By Jon Danzig
It’s that time of year again when the European Union budget is subject to scrutiny. Every year the budget is audited by the independent European Court of Auditors. Every year for the past seven years the Auditors have signed off the accounts as being reliable and accurate. And every year, British media have claimed that the EU accounts haven’t been passed by the auditors at all.
“EU auditors refuse to sign off more than £100billion of its own spending”, boldly asserted The Telegraph. Claimed the Daily Express, “Yet again the EU auditors refuse to sign off budget.” CityAM concurred and reported, “The European Court of Auditors (ECA) declined this week to sign off the accounts for the twentieth year running.”
Interviewing European Commission spokesman, Jakub Adamowicz, Mr Humphrys broadcast, “The trouble is that people are terribly sceptical about any figures that come out of Brussels, aren’t they? Because you’ve never yet been able to balance your books in the European Union and the Commission, and we all kind of think, well, they make it all up as they go along, really, and they just keep asking for more.”
Mr Adamowicz, spokesman for budget, transport and regional policy, replied, “We are working with very good accounting standards with a lot of transparency,” but Mr Humphrys interjected, “So why can’t you balance your books then, you never have!” Even though Mr Adamowicz responded, “Oh we are, we are!” Mr Humphrys went on to proclaim, “But the fact is that the auditors have never, as far as I can recall, correct me if I’m wrong, actually signed off the books and said ‘yep, fair enough, that’s accurate’. They won’t do it!”
Mr Admowicz rebutted, “Oh they have just done so this week, signing off, saying that the accounting standards are good and…” The sentence wasn’t finished as Mr Humphrys interrupted, “But they haven’t signed off the accounts have they? That’s the point, they didn’t do it last year, they didn’t do it the year before, they didn’t do it the year before; I mean they don’t do it!”
So who’s correct? The strident headlines of some British newspapers, echoed by the reassuring dulcet tones of John Humphrys? Or the Polish EU commission spokesman who could hardly get a word in?
The fact is that, contrary to the convincing assertions by some UK media, the EU accounts have been passed by the independent auditors every year since 2007 as accurate, legal, regular and reliable. Furthermore, the EU has no debt or borrowings and the books are always balanced every year. (From 1994 to 2004, the EU budget was subject to cash-based accounting. Improved accruals-based accounting was introduced in 2005. The European Court of Auditors gave qualified approval to accounts until 2006, and unqualified approval - 'clean' opinion - since 2007.)
It’s true that the auditors strongly criticised EU expenditure for having 4.7% of errors – these were essentially administrative mistakes, and specifically not fraud – but then, all government accounts across the world have a percentage of managerial errors. For example, in some recent years, the US government accounts had error rates higher than 5% - worse than the EU. In the UK, some government department budgets have error rates bigger than the EU budget. For example, according to the National Audit Office, Housing Benefit fraud and error has increased to 5.8%.
Since 2006, EU budgets have suffered from an annual ‘error rate’ ranging from 3.3% to 7.3%. Anything above 2% is categorised as ‘material error’. The Auditors, however, commended the European Commission for making strenuous efforts in trying to reduce the error rate to 2% or below.
Almost all of the errors didn’t take place in Brussels at all, but by EU member states at national government level.
In his statement about the audit to the European Parliament this week, the Court of Auditors President, Vítor Manuel da Silva Caldeira, pointed out that the only area of EU expenditure not affected by material error was the EU’s spending on its own administration. This actually shows that the European Commission has tight control on its internal finances. The problems occur when the money leaves Brussels for spending by member states – and that’s actually how 94% of all EU money is used, in EU countries on policies and programmes for the benefit of EU citizens. National governments have primary responsibility for managing and controlling 80% of all EU funds. That’s why Mr da Silva Caldeira called on all EU member states – which includes the UK government of course – to play their part in helping to prevent errors. He also called for the EU budget to be more focused on performance than expenditure.
As for fraud, this affects an estimated 0.2% of the EU budget – modest by international standards, and much better than many British government department budgets.
