kingdom, if I can use that as a point of comparison, in that if you say the essence of what I do in the UK is to look at whether accounts give a true and fair view, to look at the legality and regularity, and to look at the statements on internal control and to do this by the auditing standards of the profession in the UK. The European Court of Auditors in their statement of assurance have also looked at the accounts, they have also looked at regularity and legality and at the annual activity reports of the Directors General. Having noted—and I go on to my third point—the points of similarity, there are some very considerable points of difference, and the first one is that the Court aims for a statement of assurance, one verdict on the whole of the expenditure of the Commission, whereas I in the United Kingdom have 500 accounts representing the expenditure of British central government. In the last year I qualified 13 of the 500.

  Q191  Chairman: If I could just interrupt you there, if you had a similar system to the European one, you would have to qualify the overall national accounts?

  Sir John Bourn: Indeed.

  Q192  Chairman: So in fact, they are setting themselves quite a high test. That is the point you are making. Is that right?

  Sir John Bourn: Yes, and I think it is a test which, in a way, will be very difficult actually to meet. By setting a test which is so high, when you explain or put this out publicly, people feel how hopeless it all is; year after year they cannot give their statement of assurance. Will they ever do it? If you are trying to wrap up all the expenditure in one statement, it will be very difficult to get there, exactly as you say, Chairman. It is as if I have to say, because I qualify 13 accounts, I have to qualify the whole of British government expenditure as not fit for purpose. There is one big difference. Another difference is that we do in the UK a much greater amount of value-for-money audit. At the request of the House of Commons, we do some 60 value-for-money reports a year. The special reports of the Court are much fewer in number. In 2005, for example, there were only five of them. Thirdly, an important point of difference is, how do you evaluate the performance of an external auditor? The main way of evaluating the NAO's performance that the House of Commons looks at is in terms of the financial savings derived from our work. The target is that each year the financial savings from our work should be eight times the cost of running the NAO, not just us saying so. We make recommendations, the PAC endorse them, the Government accept them, they are costed out and then examined by my external auditor. That is again a big difference in how you evaluate the performance. Another difference, of emphasis perhaps rather than principle, is that in our work we do place a particular emphasis on systems for the management of money and the risks in those systems rather than examining a sample of transactions. As I say, this is a difference of degree rather than principle, because we do examine transactions. The Court does examine some systems, but the balance is that we put more of the emphasis on examining the systems of financial management and control, the areas of risk, as against taking some transactions. The Court perhaps is a bit the other way round. We do rely on other external auditors for our work where that is appropriate. For example, in the work that we do in the audit of the summarised accounts of the National Health Service we rely on the work done by the Audit Commission, who are the auditors of the trusts. We do not repeat their work; we rely on it. There is not very much of that in the work of the European Court of Auditors, although I know it is their intention to do more. A final point which I think is important is that all our financial audit is done by professionally qualified people, people employed by the NAO who have a professional qualification to be an auditor. The Court does have some people who are professionally qualified, but the whole cadre is not completely made up of qualified people. Chairman, those are a number of points where we have similarities with the Court, a number of points where we have differences from the Court. Perhaps if I were just to sum up my view of what the future might be, how I think it would be advantageous for the Commission and for the European Union to be able to proceed, it would be a system under which each of the member countries had a European Union account which set out the money they had received from Brussels and what they had spent it on. This account would be prepared according to International Accounting Standards, audited by the national audit office of the country concerned according to International Auditing Standards. So you would have 25 accounts, one for each of the countries, audited by the same methodology. The European Court of Auditors would by the same methodology audit the Commission's expenditure directly, and then it would be possible for the Commission to reach a view on the generality or perhaps for the Commission to produce a report which contained the reports of the 25 countries and their own reports. Some of those might be qualified, but in that way, you would have a system throughout Europe where accounts were prepared on the same standards, audited on the same standards, the different countries would have to be more explicit about what they did with the money that they received and the Commission would not necessarily have to try and give a verdict on the whole lot.

  Q193  Lord Cobbold: Does some of that not happen now? How does the money flow through the Member States' accounts at this present time?

  Sir John Bourn: It does, but it is not always easy, and the European Court and the Commission itself often deplore the fact that it is not really possible to follow how the money, once having been despatched from Brussels, had got to the olive tree farmer in Greece. I am not saying that to attack a particular country but, with the cascading of money down in many of the countries, it is not clear how it gets from one level to another. So it does not happen like that in all the 25 countries.

  Q194  Lord Cobbold: It must be paid into an account of some sort.

  Ms Mawhood: If I could help here perhaps with an example in the United Kingdom, we receive about £4.7 billion. About £2.8 billion goes through the Rural Payments Agency, which is a substantive amount of that account, but the other amounts go through the Department of Work and Pensions' accounts or what used to be the Office of the Deputy Prime Minister and are very small in comparison to the total expenditure going through those accounts. The EU expenditure is around one per cent of the DWP accounts, so they do not all get brought together in one member state, UK account for European moneys. I think that is what we are trying to say, that in the future, it would be better if all the EU moneys were accounted for in the UK European account, the French European account. That is what we are suggesting here.

