HM Government response to the House of
Lords European Union Committee report on Financial Management
and Fraud in the European Union: Perceptions, Facts and Proposals
CHAPTER 7: SUMMARY OF CONCLUSIONS (HMG RESPONSE
IN ITALICS)
BACKGROUND—THE
BUDGET OF
THE EUROPEAN
COMMUNITIES AND
ITS AUDIT
144. 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. (paragraph 4)
The Government welcomes the timeliness of
this inquiry and shares the Committee's concern.
CRISES AND
DEVELOPMENTS IN
THE COMMISSION
145. Our investigation was not presented
with any evidence of a culture of corruption in the Commission.
(paragraph 8)
Although the Commission must of course always
be on its guard against corruption, this finding is welcome.
THE MEANING
OF A
QUALIFIED AUDIT
OPINION
146. 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. (paragraph
11)
The Government welcomes the Committee's conclusion
that the lack of a positive Statement of Assurance (DAS) does
not necessarily indicate that there are high levels of fraudulent
or corrupt transactions. On the subject of the Court's annual
audit and the DAS findings, the Government understands that, since
1994, the Court's annual audit has been carried out primarily
in support of the DAS. This stems from the requirement in the
Treaty (Article 248) for the Court to audit revenue and expenditure
and to give a Statement of Assurance. The Court assesses the level
of assurance it can give in the Statement from the findings of
its annual audit and revenue and expenditure. This is clearly
indicated in the text of the annual report, the vast majority
of which is concerned with an analysis of the DAS findings by
budget sector. The Court supplements this analysis with a review
of the follow-up of DAS findings from previous budget years, and
a brief description of any relevant special reports.
The Government agrees that the DAS should
be split into a series of statements on each of the different
spending categories. This is already permitted under the Treaty
(Article 248(1): "[The DAS] statement may be supplemented
by specific assessments for each major area of Community activity").
The Court currently achieves this by including a separate paragraph
on each category in the DAS statement itself and with the detailed
analysis in each chapter.
THE STATEMENT
OF ASSURANCE:
ITS DEVELOPMENT
AND ITS
WEAKNESSES; PROPOSALS
FOR REFORM
147. We recommend that in future the annual
examination and audit of all revenue and expenditure of the Commission
should be separated from the broader objectives of the Statement
of Assurance. (paragraph 17)
As above.
148. We are pleased to see that the Commission
and the European Parliament are actively addressing issues regarding
European financial management which are raised by the Court of
Auditors in their annual audits. (paragraph 20)
Agreed. The Government also believes that
the Council took an important step forward with the conclusions
on the Commission's "roadmap" agreed unanimously at
the November 2005 ECOFIN Council, under the UK Presidency.
DAS METHODOLOGY
149. Sir John Bourn, Comptroller and Auditor
General at the UK's National Audit Office told us that, were he
required to issue a single Statement of Assurance on the UK Government's
accounts in the same way as the Court of Auditors does for Europe's
accounts, he, like the Court, would be unable to do so (Q 192).
This is because last year he issued a qualified opinion on 13
of the 500 accounts of the British Government which he audits
(Q 190). (paragraph 22)
This is an important point. It reflects differences
in audit approach and the differing statutory frameworks within
which the National Audit Office and the Court of Auditors work.
150. We consider that the Court's decision
to give a single Statement of Assurance on the accounts as a whole
means that a positive Statement is difficult to achieve. We consider
that it would be preferable for the Court to issue statements
on each of the spending areas; in much the same way that the National
Audit Office in the UK issues separate audits for each Government
department. This would give a more accurate picture of the state
of financial management in the Union and would make comparisons
with other public bodies easier. (paragraph 23)
Agreed. Also see the Government's response
to paragraph 146, above.
TRANSACTION TESTING
AND THE
DEVELOPMENT OF
THE COURT'S
METHODOLOGY
151. We concur with the observation that
the methodology employed by the Court still relies heavily on
transaction testing. Due to the small number of transactions actually
looked at each year. we do not consider that this methodology
can lead to an accurate picture of financial management. The Court
should aim to improve the methodology behind the Statement's production
so as to provide more accurate data. We consider that these weaknesses
must be remedied as a matter of priority so an accurate picture
of the error rate can be obtained. (paragraph 28)
It is true that the Court's methodology relies
heavily on transaction testing and to a lesser degree on other
sources. It would be helpful to have an accurate picture of the
soundness of financial management. However, we understand that
it is not usual, under international auditing standards, for an
auditor to give an opinion on the effectiveness of financial management.
