Toespraak hoofd Europese rekenkamer over de rol van de rekenkamer bij gebruik EU-fondsen (en)

Budapest, 25 March 2009

BY VITOR CALDEIRA

PRESIDENT OF THE EUROPEAN COURT OF AUDITORS

President,

Ladies and Gentlemen,

I would like to start by thanking Dr Kovàcs for giving me the opportunity, here today in Budapest, to talk to you about the role of the European Court of Auditors (ECA) in the audit of the utilisation of EU funds.

As auditors, both in the private and public sector, we attach great importance to promoting accountability and transparency. Accountability and transparency are fundamental democratic values that are essential to ensuring trust and confidence not only in markets but also in government. In the public sector, they are also essential to ensuring that public funds are soundly managed on behalf of citizens and taxpayers.

Accountability and transparency are particularly important in the context of an EU of 27 Members States and in the face of global challenges, such as dealing with the current financial crisis, creating jobs and growth, combating climate change and achieving sustainability. These challenges are putting pressure on public finances everywhere; meeting them will require resources to be spent wisely.

So what is the role of the public sector auditor of EU funds? In particular, what is the role of ECA and how does this relate to the role of the national audit bodies such as the State Audit Office of Hungary (SAO) in the audit of EU funds?

The role of the auditor is often unfairly characterised as that of someone who turns up after the battle in order to bayonet the wounded. In truth, I think we are more like doctors charged with trying to help keep public finances healthy.

I believe the European Court of Auditors and national audit bodies, such as the SAO, do this in two main ways as regards EU funds.

First, we provide the policy makers and those responsible for managing funds at EU and national level with reports and opinions which provide “health checks” of the state of financial management. We add value by identifying problems, by making recommendations, and by reporting on progress. We are part of the solution not the problem.

Secondly, like doctors, we work together, as a community of professionals, to share experiences and develop our skills, standards and practices. Over time this helps us to improve the quality of our advice and ultimately the outcomes for our stakeholders.

I would, therefore, like to begin my presentation by speaking specifically about the European Court of Auditors role before going on to say a few words about how the Court and national audit bodies, such as the SAO, cooperate in the audit of EU funds.

The European Court of Auditors is the EU Institution established by the EC Treaty to carry out the audit of EU finances. As the EU's external auditor, the Court’s mission is to contribute to improving EU financial management and acts as the independent guardian of the financial interests of the citizens of the Union, promoting transparency and accountability.

The Court is, since the Treaty of Maastricht, one of the five institutions of the European Communities. The other institutions are: the European Parliament, the Council of the European Union (legislature), the European Commission (executive) and the Court of Justice of the European Communities (judiciary).

Under the constitutional systems of modern States the external audit function is generally considered to be one of the main elements for ensuring accountability, alongside internal control by Government and Parliamentary scrutiny. Appropriate arrangements for ensuring external auditing are an essential part of public-sector financial management, which is a requirement for Member States’ accession to the EU.

The setting-up of the European Court of Auditors followed this same reasoning and coincided with two particularly important events, firstly, the extension of the European Parliament's powers in the area of EU budgetary control and, secondly, the full financing of the EU budget by own resources.

In view of these changes and the increase in the European Parliament's powers in the area of the implementation of the budget, it was essential for the European Communities to make a qualitative change in the external auditing of the budget.

Thus, at the initiative of Mr Heinrich Aigner, the President of the European Parliament's Budgetary Control Committee, who since 1973 had strongly argued the case for a Community-level external audit body, the European Court of Auditors was established by the Treaty of Brussels of 22 July 1975. The Court started operating as an external Community audit body in October 1977, with its headquarters in Luxembourg.

The European Court of Auditors was promoted to the rank of an institution on 1 November 1993 with the entry into force of the Maastricht Treaty, thus enhancing its independence and authority as one among equals. Since then the Court has been required to publish a statement of assurance (DAS) as to the reliability of the EU accounts and the legality and reliability of the transactions underlying the EU budget.

Its role was confirmed and strengthened on 1 May 1999 with the entry into force of the Treaty of Amsterdam, which empowered the Court to carry out sound financial management audits, emphasised its role in the fight against fraud and allowed it to have recourse to the Court of Justice in order to protect its prerogatives with regard to the other EU institutions.

