EU: Financial Management and Fraud (EUC Report)

rose to move, That this House takes note of the report of the European Union Select Committee Financial Management and Fraud in the European Union: Perceptions, Facts and Proposals (50th Report, Session 2005–06, HL Paper 270). The noble Lord said: My Lords, I thank all my committee colleagues for their hard work and commitment in producing this report, which was the last of my four-year term as chairman of the sub-committee. In particular, I thank the noble Lord, Lord Maclennan of Rogart, who chaired a number of hearings with great distinction last summer when I was away from the House of Lords undergoing medical treatment. I also thank my noble friend Lord Grenfell, the chairman of the main EU committee, who has always given the work of Sub-Committee A every encouragement. I thank our special adviser, Professor Roger Levy, for his expert advice, and last, but certainly not least, I thank Edward Lock who was our clerk for this report, before he moved on to other pastures. While he was working for our committee, he proved himself to bea highly dedicated and intelligent servant of theHouse. As noble Lords can see from volume 2 of the report, we have drawn evidence from a variety of sources, including the UK Treasury; the UK Comptroller and Auditor General; the European Court of Auditors; the European Commissioner for Administrative Affairs, Audit and Anti-Fraud; the European Commission accounting officer; my noble friend Lord Kinnock, the former EU Commissioner; Marta Andreasen, the former Commission accounting officer; the European anti-fraud officer; Terry Wynn, then the chairman of the European Parliament’s committee on budget control; and Ashley Mote, MEP. I thank all our witnesses for their evidence, both oral and written. Over the years, our sub-committee has taken a close and continuing interest in EU expenditure and its management. This report on financial management and fraud is on a topic that is of considerable importance not only to UK and other European taxpayers, but also to the overall reputation of the EU. If the citizens of the UK and other member states of the EU believe that European money is being fraudulently or inefficiently used, they are not likely to be very impressed by the European Union. On the other hand, I am sure that all noble Lords agree that it is important that any debates on these issues are founded on facts. Therefore, as well as finding a number of shortcomings in EU financial management and proposing significant changes in the way the EU handles its money affairs, our report also tries to put the debate about EU financial management into proper perspective. We start with the so-called statement of assurance from the European Court of Auditors. UnderArticle 248 of Maastricht Treaty, the European Court of Auditors is responsible for reporting on the legality and regularity of the EU’s revenue and expenditure and for issuing a statement of assurance. As we point out in our report, since 1994, the Court of Auditors has not been able to give a positive statement of assurance on EU accounts. This is a serious matter; however, we should put the lack of a statement of assurance into context. I shall quote our own Comptroller and Auditor General, Sir John Bourn, who told us that were he required to issue a single statement of assurance on the UK Government’s accounts in the same way as the Court of Auditors is for EU accounts, he would be unable to do so. He said that because he had to qualify 13 out of 500 accounts that represent the total expenditure of the UK central government. One of those accounts was that of the Department for Work and Pensions, whose budget is as big, if not bigger, than the whole EU budget. We do not argue that the ambition of issuing a single statement of assurance should now be dropped, but we believe that the Court of Auditors should, like the UK Comptroller and Auditor General, develop the practice of issuing statements on each spending area inside the EU. Here we note with approval that in 2004 the court was, for the first time, able to givea positive statement of assurance for agricultural payments, amounting to the majority of the EU budget under the integrated administration and control system. We also consider that a more accurate reflection of the substance of the court’s annual audit would be achieved if the annual audit was more clearly separated from the statement of assurance. The noble Lord, Lord Williamson—who I am glad to see in our debate this evening—pointed out that every yearsince 1994 the Court of Auditors has certified thatthe accounts of the European Commission are reliable. There is the further point that the lack of a positive statement of assurance does not necessarily mean that there are high levels of fraudulent or corrupt transactions inside the EU, as is often claimed by the British media. Indeed, much of the coverage in the press suggests that there is a significant ““culture of corruption”” in Europe's institutions; yet our evidence—and I say this with firmness—has uncovered no such evidence to support that suggestion. Indeed, Marta Andreasen, who is one of the critics as noble Lords will know, made it clear to us that she did not make this charge about a culture of corruption. However, we cannot be complacent about fraud and mismanagement, even if the level of fraud in the EU is no higher than in comparable public expenditure programmes, including the United Kingdom—hence the need for improved financial management, especially at the level of the member state. I turn to the report’s big idea, which is having national statements of assurance in each member state. We need to make sense of the system of shared management. That is to say, the shared responsibility that we have now between the Commission on the one hand and the member states under Article 274, which says that: "““Member states shall co-operate with the Commission