152. We are pleased to see that the Court
has responded to calls from the ECOFIN Council and added additional
auditing techniques over the years. In particular we are pleased
to see that the Court now conducts an assessment of supervisory
systems and controls; reviews the Annual Activity Reports and
Declarations from each of the Directors General in the Commission;
and evaluates of the results of other auditors. We consider that
these need to be further developed to give a more rounded picture
of performance over the year. In particular, greater use by the
Court of the Annual Activity Reports could add positive pressure
for their development into proper accounting tools. (paragraph
29)
Agreed.
THE MEANING
OF AN
IRREGULARITY
153. We encourage the Court to put in place
measures clearly to distinguish between irregularity and fraud
and to publish separate figures for the level of fraudulent transactions
and administrative mistakes. (paragraph 31)
It is not the Court's job to publish fraud
figures; this is the responsibility of the European Anti-Fraud
Office (OLAF). Auditors do not go looking for fraud though, if
they happen to discover suspected fraud during an audit, they
will pass on the details to the appropriate authority. The Court
may report on cases of irregularity detected during an audit.
154. Whilst the distinction between fraud
and other irregularities must be made clear, we consider that
administrative mistakes could still indicate deficiencies in the
control systems operated by the Member States or the Commission.
Attention should therefore be drawn to both administrative mistakes
and fraudulent activity. Sources of error, from whatever quarter
and for whatever reason under current definitions should be taken
into account when calculating material error rates. (paragraph
33)
The Government believes that the distinction
between fraud and irregularity concerning the EU budget is already
clear[1].
It is true that the detection of administrative mistakes, depending
on their nature and seriousness could indicate deficiencies in
control systems, and this is a method normally used by auditors
to test their opinion on the effectiveness of control systems.
DIVIDING THE
STATEMENT OF
ASSURANCE INTO
CATEGORIES
155. We support the recent decision of the
Court of Auditors to produce a Statement of Assurance giving details
of each of the areas analysed. We recommend that this should be
developed into a Statement which concentrates on an analysis of
the audits conducted each expenditure category and Member State
rather than on the single Statement of Assurance on all the accounts.
(paragraph 35)
Agreed. The Government understands that Treaty
Article 248(1) would permit a Statement of Assurance by expenditure
category, but it is unlikely that this could also permit a Statement
of Assurance by Member State.
156. We note with approval the achievements
made by the Commission in developing a system for agricultural
payments which led the Court to give a positive Statement of Assurance
to this area for the first time in 2004. (paragraph 36)
The Government also welcomes the Court's
endorsement of the Integrated Administration and Control System.
NATIONAL MANAGEMENT
OF EUROPEAN
FUNDS
157. We support calls for the European Court
of Auditors to produce a list of those Member States demonstrating
poor management of European funds. We consider that such a list
would encourage all the governments of the Member States to take
this issue seriously. Such a list should only be produced on the
basis of accurate data and so will require the development of
a sound basis for payment transaction sampling. (paragraph 38)
The Government would welcome this recommendation.
But the response to paragraph 167 is also relevant.
A COMMITMENT TO
IMPROVEMENT
158. We recognise the commitment which the
Commission has shown to improving its accounting system, particularly
with regard to the introduction of accruals based accounting.
We were pleased to hear from the Accounting Officer that the Commission
now respects internationally recognised rules; and from the UK
Minister that the EU is now one of the leaders in public accounting
terms. (paragraph 42)
Agreed.
SEGREGATION OF
DUTIES
159. We therefore support the Commission's
system of payment authorisation and execution as introduced by
the Prodi-Kinnock reforms. We consider that segregating the authorisation
and execution of payments is appropriate. (paragraph 46)
Agreed.
CONTINUING CRITICISM
160. During our inquiry we heard considerable
evidence on the Commission's financial management. None of that
evidence supports the allegation that there is a significant element
of corruption within the Commission. (paragraph 49)
The Government welcomes this finding.
DOUBLE ENTRY
BOOKKEEPING AND
THE COMMISSION'S
ACCOUNTING SOFTWARE
161. In spite of the improvements which
have been made to the accounting system there are areas which
remain in need of attention. We are concerned that there remains
a question over whether local accounting systems in the Directorates
General are indeed compliant with the standards needed for double
entry book keeping. All accounting systems operated in the Commission
should fully support double entry accounting. We expect the Commission
to investigate these allegations and to publish a full account
of its findings. (paragraph 53)
This is a helpful recommendation which the
Government supports.
INTERNAL AUDIT
AND CONTROL
162. In contrast to the progress reported
to us in relation to the Commission's internal accounting system
we are concerned that the Commission's system of internal audit
is inadequate. We urge the Commission to review fully the procedures
in place and bring forward proposals to make the system more robust.
These proposals should not seek to create new audit bodies. Rather
they should focus on requiring Commission officials and existing
audit bodies to take responsibility for the systems and the accounts.
(paragraph 61)
The Government has no evidence to believe
that the Commission's Internal Audit Service (IAS) is not doing
a good job, and notes that the Committee did not take evidence
from the current head of the IAS.
