The European Court of Auditors (ECA) has issued its annual audit report with a statement of assurance on the 2024 EU accounts.
The report launched the European Parliament’s discharge procedure as to whether grant discharge to the Commission for its implementation of the EU budget.
The discharge procedure will take time and result in a political decision. The statement of assurance is made up of four opinions, two positive and two negative ones, which seems to play into the hands of the Commission.
As previously reported, ECA issued a clean opinion on the reliability of the 2024 EU accounts and on the legality and regularity of revenue for 2024.
In two separate opinions on the expenditure side of the budget, ECA issued an ‘adverse’ opinion on EU’s ordinary expenditure, for the sixth consecutive year, and a ‘qualified’ opinion on the Recovery and Resilience Facility (RRF), the main pillar of the EU’s pandemic recovery package.
As regards the opinion on revenue, ECA reiterates every year that it does not cover unreported revenue. The Member States are losing billions in tax revenues because of tax evasion and the illicit economy. This affects customs duties, value added tax (compliance gap) and gross national income that are used to calculate their contributions to EU’s own resources.
ECA is required under Article 287 of the Treaty on the Functioning of the European Union (TFEU) to examine the accounts of all revenue and expenditure of the Union and to provide the European Parliament and to the Council with a statement of assurance. The statement is defined as dealing with the reliability of the accounts and the legality and regularity of the underlying transactions.
The article specifies that ECA shall examine whether all revenue has been received and all expenditure incurred in a lawful and regular manner and whether the financial management has been sound. In doing so, it shall report in particular on any cases of irregularity. The examinations result in opinions which form part of the statement of assurance.
Nowhere in ECA’s report is there a consolidated statement of assurance which assesses these opinions. The impression the reader is given is that the opinions have equal weight. The Commission cherry picks the clean opinion of the EU accounts, which states that they present fairly, even in all material respects, EU’s financial position, although the opinion on the expenditure showed an error level above the materiality level.
The annual audit report was subject to a hearing in the European Parliament's Committee on Budgetary Control directly after the report had been published. Piotr Serafin, Commissioner responsible for budget, anti-fraud and public administration, blamed the high error rate on the complexity of the rules. He claimed that the Commission has set up tough requirements for next Multiannual Financial Framework (MFF).
ECA President Tony Murphy did not owe him the answer and replied that the ECA and the Commission are not looking at the same thing. The Commission is “overcooking” the disagreement about the different methodologies used to estimate the error level. This is not new, he said, ECA has always warned about the shortcomings in the audit and control system.
The spending model for the RRF will also be applied in the new MFF. “Our concerns about the RRF are real. We do not consider it to be a performance-based system,” he underlined.
Commission’s mixed response
A Commission spokesperson welcomed ECA’s annual report and “its valuable insights on the implementation of the EU budget in 2024”, especially its decision to give EU annual accounts a clean bill of health “for the 18th year in a row”. Furthermore, as in previous years, ECA did not find a significant level of error for the collection of revenue for the EU budget.
The spokesperson did also refer to the negative opinions on the expenditure. “The Commission and Member States deploy substantial efforts to detect and correct errors even after the payment was made, and to recover unduly spent amounts. The Commission remains committed to further improve its management and control systems, taking into account the recommendations made by the ECA.”
According to the Commission, in most cases the errors are corrected and recovered.
“Overall, both institutions share similar conclusions on where the risk of error for the EU budget is the highest. They agree that most irregularities are due to complex spending rules. Spending areas with complex rules are generally those where payments are based on costs incurred and declared by beneficiaries. However, the Commission and the ECA have different roles and methodologies.”
The Commission does not trust ECA’s estimate of the error level, which it says is essentially based on extrapolation of errors found in a statistically representative sample of around 800 transactions from the payments made across the entire EU budget. That in contrast to the Commission’s estimate which is based on “hundreds of thousands of controls done at EU and national levels”.
ECA’s non-consolidated statement
An ECA spokesperson told The Brussels Times that the reason as to why the statement of assurance has four opinions which cannot be consolidated is because they cover different aspects. He assured that the standards used in the separate opinions are aligned with private sector accounting and auditing standards.
“The opinion on the accounts states whether they give a true and fair view of the amounts recorded in the financial year 2024. It is a financial audit which assesses whether the accounting was properly done. The criteria for audit are the International Public Sector Accounting Standards (IPSAS). Our work for this opinion does not consider whether the expenditure was used in accordance with the EU rules.”
In the private sector, a financial audit statement must disclose material errors if they affect the bottom line or could affect the decision making of the shareholders in the company. According to the spokesperson, ECA follows the same standards as other state audit institutions but he doubted that other institutions also calculate error rates.
Brian Gray, a former Director-General and head of the internal audit (IAS) at the European Commission, set up the Financial Transparency system around 2007. Asked about ECA’s statement of assurance, he replied that nowhere in the private sector is there a practice of giving a second assurance on the underlying transactions. But it did not surprise him because it has been practice for many years.
“Most errors concern failures to respect the conditions of the selected payments. In cohesion funds, most grants are subject to a range of conditions, so it is easy for the most well-intentioned beneficiary to fail to respect one or the other. The Commission should be judged on its effectiveness in keeping errors to a minimum, while applying cost-benefit criteria to its control systems. ECA does not help us to form an opinion on this.”
