MPs report on financial management in the EU

• Report: Financial managment in the European Union
• Committee of Public Accounts

Edward Leigh MP, Chairman of the Committee of Public Accounts, today said:

"Despite a measure of progress in the financial management of the EU, since this Committee last reported, many of the same old difficulties remain unresolved. These serve only to undermine public confidence in financial management within European institutions and Member States.

"Prominent among these unresolved difficulties is the persistent high level of error in some key budget areas. This has led to what should be an exceptional audit procedure, qualification of the accounts, being applied for fourteen years in a row.

"A major factor leading to error is the inherent complexity of programme expenditure in some areas. The only solution is to simplify the rules, not – as the Commission has proposed – to tolerate higher levels of error in the more complex areas of expenditure. That would weaken the accountability of EU funds.

"The published figures on levels of fraud and irregularity in the European budget have so far been pretty useless because there is no consistent arrangement between Member States for recording and reporting these figures. These and other barriers to budget modernisation need to be addressed in the current review of the EU budget. This review gives the Commission a rare opportunity to make the long term improvements to financial management which have eluded the EU for so long."

Mr Leigh was speaking as the Committee published its 32nd Report of this Session. In March 2009 the Committee had visited the European Commission, the European Court of Auditors and the European Anti-Fraud Office to discuss financial management and to examine progress made since its last visit in March 2005. The Committee was grateful to all those it met for their help and openness.

In 2007, European Union expenditure totalled €114.0 billion and revenue was €117.6 billion. In that year, the United Kingdom’s net contribution was €6.1 billion, the highest after Germany. The sums involved emphasise the need for sound financial management and control within European Union Institutions and the Member States.

For the first time the Court did provide a positive Statement of Assurance on the reliability of the accounts because the accounts accurately recorded the underlying transactions. But for the 14th successive year, the European Court of Auditors did not provide a clear audit opinion (known as a Statement of Assurance) on the legality and regularity of expenditure. It found that an unacceptably high level of the account’s underlying transactions did not comply with the rules and regulations. The lack of a clear opinion year on year significantly damages the Union’s reputation for financial management and action urgently needs to be taken.

Since the Committee last reported on this subject, in 2005, the Commission has reduced the level of errors across the budget. But a major barrier to improving financial management in some areas of expenditure is the continued complexity of the regulations which applies particularly to Cohesion policy. This policy aims to remove disparities in economic performance across the European regions and continues to be the biggest source of error, with an estimated 11 per cent of irregular spending.

The Court considers errors as material if in total they exceed 2 per cent of total expenditure in each of the main policy areas. A Commission paper, published in December 2008, suggested different levels of error might be tolerable within different policy areas. It proposed that the more complex the policy, the higher the level of error that would be tolerated as there comes a point where the costs of control required exceed the value of the likely errors prevented. We are concerned about such a proposal because it would remove the incentive to simplify the rules for the European expenditure regimes which is essential to improve financial management.

The fundamental review of the European Union budget, currently underway, offers the Commission the opportunity to modernise the budget and strengthen its financial management. If the Commission does not take this opportunity, a positive Statement of Assurance is extremely unlikely and European Union citizens will continue to think that their funds are badly managed.

In 2007, Member States reported irregularities to the European Anti-Fraud Office (OLAF) totalling €1,425 million, including suspected frauds of €316 million. (An irregularity is a failure to comply with the Commission’s regulations and fraud is an irregularity committed intentionally which constitutes a criminal offence.) OLAF warned that its figures should be interpreted with caution as they depend on the timely and accurate reporting by Member States, making trends and progress in tackling irregularity and suspected fraud difficult to assess.