DEVOLVED MANAGEMENT
IN THE
COMMISSION
163. We are not convinced by the arguments
for recentralising responsibility for financial transactions.
Rather, we consider that the decentralised system introduced by
the Prodi-Kinnock reform has allocated financial management responsibility
to the appropriate level, so long as effective control systems
are in place. (paragraph 63)
Agreed.
A SYSTEM REQUIRING
COMMISSION OFFICIALS
TO TAKE
RESPONSIBILITY
164. We are strongly in favour of a system
of signing off whereby responsibility for accounts is shouldered
first by the accountants and auditors in each Directorate General
and then at more and more senior levels. This system should culminate
in the requirement for the Secretary General of the Commission
to sign an assurance that the Commission's annual accounts are
true and fair. (paragraph 67)
The Government agrees that the Community
accounts should be signed off at the appropriate level, but considers
that this should be done by the Commission's Chief Accountant,
as the revision to the general Financial Regulation proposes.
RISK ASSESSMENT
165. We fully support the proposal in the
Roadmap to introduce a common methodology for risk assessment.
However we recognise that that the accounting system is not tailored
to provide the data to which such a common methodology could be
applied. We consider that efforts should be made to develop the
accounting system to produce the necessary data. We endorse the
use of qualitative methods to assess the risk in the meantime.
(paragraph 70)
This was one of the actions the Commission
proposed for itself in the "Roadmap". The Commission
believes that a common methodology for risk assessment would help
to give an assurance on the management of the risk of error in
the underlying transactions. However, the Commission should consider
how the methodology should be developed and how data can be used
to facilitate better risk assessment. The Commission had proposed
that the qualitative assessment of tolerable risk should be carried
out on an annual basis by the budgetary authority via an assessment
of the activity statements, but the Council was unable to agree
to this. The Court of Auditors had originally proposed[2]
that the budgetary authority should be responsible for approving
the cost/benefit balance for the different policy areas, and it
is right that this should be subject to political agreement. The
Government will press to put this back on the agenda.
DEBT RECOVERY
166. We are generally satisfied with the
Commission's procedures and reporting requirements on debt waivers.
We see no evidence of the "ruthless exploitation" of
these procedures that some have suggested. (paragraph 73)
Agreed.
WHO IS
RESPONSIBLE FOR
FINANCIAL MANAGEMENT?
167. While the Commission should do its
best to monitor the disbursement of funds we do not consider that
the Commission can be held responsible for the regularity of the
large majority of European transactions (over 80 per cent) 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. (paragraph 79)
Under the Treaty (Article 274), the Commission
is responsible for the implementation of the budget "on its
own responsibility". The Government encourages Member States
to fulfil their duties under the Treaty to co-operate with the
Commission in ensuring that funds are spent in accordance with
the principles of sound financial management, but recognises that
some Member States would remind the Council of the Commission's
ultimate responsibility.
IS THE
LEGISLATION TOO
COMPLEX?
168. 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. (paragraph 86)
Agreed.
DELEGATION RISK
169. 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 standard of control to ensure that the risk of fraud
and error is minimised. (paragraph 90)
Agreed. This is covered by Article 280(2)
of the Treaty ("Member States shall take the same measures
to counter fraud affecting the financial interests of the Community
as they take to counter fraud affecting their own financial interests.")
The Government agrees that equivalent standards of internal control
should be complied with, but with due respect for cultural and
organisational differences.
SUFFICIENT INTEREST
IN THE
COUNCIL?
170. 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. (paragraph 105)
The Government agrees, and announced on 20
November its intention to provide an annual consolidated statement
of the UK's use of EU funds, which would then be audited to international
standards by the National Audit Office. Both the consolidated
statement and audit opinion would be presented to Parliament and
made available to the European Court of Auditors and European
Commission. The Government also agrees that it is important not
to lengthen the already long discharge procedure.
171. In line with the system operating in
UK Government departments, we do not consider that a national
Statement of Assurance requires a political signature. (paragraph
106)
Agreed.
RESPONSIBILITY IN
THE COUNCIL
172. 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. (paragraph
108)
The Government believes that the Council
should maintain its interest in improving financial management
and control, following the agreement reached at the November 2005
ECOFIN Council, and calls on the current and future Presidencies
to ensure that progress is maintained. However, the Government
does not believe it would be possible for the November Budget
Council to discuss the Court of Auditor's report. The Council's
Budget Committee, which prepares the recommendation on discharge
for ECOFIN, is not able to begin discussing the report until January,
as during the autumn its work is entirely taken up with negotiating
the budget. If a separate Council Working Group were set up, to
consider exclusively financial management issues, then it might
be possible for discussions to proceed in parallel. Even so, it
is unlikely that the discharge process could be shortened, and
the recommendation discussed in advance of the ECOFIN Council
in February or March, as at present.
