Why the EU's audit is bad news

By Stephen Mulvey
EU reporter, BBC News

For 12 years the European Union's auditors have refused to endorse the spending of large parts of the EU budget.

To many European citizens, it is a mystery why such a state of affairs has been allowed to continue for so long.

Siim Kallas: "Moderate" chance of a clean bill of health in 2009

The explanation has partly to do with the tough standards of the Court of Auditors, with the decentralised nature of the European Union, and with its lack of democratic accountability - public bewilderment has not always been seen in the EU as a reason for reform.

But the European Commission and members of the European Parliament also argue that the media have given a slanted picture of the problem.

For while the auditors have found problems with the way the EU spends its money - every year since they first had to provide a declaration of assurance in 1994 - they have also declared the EU accounts to be "reliable".

This means that the European Commission has accurately recorded all transactions, assets and liabilities.

So reports saying that the auditors "refused to sign off the accounts" are misleading.

Legality

The problems the auditors have exposed have been with the "legality and regularity" of the transactions underlying those accounts.

In other words, they have found evidence that some EU spending has violated regulations and/or contractual conditions.

If I had to operate the EU system, then, because I qualify 13 accounts, I might have to qualify the whole of British central government expenditure UK Comptroller and Auditor General, Sir John Bourn

This is not the same thing as saying that EU spending programmes are "riddled with fraud". In fact, in many cases where errors are found the problems concern the paperwork alone - and the money has been spent exactly as it should have been.

The Commission does not deny that fraud occurs, but it says the scale is minute - around 0.09% of the total budget.

So how worried should we be about the auditors' complaints?

This year, the European Commission has made unprecedented efforts to calm down the media storm that usually accompanies the auditors' report, and to rebut some of their criticisms.

One of its chief arguments is that the auditors set the bar at a level far higher than any national government could achieve.

Part of the explanation for this is that the EU Court of Auditors gives just one judgement on the whole of the EU's spending, instead of judging different areas of activity separately.

The Commission quotes evidence given to a House of Lords committee earlier this year by the UK's Comptroller and Auditor General, Sir John Bourn, who said there were 500 accounts representing the expenditure of British central government.

He went on: "In the last year, I qualified 13 of the 500. If I had to operate the EU system, then, because I qualify 13 accounts, I might have to qualify the whole of British central government expenditure."

Small sample

Another point made by the European Commissioner for Administration, Audit and Anti-fraud, Siim Kallas, is that the auditors base their report on a relatively small sample of transactions - a few hundred out of millions.

They check these very carefully, and then estimate from the number of flaws they find the likely overall level of errors in spending.

In 2005 the Commission recovered more than 2.17bn euros (£1.45bn) - the Court should finally recognise this European Commissioner Siim Kallas

The point Mr Kallas emphasises is that the auditors ignore the fact that the Commission often identifies and gets back mis-spent money in subsequent years. The auditors work on an annual basis, the Commission works on a multi-annual basis.

"One will always find errors in individual transactions, in any organisation, but we have effective mechanisms to claw back any undue payments," he says.

"In 2005 the Commission recovered more than 2.17bn euros (£1.45bn). The Court should finally recognise this."

But former British MEP Terry Wynn, who spent years on the European Parliament's budgetary control committee before retiring this summer, makes an even more fundamental criticism of the auditors' approach.

According to him, it is practically impossible for the spending to be judged "regular and legal" when the auditors base their judgement on a few hundred transactions. To get below the auditors' permitted threshold, he says, there can be almost no error at all in the sample.

Member states

So it is perhaps surprising that the present Commission has set itself the goal of getting a completely clean bill of health by the end of its mandate in 2009 (when the auditors will report on the 2008 accounts).

Mr Kallas, a former Estonian prime minister and minister of finance, estimates the chances of success as "moderate", but says it depends very much on the effort made by member states, which spend more than three-quarters of the EU budget.

The largest budget heading is farm aid, which is gradually being brought under effective control, to the auditors' satisfaction, by a system called IACS (Integrated Administration and Control System).

To help keep better tabs on the rest of EU spending on the ground, the Commission and the European Parliament have been calling for an annual declaration by each member state, to confirm that systems to control the spending of EU funds have worked effectively in the year in question.

The idea was that this would be signed by a high-ranking politician, such as the country's finance minister, but the member states rejected that in December.

Nonetheless, the Commission appears to believe it is making progress in persuading national capitals to beef up their controls on the spending of EU money - and that is why Mr Kallas puts the chances of a clean bill of health in 2009 above zero.