The Treaty of Nice of 1 February 2003 confirmed the principle that there should be one Member from each Member State and that the Court should continue to take decisions as collectively, as a College. However, the Treaty allowed the Court the option of being organised in chambers. It also highlighted the importance of the Court's cooperation with the national audit bodies.

The Court’s institutional status and mandate are confirmed in the Lisbon Treaty, yet to be ratified.

The Court performs its audits within an inter-institutional framework laid down mainly by: the EC Treaty, Articles 268 to 280 of which contain financial provisions governing the Community's revenue and expenditure, and Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002, which is the Financial Regulation applicable to the general budget of the European Communities, or EU budget for short.

The life cycle of the EU budget comprises the following stages: the establishment of the EU budget, the implementation of the EU budget, the auditing of the EU budget, and the discharge of the EU budget.

The audit is the exclusive prerogative of the European Court of Auditors; the Council and the Parliament are jointly responsible for establishing the budget and giving discharge. The Commission implements the budget on its own responsibility in cooperation with the Member States as set out in the EC Treaty and the Financial Regulation.

So, the Court of Auditors is the EU audit institution set up primarily to audit the use of the funds in the EU budget. The EU budget is, therefore, the starting point of the Court’s work.

The European Union has a budget of approximately 130 billion euro, around 1 % of the gross national income (GNI) of its 27 Member States. Compared to national budgets this is a small share. However, for some Member States funds from the EU play an important role in financing public activities and the total amount is close or equal to the GNI of some Member States. The composition of the budget has evolved over time, agriculture and cohesion policies being its major components.

The EU budget is financed through financial contributions from Member States (based mostly on national GNI) as well as customs and agricultural duties. The EU budget is, to a large extent, directed to other causes than national budgets, partly due to differences in responsibilities. The Union is for example not responsible for social security systems, usually a large part of national spending.

Since the 1960's agricultural spending, typically through payments to farmers across the Union, has been the largest part of the budget although its share is now decreasing. In 2009 less than half the budget is aimed at preservation and management of natural resources, which is made up mainly of agriculture and rural development.

Ever since the 1980's a major part of spending has been directed towards cohesion - i.e. regional and social development - co financing a wide range of projects from, for example, road construction in Slovakia to courses for the unemployed in Denmark. In 2009 spending on sustainable growth is planned at 44 % of the budget, the lion's share is for cohesion. This heading also includes a significant part of the EU funds directed to research.

In addition, the EU spends significant amounts on development and humanitarian aid as well as support to countries close to the Union or candidates to join it. Lastly, about 7, 2 % of the budget is needed for financing the administration of the Community institutions. As an EU institution, the Court is itself funded from the EU budget.

The EU budget is decided annually (within the context of seven-year financial frameworks) by the Council, i.e. representatives of the Members States, and the directly elected European Parliament.

The European Commission proposes the budget and is also responsible for implementing it. A very significant proportion (notably agricultural and cohesion spending) is implemented in cooperation with the Member States. Depending on the spending schemes, national administrations may be responsible for setting spending strategies, selecting beneficiaries and projects and making payments.

A specific feature of Community expenditure is the high percentage of payments based on claims submitted by the beneficiaries themselves, be they farmers or project managers throughout the Union.

In the areas of the budget where management is shared, Member States cooperate with the Commission in setting up supervisory and control systems - internal control - to ensure that funds are spent properly and in accordance with the rules. Internal control thus has an EU as well as a national dimension. In addition to the work done by the Court, many National Audit Institutions audit European funds that are managed and spent by national administrations.

The relative importance of EU funding can be very different from the EU perspective than from the Member State’s own perspective.

For example, from the perspective of the European Court of Auditors, in 2007 Hungary contributed 0,8% of EU resources and spent 2,2% of the EU budget. However, from the perspective of the State Audit Office the Hungarian contribution to EU funds represented 3,3% of state revenues in 2007 and receipts from the EU accounted for approximately 7,3% of national budgetary expenditure. In a number of smaller net recipient Member States EU funds may represent an even higher proportion of state budgets.

