The EU accounts

EU spending shares the weakness common to many large organisations, governments, ministries and international organisations: money is spent over such a range of activities and in so many places that the auditors cannot guarantee that the exact amounts were always spent correctly. The US federal budget has not had a positive statement of assurance for about eight years. The UK's Department for Work and Pensions (formerly the DSS) has not had its equivalent statement for the last 15 years - and its budget is larger than that of the whole EU!

Since the EU's 1994 budget, the European Court of Auditors (ECA)  - the body appointed by Member States to check the EU's accounts and underlying transactions - has had to give a Statement of Assurance on "the reliability of the accounts and the legality and regularity of the underlying transactions". The accounts have normally been found to be reliable. However, the situation regarding the legality and regularity of the underlying transactions is more complex. Here, the ECA has, in successive years, given a positive statement on the revenue (income - which is the responsibility of the European Commission) and on the commitments and administration (also the Commission's responsibility). It has yet to give a positive statement on payments. More than 80 per cent of payments are the responsibility of individual governments.

Looking at a recent ECA Report, it is indeed striking to read that the auditors found that the EU's transactions were "legal and regular as far as the revenue, commitments and administrative expenditure are concerned". In other words, most of what the Commission manages centrally is now generally in order.

Weakness at Member State level

Where, then, does the main problem lie? The auditors say: "owing to persistent weaknesses at member state level in systems for supervising and controlling the implementation of the EU budget, payments were still affected by the same types of error occurring with the same frequency as in previous years". In other words, it's national governments, not the EU centrally, that are causing the main problems and it is mainly (though not entirely) on them that efforts to improve the situation must be focussed.

Interestingly, the Court does not mention a single case of fraud anywhere in its latest reports. What they refer to as "errors" are either procedural or to do with control systems. In the words of the President of the Court, the Court's findings do not mean "that the majority of payments from the EU budget are affected by error, nor can it be interpreted as an indication of fraud".

In relative terms, then, there appears to be little actual fraud on the expenditure side of the EU budget. The auditors have rather found cases of technical irregularities due to organisations or individuals failing to comply fully with the necessary procedures - and can even be as trivial as a signature in a wrong box or a late payment. Typically, they concern an error in an animal premium claim in a particular region or an overclaim from regional fund beneficiaries, such as local authorities. This normally results in a refund to the EU, or a payment from the correct rather than the incorrect fund. Sensationalist press articles then classify all these as "fraud", which they are not.

Rebalancing the spin

This year, the European Commission is apparently set to try to rebalance the media slant, and even to do the unthinkable: criticise the Court of Auditors for its methods and its presentation.

The Commissioner for Administration, Audit and Anti-fraud, Siim Kallas, (the former Finance Minister of Estonia) criticised aspects of the Court of Auditors Report, saying that it ignores the fact that money mis-spent one year is normally clawed back the next year. He said that, if you lose your wallet, but get it back with the money inside, you do not count it as a loss. He complained that the auditors consider money lost even when it may have been spent as intended - if say, a grant recipient makes a minor mistake with the paperwork, arguing that the ECA should distinguish between missing paperwork and missing money. Above all, he regretted that the ECA refuses to name which member states are lax in controlling use of EU funds.

Sir John Bourn, head of the UK National Audit Office, appeared to have some sympathy for Mr Kallas's criticisms of the ECA methodology. He said he had qualified 13 of 500 UK government accounts, but had he used the same system as the ECA, he would have had to qualify the whole of government expenditure.

Existing problems

Does this mean that there is no fraud against the EU budget? Of course, all public expenditure is vulnerable to overclaims by recipients. In 2005, Mr Kallas says, the Commission clawed back 2.17billion euros (£1.45billion) from member states, and wrote off 90 million euros (£60million). The figure written off represents the amount considered badly or fraudulently spent and irrecoverable. This amounts to 0.09 per cent of the EU budget. The Financial Times, which had exaggerated the degree of fraud claiming it was 0.9 per cent of the EU budget, printed a retraction on 26 October 2006, admitting it was one-tenth of that figure.

Does this mean that there is no mismanagement or corruption in the EU institutions themselves? No. Corrupt practices and mismanagement have sometimes been found. The 1994-99 European Commission (under Jacques Santer) was forced to resign by the European Parliament when a number of malpractices were revealed (including the employment of a personal friend as an advisor by the French Commissioner Edith Cresson). New rules and procedures to tighten up financial controls have since been introduced. Indeed, Neil Kinnock, the Vice-President of the European Commission from 1999 to 2004, was responsible for reforming the Commission's internal financial and management procedures and systems, including passing a new financial regulation and the introduction of accruals based accounting. These are now coming into operation, with the latest report by the ECA (October 2006) reporting "considerable progress".

More progress is needed

Further progress is needed. I would like to see a system where the annual statements of assurance had to be given to the Commission departments and each of the 25 national governments individually, rather than in one single statement for the whole EU. Governments would then have to take full responsibility for the EU funds managed by them with proper auditing at national level. This would further improve the accuracy of the information provided and increase confidence in the system.

Summary of key points:

• Claims that the EU budget is more open to fraud than other budgets are wide off the mark, as can easily be seen by comparisons to the US budget or the UK Dept of Work & Pensions

• The Auditors have found the accounts to be in order, but have questioned the regularity and legality of of transactions

• There have been relatively few cases of fraud against the EU budget, but there have been many cases of failing to complete procedures fully and some cases of mismanagement

• Most of these have been found to be with the Member States rather than the EU institutions

• The European Commission undertook a significant overhaul of its management systems and financial regulations which are now coming into force

• The system could be improved if annual statements of assurance had to be given to each of the 25 national governments individually, rather than in one single statement for the whole EU

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