EU: Financial Management and Fraud (EUC Report)

My Lords, last week the Minister took me to task, in the nicest possible way, for criticising the Olympics. He was right because, having had the opportunity to have a closer look at the report we are debating today, I can say that, by comparison with the financial management of the European Union, the Olympics is an example ofgood management, accurate forecasting and tight budgetary control. I offer my congratulations to the committee on its application and hard work in investigating this subject. Reading through the evidence I can only admire the committee's tact and patience. So much of the evidence from witnesses who appear reliable, honest and sensible is contradicted by other witnesses who also seem reliable, honest and sensible. For example, we have Mr Brian Gray, accounting officer for the European Commission, who, when asked whether double-entry book-keeping of the conventional kind does or does not exist, stated that, "““the idea of having single entry accounts is risible. We have never had single entry accounts””." The noble Lord, Lord Kinnock, also said that the European Commission has always used double-entry accounting. On the other hand, Mr Jules Muis, former head of internal audit for the Commission, said: "““The system of the Commission, by my definition was not double entry bookkeeping””." Marta Andreasen, who we have heard about so much this evening, gave evidence that double-entry book-keeping was not adhered to. Mr Terry Wynn MEP commented that the European Court of Auditors has concluded, every year since 1994, that the accounts are reliable. The qualified statement of assurance concerns mainly the underlying transactions. From that he comes to his conclusion that it is not correct that the accounts have not been given a positive statement of assurance; the failure is the underlying transactions—a number of your Lordships have commented on that this evening. This comment by Mr Wynn is difficult to reconcile with the statement by Siim Kallas, European Commissioner for Administrative Affairs, Audit and Anti-fraud, who in his evidence stated: "““The Court effectively gave reasonable assurance on about one third of payments””." The European Court of Auditors commented that errors were identified in accounts payable by 508 million euros and in pre-financing by 822 million euros. Mr Ashley Mote MEP stated that the Court of Auditors admits that 80 per cent of all taxpayers’ money is never properly accounted for. Mrs Andreasen’s evidence was that 90 to 95 per cent of the annual budget was refused clearance. Again, Mr Gray describes the accounting systems as rock solid. Both Mr Muis and Marta Andreasen argue that the systems are inadequate and ““fragile””; they are supported in this by Mr Mote. The Commission's July 2006 report supports Mr Muis’s opinion. Other examples of conflicting statements are over the mechanics of payment authorisations, whether the debts up to €1 million euros can be waived, whether the 416 imprest accounts are audited, on annual cash surplus, and so on. But I will spare your Lordships the full list and from going through all the detail. What comes clearly from all this is that there are two distinct views on the accounts and the reporting of financial matters in the European Union. There are those who believe that there have been minor and relatively unimportant errors in the past, with only minimal corruption, and that the road map will be sufficient to sort this out. Then there are those who say that the systems are fundamentally flawed and that there is a culture of corruption and incompetence. Whom are we to believe? What is certain is that there is a strong basis for concern. Accounts have not been passed for 12 years. We are talking not about an isolated incident but about a steady and consistent failure. Difficult though it may be, one would have thought that, once in every 12 years, the accounts would not have been qualified. There was the Santer scandal in 1999 when the Commission, headed by Jacques Santer, resigned amid allegations of fraud, nepotism and mismanagement. There was the Eurostat scandal, when millions of euros were paid to private companies owned by Commission officials—errors which, according to Marta Andreasen, occurred in the 15 per cent of the budget that is under the direct control of the Commission as opposed to under the control of member states. Accounting faults in member states should not obscure the fact that there are similar questions over accounts produced by the Commission. There is the issue of whistleblowers. I do not believe that someone like Marta Andreasen would sacrifice her career without deeply held and sincere beliefs. The committee has come up with some valuable recommendations, among which is the requirement for the reverse cascade of signing off accounts, the requirement that Commission officials and existing audit bodies take responsibility for the systems and accounts, and the simplification of rules and regulations. None of your Lordships has mentioned this tonight, but it is a fundamental problem with the whole situation. I would have liked the committee to recommend strengthening the protection for whistleblowers. In England, there is a requirement for listed companies—those quoted on the Stock Exchange—to have a mechanism in place whereby anyone reporting misdemeanours by officers of the company, however lowly or senior the officer or whistleblower’s position might be, can do so without any fear of repercussions to the whistleblower. However, all these and the other recommendations are based on the assumption that there is a real and genuine desire for a more rigorous system of reviewing and checking accounts. There may well be such a wish but, given the mass of conflicting evidence, there may well not be. I do not know the answer, but there is a lot of smoke, so there might well be a fire. The Commission owes it to itself to address openly and transparently the claims that have been made. Perhaps it could do so through the use of outside agencies, as the noble Lords, Lord Pearson and Lord Willoughby de Broke, have suggested. If it does not, serious doubts will remain about its integrity. Unless such action is taken, claims that a culture of corruption exists will be believed. Evidence has been given that, on the whole, mistakes are irregularities and not fraud. The committee has accepted this, but how does anyone know? The money has gone but, frequently lacking a proper audit trail, no one knows where it is. It is impossible to say what is fraud and what is irregularity, as the noble Lords, Lord Giddens and Lord Willoughby de Broke, pointed out. If the integrity of the Commission is not vigorously established the assumption will increasingly be made that it is fraud. It might seem a little harsh when the committee has produced such an excellent report to introduce anything but praise, but two points are worth noting. It is a pity that such prominence is given in the report, and by the noble Lord, Lord Radice, to the statement by Sir John Bourn that he would not be able to give a clean bill of health to the United Kingdom's accounts, because 13, or 2.5 per cent, of the 500 accounts he examined are qualified. The United Kingdom's situation is not comparable to the European Union situation where somewhere between 66 per cent, if you extrapolate that figure from Commissioner Kallas’s evidence, and 90 per cent, if you look at the European Court of Auditors’ reports, have to be qualified. Of more relevance is his comment that it is very likely that listed companies—those quoted on the Stock Exchange—must, "““be audited by International Auditing Standards””." He went on to note that it is odd that standards for the private sector are not seen as appropriate for the public sector. The second regret is that the committee was unable to clarify the discrepancy between conflicting evidence presented to it. I am thinking in particular of the answer to the evidence from the noble Lord, Lord Kinnock, by Marta Andreasen which could not be included in the evidence accompanying the report. I had thought that this was because it arrived late or for some other good reason, although the noble Lord, Lord Pearson, has raised doubts about that. Mrs Andreasen’s supplementary evidence contradicts the evidence of the noble Lord, Lord Kinnock. Two simple examples have already been commented on by the noble Lord, Lord Willoughby de Broke; namely, Mrs Andreasen’s employment by the OECD and her rate of pay and ranking. These two examples are facts, which could easily have been verified, thereby adding or not to the credibility of witnesses. I urge the Minister to vigorously pursue the introduction of proper accounting systems; the enhancement of the protection of whistleblowers; the assuming of full responsibility for accounts by member states, which can be done without any surrender of sovereignty or interference from the Commission, and by the directors-general; and the improvement and proper independence and rigour of internal auditing. Whether Euro-phile or Euro-sceptic, all would agree that an institution of the size and importance of the European Union must be seen to be above reproach.