WRITTEN QUESTION E-3488/02

by Charles Tannock (PPE-DE)and Christopher Heaton-Harris (PPE-DE) to the Commission

(9 December 2002)

Subject: Fraud in the European Union and the disciplining of Marta Andreasen

Following claims by the recently-suspended Chief Accountant Marta Andreasen that the EU's accounting system is deeply flawed, the European Court of Auditors has refused for the eighth year running to certify the EU budget, admitting that it can only guarantee that five per cent of taxpayers' money is being spent properly. In addition to stating that the monies could not be controlled once they had been handed-over to Member States or dispersed in aid, the Court has also made serious criticisms of the Commission's own finances which continue to be based on out-dated and discredited cash-based accounting systems.

There are varying reports as to when the Commission intends to replace the cash-based system. In view of the criticisms of previous years, could the Commission indicate why it has taken so long to accept the need for change, and why a more modern accounting system cannot be introduced within a matter of months rather than years?

Does the Commission accept that its monitoring arrangements both for money distributed to Member States and in the form of aid outside the European Union are woefully inadequate and in need of urgent review, and, if so, does the Commission have any concrete proposals as to how the monitoring procedures might be improved?

Finally, could the Commission indicate why it felt the need to suspend Marta Andreasen, given that the Court of Auditors would appear to be in substantial agreement with her assessment of the state of the European Union's finances? What effect does the Commission believe that the decision to suspend her has had on the reputation of the Commission and on its commitment to openness and transparency? Does the Commission acknowledge the validity of her criticisms, and what plans does the Commission have to reinstate her?

Answer given by Mrs Schreyer on behalf of the Commission

(10 March 2003)

1. The Commission does not agree with the Honourable Members' statements.

The Honourable Members may know that the accounting rules for the Community budget are defined by the Financial Regulation. The former Financial Regulation which applied until recently (31 December 2002) did not forsee the obligation for accrual based accounting. It endorsed on the traditional rules of cash accounting for the public sector.

Although the Commission has proposed the introduction of accrual based accounting for the new Financial Regulation, which was adopted by the legislative authority in June 2002, the Commission does not share the judgement of the Honourable Member that cash based accounting is outdated and discredited as it is still dominant in the public sector in most countries. The Commission will maintain the traditional reporting to the budgetary authorities of the public budgets. Honourable Members regularly ask the Commission about the state of implementation of payments on different budget-lines. A cash accounting system is needed to provide this information. Furthermore the statement that the funds once transferred to the Member States or the grants paid out become uncontrollable is incorrect. There are horizontal as well as sectoral regulations defining the control obligation by Member States. In addition the Commission has various mechanisms at its disposal to recover funds unduly transferred and has informed the Parliament repeatedly about progress made in this respect(1).

2. As in other administrations where accounting system reform has been undertaken, the accounting modernisation in the Commission is a major undertaking which requires considerable time, effort, expertise and financial resources to put in place. Back in 2000, with the launching of a multi-annual plan for the modernisation of the accounting, the Commission started its steady move towards accrual-based financial statements in which several accrual-based elements have been introduced.

The multi-annual plan for the modernisation of its accounting framework comprised:

- a study on the establishment and presentation of the accounts of the Community, delivered in mid-2000 by high-level experts on public accounting;

- drawing up by June 2001 an action plan for modernisation, which was discussed with the Court of Auditors. The Court has welcomed the document's orientations;

- introducing new elements of accrual accounting in the presentation of the financial statements and calculating the economic out-turn since 2000, which, as the Court of Auditors put it, represents a step forward, which is in line with the general trend observed in the public sector at international level(2), and adopting an accounting and consolidation manual for all the Institutions;

- adopting the new Financial Regulation(3) that requires the introduction of new accrual-based accounting principles (Article 133) in order to be fully effective for the budgetary year 2005 (Article 181);

- On 24 July 2002 the Member of the Commission responsible for the budget presented a memorandum(4) to the Commission describing the wide-ranging work to modernise the accounting framework and information system;

- On 17 December 2002, the Commission adopted a new Communication(5) that developed the action plan to implement full accrual accounting by 2005.This document had two purposes:

- to adopt a detailed proposal to allow the Commission to decide on the accounting framework, in particular on how generally-accepted accrual accounting principles can be implemented;

- to set out the action to be taken as regards project organisation, resources and the timing of the work to develop an integrated computerised system. The system options are appraised in detail, with a view to identifying a preferred solution in the months to come.

