Inaction In Action: The Court of Auditors, European Commissioners, and the Problem of Financial Mismanagement

Citing concerns regarding “errors of legality and regularity” regarding the accountability of community funds, the European Court of Auditors refused to sign off on the E.U. budget for the 11 th consecutive year. Over the past decade, the Court has repeatedly uncovered examples of poor accounting practices among member states and has recently suggested that the underlying cause of these errors is a lack of proper implementation and administration of the Integrated Administration and Control System (IACS) at the national level. While there is some validity to these assertions, the problem is a multi-faceted one and it would be remiss to assume that fault rests exclusively with actions of the member states. The prevailing problems stem not only from the fiscal mismanagement of the various member states but from the IACS, the Court's inability to properly measure mismanagement and from the actions of the Commission itself.

IACS

To understand such a contention, it is first necessary to understand what the IACS is and how it is supposed to work. Time constraints prevent me from offering a comprehensive synopsis of the system and as such I will cover only the primary components. The IACS is comprised of 5 key elements which when implemented properly, will purportedly curb the misuse of structural funds.

The first of these components consists of a computerized database whose primary function is to record data for each (land) holding. The database is seen as essential for payment processing, crosschecking, the application of sanctions and management in general. It can be decentralized however it is necessary for member states to use compatible systems and the reality is that multiple systems are often used depending on the structure of the member state (1).

The second component of the IACS is comprised of a land parcel identification system. Functions of this component include payment processing, checking claimed areas, checking for duplicate claims for the same parcels and carrying out on the spot inspections. One of the primary shortcomings of the parcel identification system is that it does not require information regarding land usage and the lack of such information opens the door for fraudulent claims.

The third focuses on animal identification and registration via herd registers and ear tagging. It further adds requirements for the computer database and the issuance of animal passports. According to the Court, this facet is necessary for checking the eligibility of animals claimed, checking for duplicate claims, and the verification of ownership.

The fourth component concerns applications for aid. The system stipulates one application per farmer while allowing for several animal premium applications. Applications are deemed to be essential for the provision of basic information on the areas or animals claimed.

The final element of the system is the integrated control system whose functions are to perform cross-checks between farmers and land/animal claims, to verify the eligibility of claimed areas (surface size of parcels, age of animals, etc.) and to instill checks to avoid overpayment.

While there are a number of issues with the IACS, the most glaring problems are tied to incompatibility amongst databases and the use of multiple systems. The potential for error due to incompatibility raises serious concerns regarding the effectiveness of the database. The problems are exacerbated when animal registration and identification is tied to these structures. Furthermore, it is imperative that the Court requires claimants to provide information regarding land usage. Intuition dictates that both a uniform database system and a comprehensive knowledge of applicants are necessary precursors to the reduction of fraudulent claims.

Issues of Measurement

Other issues correlated with the Court lie in their inability to accurately measure fraudulent transactions. The annual report put forth by the Court is laden with statements which testify to the aforementioned assertion.

· Currently the IACS only accounts for approximately 63 percent of the Common Agricultural Policy budget. According to the Court, CAP expenditures amounting to roughly EUR 43.6 billion have been ‘materially affected by errors.' Looking at these numbers one can assume that there are still some EUR 70 billion worth of expenditures that have not been properly accounted for.

· Regarding the reliability of the accounts, the Court report notes that ‘in the absence of effective internal control procedures for miscellaneous revenue and advances, the Court cannot be certain that the transactions relating to the sundry debtors item have been correctly and completely recorded. (2)'

· In respect to sundry debtors, the report contends ‘the recording of sundry debtors continues to pose problems' while later adding ‘..in the absence of a suitable accounting system, the Court is unable to give assurance as to the accuracy and completeness of the amounts entered as held by financial intermediaries.'

· In regard to internal policies the Court found that despite progress in some areas, there exists a number of weaknesses in regard to supervisory and control systems as well as errors in transactions at the beneficiary level. It contends that such errors will continue unless the legal framework is changed in a manner that simplifies cost reimbursement systems and clarifies procedures governing the different programs.

While it is undoubtedly an onerous affair to measure such a large number of transactions, it is crucial that the Court be able to accurately monitor all financial transfers. By neglecting to reform its own system in lieu of a legislative overhaul, the Court is failing to effectively fulfill its function and consequently doing a disservice to the tax-paying citizens of the E.U.