  Q195  Chairman: Have you put this, if I can call it, Sir John Bourn Plan to anybody? How does it square with the Road Map of the Commission and indeed with the European Parliament's ideas on this?

  Sir John Bourn: It does square with it quite well, Chairman. I will ask Caroline to fill in on that.

  Ms Mawhood: Essentially, it is a development of the idea that was proposed through the UK presidency and the Commission's Road Map. There was a proposal from the European Parliament, discussed during the UK presidency, that there should be a declaration by the finance minister in each Member State about the controls in that Member State over EU funds. And if you like, this is a development of that, saying that what you should have is an account of EU funds which—and I do not know the technicality of how it would work in practice—for example, in this country might be signed off by one of the lead departments as far as European matters are concerned, or indeed perhaps I suppose the Ministry of Finance. It is a development of that idea which, as you know, did not find favour with Member States in terms of the declaration being signed by a politician.

  Q196  Lord Jones: Do you find that British ministers are genuinely interested and concerned about the inability to have that declaration over the 11 years, and do you find Continental ministers determined to improve things? Are they genuinely concerned that other people's money is being spent to best effect?

  Sir John Bourn: You ask me to reply on what I think about ministers. I will respond to your point. I think British ministers want to see it done better, and they have been prepared to expend a certain amount of capital to press this. Under the British presidency a lot was done because that provided the impetus to get to the Commission action plan which was published in January this year. At the same time as ministers are keen on it, in the press of business I think it would be not unfair to say that sometimes an initiative for better financial control is traded off against the beetroot subsidy—I put it in rather graphic terms. That is my view of British ministers: essentially they want to see it done better. It is very hard to talk about ministers in other countries, but certainly my impression, for which you ask, is that this is not seen as such an enormous problem. The money may not have been spent exactly as it was thought that it might have been, but it has been spent, there are some people who have benefited from the spending, most of them are Europeans, and that is perhaps as much as you might be able to get. Yes, we must look at this and move it on but there is not the same interest in the systems and in accountancy and audit matters. I have certainly not seen it.

  Q197  Lord Watson of Richmond: From what I have heard from you, I would be a strong supporter of the Sir John Bourn scheme. I wish you every good fortune with it. But I would be particularly anxious to see something along those lines introduced before the next stage of enlargement of the European Union, and I wonder whether that would also be your basic feeling, that if there were clear EU accounts established for Romania and Bulgaria, for example, for membership, that would be reassuring to everybody and would certainly clarify the picture. Would you agree?

  Sir John Bourn: I certainly do agree, but I think if Romania and Bulgaria come in in 2007, reform will not have reached that. Perhaps I could make the point that, if you and the members of the Committee are interested in what you have been kind enough to call our scheme, we could set it out in a paper and submit it to you.

  Q198  Chairman: I think that would be very, very helpful, because we are looking at possible reform plans and solutions to the issue and so it would be very helpful to have yours.

  Sir John Bourn: I should be glad to prepare and submit it to you.

  Q199  Lord Inglewood: If I may make four small but discrete questions, the first is, you tell us that you have 500-odd accounts that you audit, of which 13, ie about 2.5 per cent, would fail the DAS test. In the most simple way, how do you see the performance of this country vis-a"-vis the performance of the European accounts in general? The second question is, we have talked to Commissioner Kallas, and he expressed the view that a number of supreme audit institutions find the idea of producing reports for which they are answerable to somebody other than their own national parliament as something they are very unhappy about. How do you feel about that proposition, as if you were doing something not for the UK Parliament essentially but for, shall we say, the European Commission or the European Court of Auditors?

  Sir John Bourn: On your first point, Lord Inglewood, I do think that the performance of this country so far as public sector accountancy and audit is concerned is of a higher quality than most of the other countries. Scandinavia and the Netherlands have systems which are broadly on the same lines as our own but, as I say, I think that others are coming at it from another tradition. I am not one to criticise that tradition but in terms of the performance you get in the management of public money, you get a less good performance. In terms of reporting to another jurisdiction, the way in which I would see that is that if there were to be a European Union account, the government would produce it, I would audit it, my report would be available to the British Parliament; if the Committee of Public Accounts wished to discuss it, they would be able to do that. I would not see that I had lost my sovereignty by doing that any more than the Audit Commission lose their sovereignty when I use their work in my own. So I would not feel personally threatened by that, though I do know that some of my colleagues feel that in some way it is the thin end of the wedge and gradually they will be sucked into the Court and just become subsidiary organisations. But I do not think that would necessarily happen. I certainly do not see it as a danger for us.

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