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EU: Budget

Volume 686: debated on Tuesday 31 October 2006

asked Her Majesty’s Government:

What action they will take following the European Court of Auditors’ report on the implementation of the European Union’s budget for the 2005 financial year.

My Lords, the Government were disappointed that the ECA report on the 2005 EC budget was again unable to provide a positive statement of assurance on the majority of expenditure. We are considering with the National Audit Office how member states and the European Commission might better manage EU funds at the national level and so provide the ECA with the assurances that it seeks. We also look forward to the recommendation of your Lordships’ European scrutiny committee inquiry into the management and audit of EC expenditure and accounts.

My Lords, the Minister said that the Government were disappointed, but were they not appalled at the evident waste, not to mention fraud, in the Commission’s spending, with, for example, payments on non-existent farm animals and material errors in over two-thirds of structural funds? Will the Government now concede that the climb-down last December, which resulted in our pouring more good money into a wholly unreformed EU budget, was the wrong result for UK taxpayers?

My Lords, I do not agree with the noble Baroness’s latter point; I do not think that she seriously expects me to. We are not complacent about the issue. Important steps need to be taken so that assurance can be forthcoming in due course. The target date for the European Commission is for a statement of assurance to be positive by 2009—still too far in the future. Developments have taken place recently—for example, the new accrual accounting system, the integrated internal control framework and the single audit concept—but there is still more to be done. Although I do not have time to deal with the issue now, the suggestion that 65 per cent, or two-thirds, of expenditure is subject to material error needs to be seen in the context of the criteria used for materiality.

My Lords, how long has this appalling situation lasted? Would it be accepted in any company in any major land?

My Lords, it has lasted since 1994, I believe. We need to understand exactly what the process is. The assurance considers two things. The first is whether the financial statements of the Commission fairly reflect its financial position. By and large, that assurance has been forthcoming. The difficulty has been with the legality and regularity of the underlying transactions and the process—which, I suggest, is not an integral part of most company audits. Here, the materiality concept is important because the Commission considers samples of expenditure, and, if the error rate is 0.5 to 2 per cent, the whole expenditure is counted as not approved. We need to understand how that judgment is made.

My Lords, does my noble friend agree that the two examples given by the noble Baroness were thoroughly bad ones? Agriculture and the structural funds are two of the large areas of expenditure in the European budget dispensed through the member states. If we are to get that correctness in the statement of assurance, much greater responsibility lies with the member states, which are responsible for 80 per cent of the disbursement of the European budget. We ought to be pointing the finger at where the responsibility lies, not just using the European Union as an alibi for our prejudices whenever it is mentioned.

My Lords, my noble friend is absolutely right, which is why the UK is working with Denmark and the Netherlands to provide better assurance for funds at member level. There have been developments. For example, Wales entered into the first contract of confidence with the Commission, which concerned improving the internal control systems and having those approved in advance, an audit strategy agreed for the whole period and an annual report of the implementation strategy. My noble friend is right: member states are responsible for the bulk of the expenditure, and it is there that most of the problems lie.

My Lords, is the noble Lord aware that Sir John Bourne, head of the National Audit Office, said last week that if he had to apply the same system as does the Court of Auditors, he would have had to qualify all aspects of UK Government expenditure? Will the Minister urge the UK presidency to bring the Commission and the auditors together so that they can deal with that methodology to give us a better picture of where the remaining problems lie?

My Lords, the Government are discussing with the National Audit Office the proposal for an audit of a single EU account, although that may not be the precise mechanism adopted. This is about ensuring that the systems that operate at member-state level are an integral part of the overall systems that the Commission seeks to apply. They are important matters, and the Government are addressing them. The Wales example that I cited earlier is one approach to tackling that problem.

My Lords, is not the Commission’s excuse for this deplorable state of affairs that, in a community of 25 countries with different accounting systems and different levels of transparency and honesty, it is impossible to account accurately for such vast expenditure? Instead of trying the impossible, why does the Commission not stop or try to limit the spending? For example, what is the point of the EU rather than the Spanish paying for Segovia cathedral to be done up?

My Lords, there is a process for setting the budget; I am sure that the noble Lord is aware of it. It is important that part of the new financial framework that was put in place as a result of pressure from the UK Government in particular covers new standards of financial accountability, objective setting and evaluation of budgets with SMART targets. That goes part of the way so that we can secure a positive assurance in future years.