RESPONSIBILITY IN
NATIONAL PARLIAMENTS
173. 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. (paragraph
109)
Agreed.
174. 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.
(paragraph 110)
The Government welcomes this recommendation.
It is important to discuss these issues in Parliament.
A SINGLE NATIONAL
ACCOUNT AND
AUDITING PROBLEMS
IN DEVOLVED
OR FEDERAL
STATES
175. 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. (paragraph 112)
The Government recognises the Committee's
sensitivity to the problems of devolved and federal states, which
of course includes the United Kingdom. These problems can be overcome,
given an appropriate degree of willingness to seek improvements
in the provision of assurance.
SANCTIONS FOR
NON-COMPLIANCE
176. 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. (paragraph 115)
Agreed.
THE ROLE
OF THE
COURT AND
ITS WORKINGS
WITH NATIONAL
SUPREME AUDIT
INSTITUTIONS
177. We note the desire expressed to us
by Members of the Court not to become "part of the political
game". We consider that it would be highly inappropriate
for the Court to promote a political agenda. (paragraph 118)
Agreed.
178. We are pleased to see the work the
Court has done to develop its relationships with the Supreme Audit
Institutions in the Member States. We hope that these will be
further developed in the future with a view to giving the Court
a supervisory role over the audits of European expenditure conducted
by the Supreme Audit Institutions in the Member States. (paragraph
123)
The Government agrees that the Court should
continue to develop its relationship with Member States' Supreme
Audit Institutions (SAIs). However, it would not be appropriate
for the Court to exercise any supervisory responsibility over
SAIs, as these are accountable to national Parliaments.
VALUE FOR
MONEY AUDIT
179. We call upon the Court to bring forward
concrete proposals to extend the aspects of its work which are
not directly concerned with the annual Statement of Assurance.
We consider that developments in the value for money and performance
auditing side of the Court's work would be particularly valuable.
(paragraph 125)
Agreed.
THE RATE
OF FRAUD
180. Any fraud committed against the European
Budget is a problem which should be addressed seriously by the
Commission and the Member States. We conclude that while the level
of fraud is no higher than in comparable public expenditure programmes,
including in the UK the fight must go on. We consider that efforts
should be made to convey these messages to Europe's citizens more
effectively. (paragraph 131)
Agreed.
PROBLEMS ESTIMATING
THE RATE
OF FRAUD
181. We are concerned that estimates of
the level of fraud rely on self-reporting by the Member States.
We consider that the Commission should bring forward proposals
for a new, more objective, method of determining the rate of fraud.
(paragraph 133)
The Government takes the responsibility of
reporting suspected fraud seriously. However, we recognise that
in some Member States there are legal problems with making a report
of suspected fraud before a conviction is obtained in the Courts.
The Government agrees that the Commission should work with these
countries to reach an acceptable solution. However, detecting
and reporting fraud should remain primarily the responsibility
of Member States. The Government welcomes the work of OLAF in
analysing and publishing the details of fraud reported by Member
States, and calls on OLAF to extend this work to cover the expenditure
sectors managed by the Commission. Action to prevent fraud cannot
be effectively targeted by Member States, or the Commission, until
they are aware of the amounts of fraud occurring, where they are
occurring, and why.
The Government would also like to take the
opportunity to respond to the comment in paragraph 128 of the
report, on the amounts of fraud reported. The difference in the
figures quoted by the Economic Secretary and those quoted by OLAF
is explained by the fact that, at the time of the Economic Secretary's
evidence, figures covering 2004 were the latest available. By
the time the Committee took evidence from OLAF, the 2005 figures
quoted by OLAF were available.
OLAF'S POWERS
AND ACTIVITIES
182. We are content with the extent of the
investigations which OLAF has undertaken. We consider that OLAF
should conduct a survey of the uses to which Member States put
its reports. On the basis of the results of this survey OLAF will
be able to improve the relevance of the information it passes
relevant authorities in the Member States. (paragraph 138)
Agreed.
OLAF'S INDEPENDENCE
183. We are convinced by the arguments presented
in favour of keeping OLAF administratively within the Commission.
On the basis of the evidence we have received we emphatically
refute claims that OLAF is too close to the Commission or that
the Commission seeks to divert and influence OLAF's investigative
activities. (paragraph 143)
Agreed.
29 December 2006
1 "Irregularity" is defined in Article 1(2)
of Regulation 2988/95. "Fraud" is defined in Article
1(1) of the Convention on the Protection of the Financial Interests
of the European Community. Back
2
Paragraph 55 of Opinion 2/2004 of the Court of Auditors of the
European Communities on the "single audit" model (and
a proposal for a Community internal control framework). OJ C 107,
30 April 2004. Back
| 
