Labour Euro-Safeguards Campaign - Bulletin September 2006


QUESTIONS AND ANSWERS ON EU ACCOUNTS

  1. Why does Britain have a particular problem with EU accounting?

    All Member States ought to have an interest in ensuring that EU accounting is of a high standard but the reality is that some have a much greater interest than others. There are two main reasons why Britain should be particularly concerned if EU budget and money management is poor. The first is that standards of accounting for public money are much lower in many EU countries than they are in the UK, thus leaving us in a position where much of the money we pay to the EU is used a great deal less effectively than it would be if it had been disbursed by our own government. The value for money secured by all we pay to the EU - our gross contribution - is inevitably going to be much lower if large sums are either misappropriated or not accounted for at all. The second is that we are huge net contributors to the EU budget and its other institutions. Furthermore the amounts of money involved are set to rise fast to much higher levels. Our gross contribution to the EU Budget alone in 2006 is projected to be £13bn with probably around another £2bn paid to other EU institutions. By 2013 our net contribution to the Budget is expected to be £12bn, with large additional sums paid elsewhere to the EU, involving a gross contribution which may well be rising to £20bn per annum. Britain therefore has a massive interest in seeing that EU accounting is operated to a high standard. Unfortunately, the reality shows a huge gap between what ought to be the position and what the situation actually is.

  2. What is the scale of the problem with EU accounting?

    The scale of the problems with EU accounting is almost unbelievable. No audited accounts have been signed off for the last eleven years. This entails a dereliction of duty by the EU Commission which would put the director of any company in Britain in line for heavy penalties and at risk of being put in gaol. It would be completely unacceptable for even the smallest voluntary organisation. It is well known that as much as 5% of EU expenditure - around Ä5bn - is lost to fraud while another 5% cannot be accounted for. It is less well known that the EU Court of Auditors itself admits that up to 80%, and perhaps as much as 95% of all EU spending is not subject to proper audit, only administrative expenses, representing 5% of the total, being fully covered. All the rest is disbursed in ways which characteristically leave no clear accountability between the Commission, the Member States and the bodies which are supposed to be responsible for spending very large sums of public money. When funds go astray, each of them blames the other and there is no single authority able to hold anyone to account. The scale on which these problems are to be found is huge, made worse because there is also little incentive to obtain good value for money, with thorough project evaluation both before and after expenditure being all too rare. The EU has a vast number of bank accounts - 662 in 45 different countries at one recent count - and many of these are operated in ways which are wide open to fraud as well as to less flagrant forms of abuse. Money is paid into them by the EU which can then be drawn down by the recipients with no clear paper trail to account for where it goes. It is then not clear whether the EU Court of Auditors has responsibility for how the funds are spent or whether this is entirely a matter for the Member States, whose standards of probity themselves vary widely. There are thus no clear lines of accountability and no effective sanctions against widespread abuse.

  3. Why is there no effective control over EU expenditure?

    How can it be that mismanagement on this scale can be allowed to continue? The fundamental reason is that the current state of affairs suits large numbers of people in the EU, who do not therefore want it to be changed. It allows those in positions of power large measures of discretion and patronage, shading into opportunity for outright fraud which is unlikely to be detected or penalised even if it is discovered. There is thus no effective pressure to change the institutional arrangements currently in place, however ineffective they are. Each of the EU's directorates, for example, has its own accounting function and is effectively responsible for its own auditing, without any outside challenge. Instead of having regulatory bodies with independent power, which is clearly what is required, both the Court of Auditors and OLAF, the body supposed to be responsible for dealing with fraud, are responsible to the Commission. The EU Court of Auditors, most of whose members are placemen and women with little appropriate accounting experience, have thus no ability to force through change and to insist on higher standards. Meanwhile OLAF is recognised by everyone as being a totally ineffective organisation. It has failed to secure a single conviction in the seven years of its existence despite the fact that huge numbers of cases of fraud have been referred to it - 9,400 in 2004 alone. There is little doubt that part of the problem lies in the EUís own financial regulations which determine that it is not deemed cost effective even to try to recover any misappropriated sum of less than Ä1m, a loophole which is an open invitation to abuse. Meanwhile, OLAF relies largely on Member States to deal with investigations where all is not thought to be well and to pursue prosecutions and recovery of funds. Member States, in turn, may turn a blind eye or do little to press matters to a conclusion on the grounds that the money going astray is not theirs and it is therefore someone elseís responsibility to take action. In these circumstances, all to often nothing is done to remedy abuses.

