Desperately seeking transparency

Michelle Perry discusses why it�s high time the European Commission got its finances in order

The European Community has failed to secure a clean bill of health for its financial accounts since the so-called statement of assurance was introduced in 1994.

That�s 10 years of qualified financial statements due to high levels of suspected fraud and financial �irregularities� within the European Union.

Were these institutions a private or publicly listed company they would have gone out of business years ago. Neither shareholders nor other stakeholders would tolerate such blatant lack of financial transparency and accountability, so why do we allow it to take place at the European institutions that govern us?

British MPs put the problem down to �institutional inertia�. Anecdotally, however, it is understood that there has been a lack of political will at the top to take up the gauntlet to reform the Community�s internal controls.

John Davies, head of business law at ACCA, says: �This is a serious situation and it�s high time it was taken seriously at a political level. The situation cannot be allowed to continue indefinitely as, sooner or later, the EU credibility will come to a fall.�

Undoubtedly the task is a formidable one, and one that is even more challenging since the EU expanded from 15 members states last May to 25 members. But it is one that has to be put right now before we face an eleventh year of qualified financial statements and a further drop in public confidence.

The UK National Audit Office has also consistently raised concerns about the management of EU finances. But the most recent and harshest criticism has come from the UK�s powerful cross-party Public Accounts Committee.

Following publication in April of its report into the EU�s management of its finances, PAC chairman Edward Leigh MP said: �The task of achieving strong audit and accountability arrangements in the European Union is one Sisyphus himself� would not envy. Little has changed because of institutional inertia.�

The current hope is that the British Government, when it takes up its six-month rotating presidency of the EU in July, will make reform of internal financial controls and accountability one of its top priorities.

�Regardless of other high profile issues, this is an issue that the UK should be pushing,� says Davies.

�We�re talking about a problem that is deep-seated and long running. Whatever measures have been introduced so far, they don�t appear to have worked,� he adds.

With the UK General Election now behind us, and the Labour Government retaining power, albeit of a much smaller majority, we can expect an announcement of its priorities during its EU presidency before July.

Indeed, it is understood that British MEPs have been pivotal in pushing for the �roadmap� - the new plan announced in February that is intended to overhaul the EU�s internal controls, as well as stamp out alleged fraud and mismanagement of the Community�s 98.3bn euros (£67.4bn) budget, by ensuring better communication between the EU institutions and tighter controls.

But who is to blame and where are the changes needed? Is it simply down to a lack of leadership and control at the Commission? Or should responsibility be laid at the door of others?

Observers argue the Commission cannot be held wholly responsible for the financial shortcomings. After all, it directly controls only 20% of the EU budget, while the 25 member states are in charge of the lion�s share, 80%.

This is the issue at stake: how to wade through the quagmire of 25 legal systems and national auditing procedures to set out a uniform method to account for European expenditure.

In a report to the Commission in March, Terence Wynn MEP, a member of the Committee on Budgetary Control, urged the Commission to find ways to ensure member states uphold their responsibilities in accounting for funds.

�In cases involving shared management of Community funds, the Commission must, as a matter of urgency, find ways to improve accountability at member state level by dealing efficiently with the �delegation risk�, which results from the fact that the Commission, whilst having final budget responsibility for all its expenditure, is also required to bear that responsibility when EU funds are expended in shared management with member states,� says Wynn.

There is now a push to require each member state to provide the Commission with an annual report stating that adequate national controls are in place to ensure an audit trail for EU funds.

Wynn states: �Recognition of the fact that member states and beneficiaries do not always give the same attention to the spending of European money as to the spending of national money, the heterogeneous quality of member states� control standards and the notable absence of involvement of most national audit institutions in seeking assurance that European funds are being used regularly and legally for the intended purposes� takes the view that these problems cannot only be resolved by centrally imposed controls, and that the current situation clearly demonstrates the need for new instruments to enhance the Commission�s insight into the member states� management and control systems.�

The Wynn report proposes that the member states� annual report on internal controls includes a description of the national control systems, an assessment of the effectiveness of these control systems, a remedial action plan if necessary and confirmation by a national audit institution or another external auditor.

Penalties, such as the withdrawal of a percentage of funds to a member state that flouts EU regulations, exist but sources within the EU say these aren�t enough. Initiatives are now underway to make these penalties more �persuasive�, says an EU source.

Defining the responsibilities of member states is key to the roadmap being drawn up by Siim Kallas, Vice President of the European Commission responsible for Administrative Affairs, Audit and Anti-fraud, who took over from Neil Kinnock this year.

�An important element in the roadmap will be how member states can provide reasonable assurance to the Commission that adequate supervisory controls and systems are in place,� states Kallas.

Concerns have also surfaced over pressure on the Court of Auditors to water down its approach to auditing. The Court has resisted this pressure; a move welcomed by the UK�s PAC.

Leigh says in his report: �The committee does not believe that a positive statement of assurance should be achieved by watering down the Court�s approach, and believe the Court is correct to resist pressure to do so.�

A spokesman for the Court of Auditors says that part of the problem is that the IT systems weren�t designed with the auditor in mind, so work must be done there.

�Auditors normally place great reliance on systems where they can, and the roadmap involves placing more reliance on the systems.�

Responsible

Clearly reform is underway. But progress won�t be known until next year when the Court of Auditors publishes its next year-end report. Nevertheless, a clearer idea of who is responsible for what should be outlined before the year is out. Wynn�s committee wants the Commission to present an initial report exploring the roadmap to a protocol with member states before 1 October 2005.

Commissioner Kallas has stated that �based on the principles set out in the roadmap, the Commission will therefore endeavour - by November 2005 - to reach a common understanding with the Discharge Authority, the Council and the Court of Auditors on the application of a Community Internal Control Framework�.

Time is not unlimited. If the EU institutions fail this time round to provide the public with assurances that taxpayers� money is accounted for with transparent methods, a further drop in public confidence is inevitable... worse still, internecine fighting between member states who comply and those who fall short could scupper any hope of the European Union as a well-oiled, accountable machine.

Michelle Perry is a freelance journalist specialising in financial and business issues.