EU Accounting - Making Government Accounting look good

Marta Andreasen - August 2012

I have held the position of Chief Accounting Officer at the European Commission before becoming an MEP.  So I have direct experience of the inner workings of a supranational governmental organisation - the European Union – which make the relatively poor standards of national government accounting look good.


The European Union as an accounting entity is large but not overwhelmingly so.  For 2012 the budget for all the European institutions allows for commitment appropriations of €147.2bn and payment appropriations of € 129.1 bn. [1] To put these figures into context, the general government spend for Greece in 2011 according to Eurostat [2] was €107.8 bn.  That of Denmark was around €138.9 bn - the government spend of these two countries is closest in size to the EU budget.  Greece has a population of around 11 million and Denmark around 5.5 million, compared with a total population for the Member States of around 502.5 million.


The EU derives approximately 99% of its income from what it describes as "Own Resources" - this source of income is capped at 1.23% of Gross National Income (GNI).  The "own resources" are customs duties/sugar levies, a proportion of VAT and the GNI based own resource - essentially a direct levy on the governments of the Member States. The EU authorities are eager to replace the GNI based own resource is also one with something over which they have direct control, such as the proposed Financial Transaction Tax.


There are seven European institutions [3] of which the European Commission accounts for over 97% of the total budget, both on the commitment side and the payment side.  In theory best practice accounting should apply to these significant budgets. If one reads the current version of the Financial Regulations and Implementing Rules applicable to the general budget of the European Communities - synoptic presentation[4], the requirement for accrual accounting is clearly laid out.  Article 124 states


The financial statements shall be drawn up in accordance with the generally accepted accounting principles, namely: . . .

. . . (h) accrual-based accounting.


This clearly meets the International Public Sector Accounting Standards (IPSAS) criteria in theory.  But in practice?



Unknown beneficiaries

Consider two related events. In February 2012, the Commissioner for Financial Programming and Budget, Mr Janusz Lewandowski gave an interview to FT Deutschland. [5]   In it he warned that due to higher than expected reimbursement applications at the end of 2011, and a tighter payments budget for that year than he wished for, he was faced with a shortfall and would have to carry forward almost € 11 billion of Structural and Cohesion fund payments to be paid from the 2012 budget. And yet by April 2012 he was announcing that the overall EU payments budget for 2011 had shown a surplus of € 1.49 bn


Realising that these two pronouncements might be seen as at complete odds with one another, Commissioner Lewandowski gave this very telling explanation:


"Of course, one could find it contradictory that the 2011 budget shows a small surplus when we announced that we could not pay €11bn worth of bills that arrived last DecemberThis is mainly due to two reasons: on the one hand it is immensely difficult to shift funds from one part of the EU budget to another; on the other budgetary procedures are very slow and late sources of income cannot always be processed by the end of the budgetary year. This is also why the European Commission keeps pressing Member States and the European Parliament to agree to make the EU budget more flexible, more in line with real life. Regrettably, so far we have not been successful in achieving the flexibility that we need to react quickly to new developments. With the existing rigid rules, achieving a 1% surplus is the best possible result". [6]


If this were the case, would not have been better to announce it at the time the original shortfall was being presented rather than later, when it gives the impression of being an excuse.  One would also have expected it to be balanced by a presentation of the various underspends, by budget heading and indicative amount, even if no disbursement were possible.


Interestingly, Commissioner Lewandowski also stated that claims for some €15 bn  Structural and Cohesion funding were received in the final three weeks of 2011, a hitherto unprecedented level of claims, at least €5bn or €6bn higher than would normally be expected at year end.  He did not give any indication of which Member States the claims came from, but given that these funds are theoretically intended to benefit poorer states, some of which are having difficulty in balancing their books, it is not too difficult to work out. 


My first impression was that Commissioner Lewandowski’s department was either apathetic or genuinely lacked some basic accounting controls.  In my experience, the second is much likelier. I suspect that there has been less improvement in EU accounting than the authorities would like everyone to believe since my own experiences back in 2002.


Then I was the first qualified accountant to hold the post of Budget Execution Director and Chief Accounting Officer at the European Commission.  There was no statement of account at handover from my predecessor, who in fact continued to work elsewhere in the same institution.   I was asked to sign off on accounts prepared before I arrived.  The closing balances on these accounts differed from the opening balances of the then-current year by some € 130 million, for which no satisfactory explanation was available - I was told that they were loans which had been written off between one year and the next, but never succeeded in getting a list of the mysterious beneficiaries.