  4. What happens to those who do try to get changes made?

    While the Commission as a whole has a lamentably bad record at tackling the problems of financial accountability in the EU, this has not been true of all its employees. A few brave and determined people, such as Bernard Connolly, Paul van Buitenen and Marta Andreasen, have made serious efforts to bring abuses to light and to try to get something done about them. In each case, the EU bureaucracy and the Commissioners in charge of them, who ought to have welcomed their public spiritedness and offered their support to root out the abuses they exposed, instead turned on them with a viciousness which left their careers disrupted, their personal finances heavily disadvantaged and their private lives subject to immense strain. Hardly surprisingly, in these circumstances, the number of people who are willing to come forward to shed light on the ways in which EU funds are not properly accounted for is very limited. The consequence is that there is a culture where abuses are tolerated and accepted, where probity is at a discount and where honesty and high standards of public service do little for career advancement.

  5. In what sorts of ways are abuses to EU accounting systems perpetrated?

    How do Commission officials manage to keep the EUís accounts in such disorder? The answer is that a number of the basic rules of accounting are regularly disregarded, making it impossible to keep track of how funds are disbursed and balances accounted for. A well used procedure is to make retrospective adjustments to accounts, allowing large sums to be written off, frequently with no explanation as to why this has been done. Ä750m worth of sundry debtors, for example, simply disappeared in the accounts between 2002 and 2003, of which Ä663m were cash advances to ďfinancial intermediariesĒ. Another practice is to make provisions for expenditure which may be required in future and then to write them back, without adequately accounting for the surpluses thus created. This is not difficult to do in an accounting environment where advances can be treated as expenditure and loans written off because no recovery action is being taken. A third is to account twice for the same expenditures, a process which has been particularly rife in dealing with EU pension liabilities. Until recently, there were no security controls, so that there was no way of tracing how changes to records had come about. None of these procedures would be allowed in any organisation audited to modern international standards. One of the important consequences of allowing these sorts of abuses to occur is that, against all its own rules, the EU has accumulated very large cash balances - recently estimated at some Ä21bn, which is more than 20% of the EUís entire annual expenditure. The EUís failure to spend a significant proportion of the money it raises at all - let alone on the projects for which it was originally intended - incidentally raises important questions as to whether the increases in EU cash calls on its Member States are justifiable, even in the EUís own terms.

  6. Is anything being done to secure improvements?

    Faced with these problems, have any steps been taken to try to overcome them? Despite the well know deficiencies of EU accounting, very little has been done to improve matters. For many years, the EU did not even operate a double entry book keeping system. Attempts were made to get one introduced at the end of 2004 but the opening balances which were used were so incomplete and inaccurate that little increase in accountability was achieved. Procedures were put in place to increase the traceability of changes to accounting data but as there was no public disclosure, they did little to increase responsibility or transparency. The EU's accounts have still not been signed off. The Court of Auditors simply does not have the power to enforce the auditing standards that are required to stop the current level of abuse. The European Parliament, which might be expected to play an important role in curbing poor management of the EUís finances, is in no position to lecture other people about probity. The scandal of MEP expense accounts scams, which still continues, exemplifies the extent to which MEPs are caught up in the same culture of lax accountability for funds which plagues the EU Commission. This is not to say that there are not people at all political and administrative levels who are aware of the low standards in EU accounting and would like to have them changed. The problem is that there are not enough of them and the overall culture makes it exceptionally difficult for them to press effectively for real improvements.

  7. What can Britain do about this situation?

    Unfortunately, on its own, there is little that Britain can do to remedy these problems. The recent British Presidency, during the second half of 2005, was supposed to have seen some of the abuses tackled, but to no noticeable effect. The problems are endemic to the undemocratic structure of the EU, which leaves no effective way for those in control to be brought to book. Nor is the situation likely to be improved by the accession of East European countries with low levels of public probity and a huge hunger for EU subsidies. Various proposals have been suggested for Britain to withhold funds until EU accounting abuses are tackled but it is unlikely that such a strategy would be effective. In the meantime, Britainís net contribution to the EU is set to double over the next seven years. If during this period, the low standards of accounting and accountability within the EU continue to prevail - and there is little sign that there will be any radical changes leading to improvements - are the British people really going to put up with it? As the pressure on public funds in the UK tighten, as seems very likely to happen over the coming years, is the electorate going to watch with equanimity, larger and larger sums of the money they pay in taxes disappearing into a black hole of waste, misappropriation and lack of accountability?

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