EU Accounting - Making Government Accounting look good
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.
To put these figures into context, the general government spend for Greece in
2011 according to Eurostat
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
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,
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?
Consider two related events.
In February 2012, the Commissioner for Financial Programming and Budget, Mr
Janusz Lewandowski gave an interview to FT Deutschland.
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 December.
This 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".
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
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).
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
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,
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
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
Article 7 of the Financial
Regulations has this to say on the topic
budget shall contain differentiated appropriations, which shall consist of
commitment appropriations and payment appropriations, and non-differentiated
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).
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.
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
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
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.
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.
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
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
Unfortunately, as is so
often the case, accounting questions were low down the list of considerations,
and the Commission's 2010 published accounts
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,
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.
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
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.
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.
Strukturhilfen: EU droht riesiges Finanzloch: FT Deutschland 07/02/2012
Court of Auditors: Annual Report concerning the financial year 2010
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
Financial Transparency System website
Accounts of the European Union - Financial year 2010