In Member States that have higher public sector spending and are net contributors to the EU budget the reverse may be the case. As EU funds are a relatively small part of government expenditure, they are less significant from the perspective of the National Audit Institution.

A National Audit Institution, therefore, provides a picture from an independent national viewpoint of the use of the part of the EU funds spent in that Member State by the national authorities. The Court, on the other hand, audits EU policies not Member States and it does so from the EU level all the way down to the final beneficiary of EU funds within the Member State. The amount of work the Court carries out in a given EU Member State, therefore, largely reflects the proportion of total EU funds in a particular policy area that are spent in that Member State.

The results of the Court’s work are used by the Commission, the Parliament and the Council as well as by Member States, to improve financial management of the EU budget. The Court’s work provides an important basis for the annual discharge procedure whereby the Parliament, basing its decision on recommendations from the Council, decides whether the Commission has met its responsibility for the execution of the previous year’s budget. Despite its name, the Court has no judicial powers.

The Court carries out different types of audits: financial, compliance and performance audit. These address the three following questions:

Financial audit corresponds to the question, do the accounts present fairly, in all material respects, the financial position, results and cash flow for the year, in accordance with the applicable financial reporting framework?

Compliance audits ask whether activities, financial transactions and information, in all material respects, in compliance with the legal and regulatory frameworks which govern them?

And finally, performance audits address the question, is the financial management sound?, i.e. are the funds used kept to a minimum (economy), are the results achieved with the least possible resources (efficiency) and have objectives been met (effectiveness)?

The Court's audit of the EU accounts is carried out in line with International Standards on Audit (ISA), which are applied by the public and the private sector. Existing international standards on audit do not however cover the kind of compliance audit undertaken by the Court to the same extent. The Court takes an active part in the development of international standards, by standard-setting bodies (INTOSAI, IFAC) alongside national audit institutions, such as the SAO.

In order to provide assurance as to whether the payments comply with legal and regulatory frameworks, the Court draws on the results both of its examination of supervisory and control systems, intended to prevent or detect and correct errors of legality and regularity, and of a sample of the transactions (payments) themselves. When systems are tested and found to be reliable, then fewer transactions can be audited by the Court in order to come to a valid conclusion on their legality and regularity. Other sources, such as the work of other auditors, are also used to support the Court’s conclusions.

In performance audit, the Court uses a variety of audit methodologies to assess management and monitoring systems and information on performance against criteria derived from legislation and the principles of sound financial management.

When selecting which performance audits to carry out, the Court aims to identify audit subjects which are likely to yield high impact in terms of identifying potential improvements in the economy, efficiency and effectiveness of EU spending.

The Court publishes the results of its audit work in three main types of report:

Firstly, in its Annual reports the Court presents the results of its financial audits in the form of statements of assurance on the implementation of the EU budget and the European Development Funds. These two reports are published together in November.

Secondly, the Court produces specific annual reports on the results of financial audits on the Communities agencies and bodies, such as the European Institute of Innovation and Technology (EIT) that will have its seat here in Budapest.

The third type of report the Court produces are known as special reports. These present the results of selected performance and compliance audits. Special reports can be published at any time during the year.

In addition, the Court is called upon by EU legislation and other EU institutions to provide its opinion on new or updated legislation with a financial impact.

The Court also produces opinions on topics related to EU financial management on its own initiative. An example is the Court’s opinion 6/2007 on the annual summaries of Member States; ‘national declarations’ of Member States; and audit work on EU funds of national audit bodies. The Court’s opinions draw on its audit experience.

I have talked so far about who we are and what we do. Now I would like to give you a brief overview, from the Court’s perspective of the state of the management of EU funds.

So what do the reports of the ECA say about the state of EU financial management and about the way forward?

In its most recent annual report on financial year 2007, the Court gave, for the first time, a clean opinion on the reliability of the EU accounts. This comes three years after the introduction of accruals accounting by the Commission and represents significant progress towards improving transparency and accountability.

However, as regards the legality and regularity of underlying transactions the Court concluded that the situation was similar to previous years as areas making up the majority of expenditure continue to be affected by material levels of errors of legality and regularity although to different degrees.