In fact there was almost no control of 90% of the expenditure - the so-called indirect payments, where money was paid to agencies in the Member States for onward transmission to the intended beneficiaries. The lack of control at the time was exacerbated by systems issues.  At the time that I took over my post, the various Directorates-General of the European Commission had their own disparate accounting systems, with varying levels of probity and security: indeed some of the systems were reliant on spreadsheets!  Although proprietary software, customized for the institution, had been purchased some five years prior to my arrival, its use had never been implemented; and although the Court of Auditors was scathing in its opinion of the existing system, nothing was actually done. Particularly worrying were the large amounts that went out as advance payments which were not clearly and centrally tracked on the systems.  For many projects proper accounting of the use of the money did not take place until well after they were concluded, sometimes a year or more after.


In fact in the policy areas of Structural, Cohesion and Research, much of the funding is in the form of pre-financing i.e. advances.  For example under the Seventh Framework Programme round of research funding, which runs from 2007 to 2013, advance payments can be up to 80% of the EU contribution.  Pre-financing also exists in other policy areas.  The main issue is that for funding under co-responsibility, accounting for the use of disbursements occurs firstly well after the event and secondly on the basis of both expenditure and outcomes as reported by the recipients and which the European Institutions have no real incentive to challenge.  In short, control, even where it is exercised, is very much post hoc, as an example later will illustrate.




The annual reports of the European Court of Auditors – the EU watchdog, supposedly independent – have never convinced me that the situation has ever experienced real improvement. But I have more recent and hands on knowledge of poor control in this area through whistleblower claims that arrive in my office.


In one case I was approached by a whistleblower in one of the Member States who had concerns that a business support scheme, partly funded by the European Regional Development Fund (ERDF) in which he had had some earlier involvement was being run fraudulently. The original lead partner of the project had run into cash-flow problems and the administration of the scheme, which was being funded through an agency in the Member State, was transferred to another partner.  In the course of events my source was made redundant, thanked for his services and let go.  He decided to keep a watchful eye on his former employers and was surprised to see that a scheme which was well behind on its targets quickly began to match and exceed them.


My source tried to alert the funding authority in the Member State.  They initially displayed some interest, but he began to suspect that the investigation was not being pursued vigorously.  It was then that he contacted my office.  Investigation on our part uncovered the fact that one of the principal actors had previously served time in prison for fraud, and had also been involved in an earlier European-funded project, which had run into difficulties.


Some of the outputs claimed by the scheme were demonstrably untrue, and the match-funding claimed was either doubtful or ineligible. (Match-funding is funding from non-EU sources to stand alongside the EU grant.  Much grant funding works on the principal of co-financing, with the EU only being allowed to fund a proportion of the works - typically in the region of 50% but it can be considerably higher in the cases of poorer Member States.  Whilst the impression is given that the EU is helping to fund the Member State's project, in fact the reverse is closer to the truth).


Eventually I understand that repayment of the grant was requested by the Member State agency in question, although the prospects of being able to recover anything were remote.  The underlying lesson is that in this as in so many other European Union interventions, there was a vested interest on both sides in ticking boxes, and on neither side in asking too many questions if the results look acceptable.



Poor Control

The European Union’s diverse system of accounting controls over spending are not unitary, but are spread out between Brussels and the Member States. There exist approximately 32 decentralised agencies within the EU.  Of these, 26 are policy agencies, three are security and defence agencies and three are judicial agencies.  They are scattered across seventeen of the twenty seven member states.  Belgium, with seven, has most followed by Spain with five and France with three.  Most countries have one or two.  The United Kingdom is host to the European Police College (CEPOL), the European Medicines Agency (EMEA) and the European Banking Agency. Additionally six executive agencies (five in Brussels and one in Luxembourg) also exist, but do not have full autonomy or decentralised status.


Of the Commission's €125.6bn payments budget for 2012, €55.9bn (44.5%) relates to the Common Agricultural Policy (CAP) - including Rural Development, €35.5bn (28.2%) relates to Regional Policy and a total of €4.6bn (3.7%) relates to Research. The CAP funds are entirely managed within the Member States, and the contributions are reclaimed from the European Union in arrears.  In its most recent published annual report, that for the Financial Year 2010[7], the European Court of Auditors estimated a "most likely error rate" of 2.3% for this policy area.


Regional funds too are largely managed in the Member States and reclaimed after the event.  Regional aid is by and large intended only to part fund projects, in partnership with funding sources within the Member States which may be cash but are often "in kind" contributions.  The policy area which includes regional funds (it also includes energy and transport) had the highest most likely error rate in 2010, at 7.7%. These error rates can be contrasted with the research budget where funding tends to bypass the Member State governments and is managed directly by the research institutions.  The most likely error rate for this area was estimated at 1.4% in 2010.


In the case of over 75% of the Commission budget, therefore, actual control is not exercised directly by the Commission but is instead shared with the Member States where in many cases financial accountability is not as strong as it should be.  Equally importantly, control in practice falls into the gaps between the EU and the Member States.



