Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 534-539)

Mr Graham Meadows, Mr Nicholas Martyn and Mr Marco Panigalli

17 OCTOBER 2006

  Q534  Chairman: Welcome, would you like to introduce your team, Mr Meadows?

  Mr Meadows: May I say that Commissioner Hübner regrets that she is unable to attend the Committee this morning but we have with us Marco Panigalli who is her adviser on budget and financial management affairs in her Cabinet. Nicholas Martyn is the director of our audit directorate in DG Regional Policy and he controls a team of 65 auditors. May I mention colleagues behind? We have two of Mr Martyn's colleagues: Androulla Ioannou and Frank Rawlinson, who work on the co-ordination of audit, and Jonathan Denness who is of a "different species"; he is a geographical person who will help the Committee and us if any of the questions turn to programmes in the United Kingdom.

  Q535  Chairman: Obviously regional policy (regional funds) is a very big issue in our inquiry. What is your assessment of the quality of financial management in this area?

  Mr Meadows: If we look at the annual activity reports over the last two or three years and the declaration which I as the Director General make on the way in which the funds have been managed in that time, you will see that we have a very small number of reservations covering an amount of expenditure which I think last year was slightly in excess of 2 per cent and the year before that was slightly below 2 per cent. This can be interpreted as a fairly high level of assuredness in the way in which the systems both in the Commission and in the Member States operate.

  Q536  Chairman: Are you saying that you are happy with the present situation?

  Mr Meadows: Happy is probably the wrong word because we are constantly trying to improve and I do not want the Committee to think that when we read the observations of the Court of Auditors or any other body that we take, as it were, a combative view and say that we are right and they are wrong. We are always trying to learn, but we are more or less content that we are doing the best we can at the particular moment, although we always hope in any one year to do better than we did in the year before.

  Q537  Chairman: Is it right to say that this is in fact the most difficult area or the most intractable area if you are looking as an auditor at what is happening?

  Mr Meadows: It may be difficult in the sense that it is an area for the most part of shared management, and so the responsibility which the Commission has for the management of the budget has to be shared in practice—although it can never be shared, as it were, politically—with the Member States. As the years go by, we get better and better at co-ordinating our audit effort with the audit effort which is being undertaken by the Member States themselves. We get better at harvesting the results from the Member States and using those results in our own declarations of assurance. Although, we may be faced with a situation of complexity in the sense that we will soon have 27 Member States; something in excess of 300 programmes often operated in regions; Member States operating different systems and different types of system, we are looking for the same degree of assurance. So although it may look complex from the outside, we are becoming more confident that we actually are able to harness the advantages that the situation brings, the advantage being that, in addition to the European audit force, either from the Directorate General, from the Court of Auditors, we are able to call on the audit forces of the Member States, which means that we have a very considerable team of auditors watching over the operations of European regional policy.

  Q538  Chairman: Could you talk us through an individual case and how your relations work with a Member State, the communications between the Commission on the one hand and the Member State on the other?

  Mr Meadows: I will start off with one Member State with which we currently have difficulties and then I will ask Nicholas Martyn to complete the answer. If we take the case of our latest annual activity report, in other words the report from last year which was signed off in March, we had three reserves: two concerning Spain and one concerning England. If we look at the reservation concerning Spain, the reservation grew out of audit work which we carried out in Spain. The Commission had doubts about the degree of thoroughness which was being exercised in the initial declaration of payments. We were trying to make sure that these payments were in conformity or were legal and regular with respect to Community law. As a result of that, we began talks with the Spanish authorities. We drew up an action plan with them, which is basically a list of actions which they will undertake by a particular time in order to put right the problems which we have seen. Whilst this is going on, because it affected so much of the expenditure in Spain, we have maintained a reservation on the expenditure there. We are still carrying on conversations with the Spanish authorities. We think that we are getting to a position now where they have actually carried through most of the things required in the action plan. We are now starting audits in Spain to verify that this is in fact the case. If those audits confirm what the Spanish authorities are saying, then we will lift our reservation on their expenditure. A similar process is being undertaken in England. Perhaps you would like Nicholas Martyn to talk about more normal relations with Member States as opposed to cases where things are not as we would wish.

  Mr Martyn: Perhaps I can just explain the idea of building up assurance. This is how shared management works. In the first instance it is the Member State which is responsible. So if we take a structural fund programme, an ERDF programme, then it is the managing authority for that programme that has the primary responsibility for implementing the programme and carrying out all the first level checks on selecting the operation, checking that the beneficiaries can implement the operation, and then when the expenditure is declared for that operation, carrying out the checks on that expenditure—desk checks in the office but also on-the-spot visits to make sure that it is really happening. That is the responsibility of the managing authority. That is the first level of assurance that things are working properly in the system. The second level is then that for every programme there is also a paying authority. The paying authority has to be independent of the managing authority and it is the paying authority that certifies expenditure to the Commission. So the paying authority formally certifies.

  Q539  Chairman: This is at national level?

  Mr Martyn: All this is at national level. For an individual programme, the beneficiaries all declare their expenditure up the line; it is declared by the managing authority to the paying authority, and the paying authority then certifies this expenditure to the Commission, which then triggers a co-financing. There is a formal declaration signed by the paying authority saying that this expenditure is legal and regular. The paying authority has the job of making sure that it has adequate evidence that the first level checks have been done. It has to satisfy itself that the checks by the managing authority have worked properly so that it has this assurance. When we pay out the €20 billion a year that we pay out in the DG, the first assurance we have is that this has all been certified by the paying authority. Then for each programme there has to be regular audit work carried out. There have to be audits of systems and there have to be audits covering a minimum of 5 per cent of the expenditure. This is carried out on a rolling basis during the implementation period. The auditing bodies in the Member States send us copies of the systems audit reports and they also send us an annual report summarising the audit work that has been carried out and the main results and conclusions from that. Then we have an annual meeting with each audit body in order to discuss these results. If that audit work has been done properly then checks of this certification process are something that can be relied on. We then, as the audit directorate in the regional policy DG, have our own programme of audits where we also check the system and check the reliability of what is being done. If these different levels of control are functioning properly then we have a good basis for assurance. If we find that things are going wrong then, as Mr Meadows explained, we have systems in place in order to correct the problem either by implementing remedial action at the Member State level, by correcting expenditure for the past and/or, as a last resort, we have the power to apply financial corrections.

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