The areas of shared management accounting for 80% of expenditure were among the areas found to be materially affected by error. These areas are mostly made up of spending on agriculture and cohesion which is spent through national budgets.

Material levels of errors of legality and regularity persist because there is a high level of inherent risk associated with many areas of EU spending and weaknesses related to supervision and control.

Much of the EU budget, including in the areas under shared management, is disbursed to millions of beneficiaries across the Union, often under complex rules and regulations based on the self-declarations of those who receive the funds. These inherently risky circumstances lead to errors in all Member States by final beneficiaries and by those paying out the funds.

As most errors occur at the level of the final beneficiary they can often only be detected reliably by detailed controls carried out on-the-spot. Such checking is costly and so usually only a small proportion of individual claims are checked.

The Court has identified that there is also scope for improving existing control arrangements and for recovering money illegally or irregularly spent. However, the Court acknowledges the significant efforts by the Commission, and at Member State level, to address weaknesses in supervision and control.

The Commission action plan towards an integrated internal control framework is an example of a positive way forward which was inspired by the recommendations of the Court and its opinion on the “Single audit” concept published in 2004. The effects of implementing the actions foreseen or currently being implemented will however take time to be felt.

For example, 2007 was only the first year for which Member States were required to produce an annual summary of available audits and declarations. These annual summaries can in time, as outlined in the Court's opinion 6/2007, stimulate improved management and control of EU funds. But they do not yet provide a reliable assessment of the functioning and effectiveness of the systems.

But looking forward, the Court suggests in its annual report 2007 that, when developing further measures to improve financial management, there is a need to acknowledge that some risk of error is inevitable and that the benefits of extra controls need to be weighed against their costs.

Also, there needs to be agreement at the political level on the tolerable risk of error in the different areas of the budget and recognition that schemes that cannot be satisfactorily implemented at an acceptable level of cost and with tolerable risk should be reconsidered.

The Court is therefore encouraged by the Commission’s recent publication of a communication on the “Tolerable risk of error”.

The Court is of the view that analysis of the costs and benefits of expenditure programmes could inform not just discussions about “tolerable risk” but also a review of the regulatory regime and management structure for the programmes concerned.

It would be useful if expenditure programmes, at the time of adoption, also gave sufficient information on the risks associated with such programmes and the costs of the intended controls designed to reduce these risks to a tolerable level. In this way, decisions would be taken in a more informed manner, explicitly considering the risks and costs involved.

The Court also recommends the Commission to continue in its efforts to improve its monitoring and reporting, including working with Member States so that effective use of annual summaries can be made.

Beyond this, in its contribution to the consultation process “Reforming the Budget, Changing Europe”, the Court has suggested that decision makers apply the principles of clarity of objectives, simplification, realism, transparency and accountability when designing arrangements for EU spending.

The Court has also encouraged the political authorities of the EU to explore the scope for recasting EU expenditure programmes in terms of outputs and to critically consider the appropriate level of national, regional and local discretion in managing the programmes.

Indeed, many of these issues have been identified in the Court’s special reports, where common themes include a lack of clear objectives for interventions, a lack of focus on measuring outputs and effectiveness, and a lack of appropriate monitoring.

I will give you a few recent examples. For instance, in its Special Report 12/2008 on the Instrument for Structural Policies for Pre-accession (ISPA), covering the period 2000-2006, the Court concluded that there was a coherent strategy and that the projects audited by the Court did increase the compliance with the EU standards or improve the links to the Trans-European network. However, those projects were not always adequately prepared, mainly due to late methodological guidance in relation to the first wave of applications, and significant delays and changes in the financing plans. On the basis of its findings and conclusions the Court made recommendations for improving the preparation of future accessions to the EU.

Another example is provided by the Court’s audit in 2008 of the cross-compliance policy at the Commission and in seven Member States representing the diversity of agriculture across Europe. In this report (8/2008), the Court concludes that the objectives of this policy had not been defined in a specific, measurable, relevant and realistic way, and that at farm level many obligations were still only for form’s sake and therefore had little chance of leading to the expected changes, whether reducing the size of payments or modifying farming practices. The Court, therefore, recommended that the applicable rules should be simplified, clarified and prioritised.