The EU Budget

There are a number of problems that can be traced to Commitment Appropriations and Payment Appropriations, or the EU budget is produced in terms of commitments, payments and non-differentiated appropriations.


Article 7 of the Financial Regulations has this to say on the topic


  1. The budget shall contain differentiated appropriations, which shall consist of commitment appropriations and payment appropriations, and non-differentiated appropriations.
  2. Commitment appropriations shall cover the total cost of the legal commitments entered into during the current financial year, subject to Articles 77(2) and 166(2).
  3. Payment appropriations shall cover payments made to honour the legal commitments entered into in the current financial year and/or earlier financial years.


Commitments are obligations entered into.  However these are not necessarily obligations in the sense that a business would think of them, in other words for accruals purposes, rather they represent rather the maximum that could be paid out over the life of a contract. [8] This distinction between commitments as the EU sees them and as a normal business sees them results in the concept of "Reste à Liquider" (meaning "remaining to be paid"), commonly referred to as RAL or the RALs.  Payments are self-explanatory.  This is the "headline" side of the budget - the part on which attention is most focussed, although it is to a large extent determined by the commitments side of things, which does not get the attention it deserves - the payment budget is to a large extent a lagging indicator.


Annual commitment and payment appropriations need to be looked at in the context of the Multi Annual Financial Framework (MFF), seven-year plans within which the annual budgets sit.  The current MFF is that for 2007 to 2013, and planning for the next one is already in progress. Non-differentiated appropriations are those areas where commitments equal payments: i.e. where the budget is for one year at a time.


A problem arises where there are unfulfilled obligations.  The budgets of institutions other than the Commission are largely undifferentiated: commitments and payments (with the help of accruals) occur within the financial year.  The administrative portion of the Commission's budget, which constitutes approximately 6% of the total is also largely undifferentiated.  That part of the budget is carefully planned and accounted for.  One could almost say it was nurtured, as people's EU careers are dependent on it.  The majority of the agricultural support budget is also undifferentiated.


It is the differentiated portion of the budget which is problematical, dealing as it does firstly with multi-year schemes and secondly with Member State administrations and other outside agencies.  Broadly speaking, in the earlier stages of a Multiannual Financial Framework few claims for reimbursement are made, but advances are often paid.  In the later stages, claims are submitted.  Obviously there is some overlap between one MFF and the next, and although there are time limits on claims they are not rigorous. For example, in the 2012 payments budget there is a line item of over € 42 million in respect of the European Social Fund 2000 - 2006 round.  It has to be said that this is a fairly small proportion of the overall budget, and in all likeliness most if not all of it will relate to claims which have been registered but frozen for one reason or another.


Amounts for which theoretical obligations have been entered into but which have not been paid (they may not be due for payment in the immediate future) are referred to as the RALs (Reste à liquider) referred to above. They are outstanding commitments. The amount of these outstanding commitments - claimed at the end of 2011 to be some €207bn  i.e. €50bn higher than expected and equivalent to 19 months payments - can in my view and experience only be caused by inaccurate and irresponsible budgeting.


The European Commission explains these budget issues in several ways;


Firstly contracts such as research contracts are signed which cover a number of years, possibly three or more, and there will be a period of grace afterwards to coordinate and submit claims, particularly where multiple actors are involved across the Member States.


Secondly there may be restrictions on the payments budget.


Thirdly there may be shrinkage of the project itself as partners withdraw; for example a key person may resign from an industrial partner in a project which can result in a de facto withdrawal of that partner from the project, or the partner may be taken over and the new owner may downsize or streamline the operation.


Finally a project may not go ahead as planned due to the shortage of match funding in the Member State, particularly if the state in question is undergoing enforced austerity.  This is increasingly an issue, and may reflect the real significance of these projects in the life of the Member States.


Out of all the excuses given by the Commission to explain the existence of this huge level of outstanding commitments only the latter can be considered as reasonable, particularly in the current critical situation.



Plus ca change…

There is no doubt that the budgeting exercises continue to be done at a rudimentary level, and meaningful communication with Members States to assess their real needs does not happen.  How can the EU understand the various needs?


Returning to the RALs, there are effectively two ways in which they are reduced.  Either payments are made or decommitments are made.  The latter are supposed to occur when it is realised that an item is not payable or is not payable in full, either because claims have exceeded their eligibility date or because for whatever reason the activity being funded has not or will not occur.


In a gesture to openness, since 2007 the European Commission has had a Financial Transparency System.  [9]  However it has limitations.  It lists grants and procurement payments, but only those made centrally.   For funds managed in the Member States, one is referred to national websites, and one finds a forest of dead links and out-of-date information. 