The EU's audit processes are more robust than those of the UK Government. It was Audit General Sir John Bourn who stated that if the European Court of Auditors standards had applied to the British government’s accounts, he could not have signed off those accounts in total, because he had to give an adverse opinion on 13 of the UK government’s budgets.
If some of the British media were subject to an audit of their reporting of the EU accounts, by my reckoning their error rate wouldn’t be less than 5%, but closer to 100%. So why do they report that the EU accounts haven’t been signed off when clearly they have been? Why do they report that the EU accounts haven’t been balanced, when they are balanced every year? It’s hard to know why: is this a dark anti-EU agenda that pervades much of our media? Or is it simply a misunderstanding of the way the EU accounts and audit work? Either way, it’s not good for democracy or edifying debate, which depend on accurate reporting and information.
This week the European Commission representation in London told me, “The statement that the EU accounts have not been signed off by auditors for X years is a myth – one which we have exposed many times. The opening remark by John Humphrys – that the EU has not balanced its books – shows one of the reasons why this myth perpetuates: journalists assume the EU budget works like the budget of a national member state, which it doesn’t. Unlike national accounts, the EU budget cannot generate debt or be in deficit. It is balanced, each and every year.”
The Commission also pointed out that often the errors are first detected by their own internal audits, something which the Court of Auditors has acknowledged. The Commission also stated that they undertake financial corrections which brings the average error rate down to below 2%, and commented, “Although the Court does not take full account of corrections in its calculation, they do indicate sound financial management.”
The European Court of Auditors (ECA) told me in an emailed list of clarifications this week, “It is a frequent misunderstanding that the ECA did not approve or sign off the EU accounts.” In response to the Daily Telegraph and other UK media that claimed the EU accounts had not been given the “all clear” for 19 years, the Court confirmed, “The ECA has signed off the 2013 accounts as reliable (given a ‘clean opinion’), as it has for every financial year since 2007.”
The ECA further explained, “The ECA concludes that the 2013 accounts present fairly, in all material respects, the financial position of the EU and its results for the year. As well as the opinion on the accounts, the ECA is also required to give an opinion – based on its audit testing – on whether the underlying payments were made in accordance with EU rules. For 2013, the estimated level of error in these transactions was again too high at 4.7% for the ECA to give a clean opinion on the regularity of expenditure.”
But – and it really is a big but – the ECA made the point that the blame mostly rests with member states who made incorrect claims for EU funding in the first place. “The ECA concluded that for a large proportion of the errors found, national authorities had sufficient information available to have detected and corrected many of them before claiming reimbursement from the Commission. This could have significantly reduced the error rate.”
As to how British media could have got their reporting so wrong, the ECA press office commented, “In the past, some commentators have multiplied the total EU budget by the error rate and came up with a total for ‘money wasted’. This approach is simplistic and can be misleading. The £109 billion refers to the spending areas for which our audit work shows a material error rate. This is correct but vastly overstates the impact of those errors: 4.7% of the budget as a whole.”
So in summary, these are the facts:
• The EU budget is always balanced, so there is no debt or deficit.
• The independent European Court of Auditors have signed off the European Commission accounts every year for the entire 2007-2013 accounting period.
• The Auditors reported that the Commission’s accounts were accurate, legal, regular and reliable.
• For 2013, EU Budgetary spending totalled €148.5 billion representing about 1% of the 28 EU members GDP. (By contrast, the budgets of EU countries represent 49% of GDP on average.)
• The Auditors found that EU revenue was free of ‘material error’.
• The Auditors criticised the error rate of 4.7% of the EU's 2013 expenditure. But this 'error rate' is not fraud; it relates to expenditure not strictly applied according to EU regulations. Most errors took place at national level by EU member states rather than in Brussels. The goal of the EU is to have an error rate of no more than 2%.
• The EU states that it "claws back" undue payments from the project or country at fault. This can bring the average error rate to below 2%.
• Over 95% of all EU expenditure is in line with the rules.
• 94% of the EU budget is actually spent in EU countries on policies and programmes that benefit citizens directly.
• The EU budget has to be democratically approved by the European Parliament and agreed by the European Council, which comprises the democratically elected heads of member states.