Similarly, in its report (5/2008) “The European Union’s agencies: getting results”, the Court's audit showed that the audited agencies drew up planning documents for their activities but that these did not, however, set any precise medium-term result and impact objectives. Monitoring tools remained fairly rudimentary in most of the agencies, and the lack of performance indicators and of activity-based budgeting/ management was quite widespread. Accordingly the Court made recommendations for how agencies could improve specific aspects of their systems for managing performance.

As I outlined above, most EU expenditure is in areas under shared management, which means that it passes through the national budgets of Members States and is executed by Member State authorities at either national, regional or local level.

This also means that most “EU expenditure” falls within the audit mandates of both the European Court of Auditors and national audit bodies of the Member States.

This brings us to the importance of cooperation between the Supreme Audit Institutions of the Members States of the EU, such as the SAO, and the European Court of Auditors.

The EC treaty foresees that the European Court of Auditors and national audit bodies shall “cooperate in a spirit of trust whilst maintaining their independence”. Maintaining our respective independence is essential to our ability to carry out our distinct but complementary roles with respect to the audit of EU funds.

The national audit bodies have a national perspective and provide recommendations to improve financial management within Member States; the European Court of Auditors, as I explained earlier, provides an EU level perspective by policy area. This EU level perspective enables the Court to contribute to improving financial management at EU level and to the sharing of best practice between Member States.

The cooperation between audit bodies takes a number of forms. First, there is direct role played by national audit institutions to facilitate the audit missions of the Court in their Member State. And I would like to take this opportunity, on behalf of the colleagues of the European Court Auditors, to thank the colleagues of the State Audit Office for the spirit of their cooperation and their assistance in facilitating the Court’s audit missions to Hungary.

Secondly, there is the work we do together in the Contact Committee of the Heads of the Supreme Audit Institutions of the EU Member States, which provides a forum for sharing experiences and for developing common approaches as regards the audit of EU funds.

For example, at the meeting held in December 2008 at the European Court of Auditors in Luxembourg we discussed “the EU budget review” and the “Lisbon Strategy” and, in last February, we held a workshop on the “Role of the EU SAIs in the current economic and financial crisis”. And just this morning, President Kovàcs and I have been discussing how to take things forward in the Contact Committee meeting to be held, here in Budapest, in December 2009.

The third form of cooperation is through EUROSAI and INTOSAI, which bring together audit institutions from the European Union and beyond, to address common audit challenges. I am pleased to say that both the ECA and the SAO actively participate in these professional forums. For example, the SAO took the lead at the EUROSAI Congress in Krakow in 2008, chairing the working group that reported on the theme “Establishing an Audit Quality Management System in a Supreme Audit Institution”. The Court too contributed to the work of the group with its paper on the role of Leadership. Both the ECA and the SAO have also been actively involved in the development of environmental auditing as well as the development of common standards and approaches for the audit of EU funds.

To conclude, the European Court of Auditors is the EU institution with responsibility for auditing the EU budget. A budget that is based on contributions from Members States, who share the management of 80% of the expenditure with the Commission.

The Court has found that there continue to be significant areas for improvement in the way funds are managed, in particular regarding those funds under shared management. However, the Court notes that progress is being made and that significant steps are being taken at EU and National level, which should lead to improvements in the medium term.

The Court also hopes that the ongoing EU budget review will address the fundamental long term challenges associated with raising funds and ensuring they are spent wisely, not least those challenges identified by the Court in its written contribution on EU budget reform.

President Kovàcs,

Ladies and Gentlemen,

In the midst of the current financial crisis and the other global challenges the EU faces, I believe the European Court of Auditors is better placed than ever to keep playing a significant role in improving the financial management of EU funds and promoting accountability and transparency by making effective use of its unique EU level perspective.

We look forward to playing this role alongside our colleagues from the national audit bodies, such as the SAO, continuing to cooperate in a spirit of trust whilst respecting each other’s independence, promoting accountability and transparency in the interests of the citizens and taxpayers of the European Union.

Thank you for your kind attention.