Centrally-held information is updated annually, but only after the accounts have been closed for the year in question, generally half way through the following year.  So when information is provided it can already be 18 months old.  The system is so unwieldy that attempts to use the filters to restrict the download to a manageable size do not seem to work, certainly when working remotely and the size of the resultant files - the 2010 data result in a spreadsheet of 26.4MB - come close to overwhelming the average computer.


Stepping aside from the pure accounting/bookkeeping viewpoint for a moment, the current crisis has shown – especially for the layman- the utter inefficiency and inaccuracy with which the EU budget is planned, spent and recorded. For example the EU has given over € 285 bn to Ireland, Greece, Portugal and Spain since the year  2000.  Where has it gone?  To what ends? At a time when the low interest rates and sense of euphoria following the introduction of the Euro were stoking up a boom, these funds added to it.  They have focused on infrastructure projects not on the basis of need, which could be determined locally, but on how they could advance the larger European project, and with little thought as to whether they were needed or how sustainable they would be when times got harder.  Projects have been managed in the Member States but funded in a large part by Brussels, and proper control has, as I have said elsewhere, fallen between the gaps. This has, to my mind, considerably exacerbated the current crisis.


A particular area of accounting interest is that of the so-called "Financial Engineering Instruments".  These were introduced around 2008 and use Cohesion and Rural Development Funds to create financial instruments within the Member States to provide loans, guarantees and equity investments with the intention of stimulating financial growth, rather than for their primary purpose as grant funding.


Unfortunately, as is so often the case, accounting questions were low down the list of considerations, and the Commission's 2010 published accounts [10] contained a prior year adjustment in respect of the 2009 accounts.  Previously monies given through the funds in question had been treated as an expense incurred entirely the year of payment.


However it was realised that this was incorrect and the accounts for 2009 were restated to show prepayment of € 2.43 bn and a corresponding reduction in expenditure.


The notes to the accounts explained that member states had not been obliged to provide periodic reports on the use of these funds, and that valuation could not be extracted directly from the bank accounts of the funds themselves.  Thus the figures used came from information requested from the Member States in early 2011, i.e. they were compiled retrospectively after the end of the financial period, rather than during it. When I raised this matter in a Written Question to the Commission[11], I was told that the actual decision to change the accounting policy was only taken in late June 2011 following on from concerns raised by the Court of Auditors.  Thus the revised information for 2009 was compiled from information provided by the Member States, well after the event.



Quis custodiet…?

It would not be right to discuss accounting issues in the European Union without mentioning audit.  The institutions are provided with internal audit functions, and there is an external audit function.  Except there isn't - external audit is provided by the Court of Auditors, which is one of the EU institutions.  The members - one per Member State - are put forward by their national governments and are political appointees.  One member, from a former Eastern Bloc country, had a previous career as a secret policeman.  The one institution which does receive a genuine external audit is the Court of Auditors itself.


Although the EU establishment would like to argue that some of these problems are now in the past, what is certain is that their repercussions are not.  For example the figures presented to support Greece's case for entry into the Euro did not receive as full a scrutiny from Eurostat as they really needed - they were taken more or less at face value.   Eurostat is a Directorate-General of the European Commission, whose purpose is to provide statistical information to the EU institutions and to promote the harmonisation of statistical methods across the member States and accession countries.


Article 317 paragraph 1 of the Treaty on the Functioning of the European Union says that the European Commission shall implement the budget "on its own responsibility, having regard to the principles of sound financial management". It adds that Member States will cooperate in this task. The Commission has its own interpretation of the latter part, and uses it to apportion blame onto Members States.


The fact is that the responsibility for control on spending seems to be borne by no one. You might be forgiven for thinking that this arrangement has been deliberately set up in order to justify the EU federal government of a unitary state along the lines of the United States.  That I fear is what is intended and I think that the process which is already in progress.  And at its heart the Project is neither democratic nor accountable.


[1]  EUR-Lex EU budgets online 


[3] These are the trio of European Commission, European Parliament and the Council/European Council.  The others are the Court of Justice, the Court of Auditors and the European Central Bank.  There also exist, without the full status of Institutions as recognised in the treaties, the following; the Economic and Social Committee, the Committee of the Regions, the European Ombudsman, the European Data Protection Supervisor and the recently-added European External Action Service.


[4] Financial Regulations and Implementing Rules applicable to the general budget of the European Communities: available for free download here


[5] Wegen Strukturhilfen: EU droht riesiges Finanzloch: FT Deutschland 07/02/2012


[6] European Commission press release 16th April 2012 at


[7] European Court of Auditors: Annual Report concerning the financial year 2010

[8] It is worth pointing out in passing that accruals accounting when I was at the Commission was almost non-existent and where it did exist, supporting data were poor.


[9]  European Commission's Financial Transparency System website

[10] Annual Accounts of the European Union - Financial year 2010