Detailed development of both the accounting framework and the system is undertaken in 2003 with the relevant testing and implementation phases beginning in 2004. In particular, the issues relating to the implementation of accrual accounting principles will be examined in detail to identify the accounting treatment of each type of transaction for each different service or activity.

The Commission is not alone in moving towards the respect of generally accepted accrual accounting principles. Many developed countries are also engaged in the same process and, encouraged by international bodies and organisations such as the OECD(6) and IFAC(7), have begun to modernise their accounting systems over the past few years, switching from a cash-based to an accrual-based system.

Experience in the Member States shows that reforming public accounting systems represents a major upheaval both in terms of the introduction of new practices and in human terms, not to mention the financial resources required. IFAC Study 14, Chapter I, mentions that a transition period for accounting reforms can be short (up to 3 years), medium (4 to 6 years) or long (over 6 years). There is no instance in which accrual accounting has been, or could be, introduced within a matter of months rather than years.

3. With the exception of reservations made by the Court of Auditors in its Annual Report and by the Commission itself in its annual synthesis report on annual activity reports and declarations, the Commission considers that its arrangements for checking the use of Community appropriations by and in the Member States are broadly satisfactory. When problems and shortcomings are detected, either by it itself, or by the Court of Auditors, the Commission endeavours to take the necessary measures in order to solve them.

Major efforts have been made over the last few years to improve management and control systems, particularly in the area of shared management, both by putting in place and constantly developing the Integrated Administration and Control System (IACS) for agriculture and through reform of the Structural Funds which provides for strengthened control standards and norms. Likewise, in the field of external action, the Commission set out in detail a raft of significant measures in its Communication of 16 May 2000 on the reform of the management of external assistance(8).

However, it remains the case that the quality of management and control of Community funds is partly dependent on the efforts made by the Member States, which have considerable responsibility in this area. For this reason the Commission is continuing to put in place and implement a set of incentives and binding measures on the Member States, for both agriculture and structural measures; in the latter domain, the incentives are intended to boost coordination and promote simplification of the regulatory framework, while the binding aspect of the strengthening of the financial corrections contributes to the same objective.

The Commission's synthesis report (Synthesis of the Annual Activity Reports and declarations of the Directors-General and Heads of Service(9)) is accompanied by an action plan, providing for a series of specific actions in this area.

Several of these actions are targeted at the management of external aid, shared management of the Structural Funds, and clarification of the responsibilities of the key actors in audit and control.

Furthermore, the Commission also drew up an action plan in connection with the 2001 discharge, which it communicated to Parliament on 23 December 2002, on the basis of recommendations by the Court of Auditors in its last annual report.

4. The Honourable Members will understand that the Commission can only reply in general terms to their questions as far as they are directly related to a disciplinary procedure that is presently still in progress. This procedure is related to alleged breaches of the Staff Regulations of the European civil service.

The Commission is aware of the fact that disciplinary proceedings initiated in relation to the former accounting officer have been misinterpreted in some parts of the press and elsewhere. Reference to the past assessments of the Court of Auditors and the Commission, and to the action designed and increasingly implemented by the Commission, and to the dates of events demonstrates that any inference that there is a consequential link between the former accounting officer's claims and the Court's conclusions would be inaccurate and misleading.

Meanwhile, it should be noted that the active commitment to openness and transparency given by the Commission does not diminish the obligation of all officials to respect the rules and procedures.

(1) See for example most recently the Communication COM(2002) 671 of 3.12.2002.

(2) Court of Auditors Annual report concerning the financial year 2000 OJ C 359, 15.12.2001.

(3) Commission Regulation (EC, Euratom) No 2342/2002 of 23 December 2002 laying down detailed rules for the implementation of Council Regulation (EC, Euratom) No 1605/2002 on the Financial Regulation applicable to the general budget of the European Communities OJ L 357, 31.12.2002.

(4) SEC(2002) 853 final.

(5) COM(2002) 755 final.

(6) OECD: Organisation for Economic Co-operation and Development.

(7) IFAC: International Federation of Accountants.

(8) http://europa.eu.int/comm/external_relations/reform/document/communication_en.pdf.

(9) COM(2002) 426 final.