to ensure that the appropriations are used in accordance with the principles of sound financial management””." It is significant that more than 80 per cent of European transactions, and most irregularities, take place within member states. We can all agree, surely, that it is unacceptable for Governments of member states to treat European money with less care than national funds, and we should also be concerned about the variability of control standards between member states. We are, therefore, as a committee, strongly in favour of a national statement of assurance on the European moneys disbursed in each member state. We have taken evidence on the Dutch pilot scheme. Under that scheme, the financial Minister issues an annual national statement on the use of European funds, subject to shared management in the Netherlands. The statement is then sent to the Dutch Parliament and the national Court of Auditors. The national statement and its corresponding audit are also sent to the Commission. I have to say that we, as a committee, are highly delighted that following the publication of our report on 7 November, the UK Government announced on 20 November their intention to provide an annual statement of the UK’s use of EU funds. That statement will be audited to international standards by the National Audit Office. Both the statement and the audit will be presented to Parliament and then made available to the European Court of Auditors. We hope that other governments will follow suit, because that is absolutely vital. In this context, we do not consider that a national statement of assurance necessarily requires a political signature; it can be done like the Whitehall model through accounting officers and the Comptroller and Auditor General. Linked to a national statement of assurance in each member state, we need a robust system of naming and shaming. We support calls for the European Court of Auditors to produce a list of member states who are guilty of poor management of European funds. We consider that such a list would encourage member states to take financial management of European funds more seriously. I now turn to what we have to say about the Commission. Though, in our view, the main priority in European financial management improvement is to strengthen control and audit in member states, we need also to build on the recent changes in the Commission’s accounting and audit systems, especially those introduced by the Prodi-Kinnock reforms. According to Brian Grey, the Commission’s present accounting officer, the Commission now adheres to the International Federation of Accountants International Public Sector Accounting Standards, and the UK Treasury Economic Secretary Ed Balls has also welcomed the recent adoption by the Commission of accruals-based accounting, which he says has, "““made the EU one of the leaders in public accounting terms””." We also support the new four-stage system of authorisation and the segregation of authorisation and execution of payments introduced by the Prodi-Kinnock reforms, as well as the new decentralised system of management control. However, and I now turn to one of the points put to us by Marta Andreasen, there is a divergence of opinion about whether all Commission systems are consistent with double-entry bookkeeping. The present chief accounting officer says that they are; Marta Andreasen says that they are not. We say that all the accounting systems operating in the Commission should support double-entry accounting and call on the Commission to investigate this issue and publish a report. With respect to signing-off of accounts, we are strongly in favour of a system whereby responsibility for accounts is shouldered, first, by accountants and auditors in each directorate general and then at more senior levels, culminating with the signature either of the secretary-general, as we argue in this report, or, as the Treasury thinks is a better bet, the Commission's chief accountant. The European Commission has improved its performance on financial management, but, as it admits in its various recent reports, it needs to go much further. We suggest that in future issues arising from the Commission’s accounting and audit system should be covered by the Court of Auditors in an annual report so that we can assess progress. Our committee has taken and will continue to take close interest in how the European Union’s finances are managed, but we would also like to have regular debates on audit and management and on the UK's annual statement on the Floor of this House and in another place. I would like to have the Government's response on how they intend to promote an informed debate on these matters, because unless the citizens of the European Union and the UK know what is going on, they will be taken in by the kind of headlines that we see in our press. We conclude that the level of fraud is no higher than in comparable expenditure programmes. However, that does not mean to say that we should be complacent, and the fight against fraud must go on, especially, as we say, at member-state level. We applaud the efforts of the European Parliament, especially the budgetary committee; we welcome the recent reforms at Commission level; and we call on the European Council of Ministers, which, after all, represents the nation states, to take the issue far more seriously. European citizens, including UK citizens, need to be confident that European money is being efficiently and honestly spent. I believe that the Government's decision, following our report, to produce an annual statement of assurance is a breakthrough, and I hope that other member states will speedily follow their excellent example. I beg to move. Moved, That this House takes note of the report of the European Union Select Committee Financial Management and Fraud in the European Union: Perceptions, Facts and Proposals (50th Report, Session 2005–06, HL Paper 270).—(Lord Radice.)