Problems concerning the Commission

As previously mentioned, the Court is not sole at fault. It is necessary for member states to hold themselves accountable and ensure that community funds are properly spent. At a recent meeting of finance ministers, current president Gordon Brown of the United Kingdom rejected a request by the Commission that required finance ministers of member states to personally sign off on their country's spending. Such irresponsible behavior by leading members of the Commission not only contributes to the problem but also sets a poor example for both newer members and current candidates. It is absolutely essential that those member states that have more experience behave in a fiscally ethical manner and unfortunately this has not been the case in recent years.

For example, in 1999, former French prime minister and European Commissioner Edith Cresson was under investigation for misappropriation of E.U. funds after she hired Rene Berthelot as a consultant. In total Berthelot received payments of approximately BEF 5.5 million despite the fact that his qualifications did not correspond to the various posts to which he was assigned (3). In the same year, allegations of fraud and mismanagement led to the resignation of European Commission President Jacques Santer and 19 other Commissioners.

The pervasiveness of this financial mismanagement can be seen in the 1 st Report on Allegations Regarding Fraud, Mismanagement and Nepotism in the European Commission where, in the concluding remarks the report states: ‘Undoubted instances of fraud and corruption in the Commission have passed unnoticed at the level of the Commissioners themselves.'

Conclusion

In sum, the irregularities mentioned by the Court as the reason for failing to sign off on the E.U. budget are the function of a variety of shortcomings. Of these shortcomings, the most predominant is concerned with the effectiveness of the database. Although the Court places the blame squarely on the member states and their failure to properly implement the system, one can easily see that the root of the mismanagement problem runs much deeper. The very fact that the Court has failed to sign off on the budget for such a lengthy period of time leads to questions surrounding its' ability to curb the misuse of E.U. funds. This is further evidenced by the British member of the Court, David Bostock, who suggested that the IACS had reduced the risk of error for most E.U. agricultural expenditures to an acceptable level. There is undoubtedly a need for very serious reform when EUR 43.6 billion of CAP expenditures which have been marked as ‘materially affected by errors' constitute an acceptable level.

Even more disturbing is the lack of accountability and responsibility by Commissioners at a national level. Allegations of fraud at the highest level of the Commission speak to the pervasiveness of the problem while the failure to sign off on their own countries spending suggests that Commissioners are not willing to seriously address the problem. One cannot expect ethical behavior at lower levels of the E.U. when the highest-ranking members are engaged in corruption and neglect to take responsibility for their own unethical conduct. This is perhaps best summarized by a comment in the 1 st Report on Allegations Regarding Fraud, Mismanagement, and Nepotism which states: ‘Protestations of ignorance on the part of Commissioners concerning problems that were often common knowledge in their services, even up to the highest official levels, are tantamount to an admission of a loss of control by political authorities over the Administration that they are supposedly running. This loss of control implies at the outset a heavy responsibility for both the Commissioners individually and the Commission as a whole.'

Still, there are a number of questions which remain unanswered. Who are the primary actors responsible for these losses? Can we assume that member states who receive more funding are more likely to lose money in the bureaucratic shuffle? If this is a rational line of thinking then the two largest recipients, Germany and France, would responsible for the greatest portion of mismanaged funds. (4) Why is the European public not outraged at the fact that such massive amounts of money are being wasted and what can be done to draw greater attention to the problem? Until the Court of Auditors makes a concerted effort to engage in serious and comprehensive reform and until members of the Commission make a resolute attempt to rectify this problem, tax-paying citizens of E.U. member states will continue to lose their money to self-serving con artists and negligent bureaucrats.

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(1) 3 rd EUROSAI Training Event – Evaluation of Internal Control Systems. Prague, Czech Republic-2003.

www.nku.cz/seminars/Prague_2003/m8.ppt

(2) European Court of Auditors – 2004 Annual Report.

(3) 1st Report on Allegations regarding Fraud, Mismanagement, and Nepotism in the European Commission- March, 1999.

(4) 3 rd EUROSAI Training Event – Evaluation of Internal Control Systems. Prague, Czech Republic-2003.

www.nku.cz/seminars/Prague_2003/m8.ppt