ACCOUNTABILITY REQUIRES A FULL AUDIT TRAIL FOR ALL EU EXPENDITURE
Interview with Jan Gregor, ECA Member and Dean of Financing and Administering the Union Audit Chamber
Working as an ECA Member since 2016, Jan Gregor has been the reporting Member for various special reports and for the annual report on performance the ECA published for a few years. As Dean of the ‘Financing and Administrating the Union Audit’ Chamber, he is currently the Member responsible for coordinating the tasks related to the ECA’s main report, the annual report, which serves as key input for the European Parliament’s annual discharge procedure. In this interview, he highlights how the Commission should lead by example when it comes to accountability, not only when defining accountability conditions for member states, but also for its own actions.
By Gaston Moonen
Basic accountability principles should apply to all EU initiatives, including emergency instruments
Having worked in the Czech Ministry of Finance, including as Deputy Minister of Finance, Mr Gregor has not only been held accountable as an executive, but was also responsible for introducing accountability arrangements into the Czech public sector. ‘In 2004, my main task was to ensure compliance with the EU Financial Regulation and the sector rules in cohesion policy and agriculture. We had to adjust our legal framework, our financial management and control framework, and introduce the internal audit function, which I established within our organisation as the first one in the Czech Republic.’ He believes the accession process was also useful as a way of promoting the principles of sound financial management. ‘What was guiding here is to have full audit rights. This is what we had been hearing from the European Commission at that time, from peer reviewers and from SIGMA1. Furthermore, we needed a full audit trail for all related actions. I recall that we felt that what was required from us was quite tough in comparison to what some of the “older” member states were doing.’
Mr Gregor refers to the ECA’s strategic goal of being at the forefront of public audit. ‘Our audits often focus on EU governance, accountability and transparency arrangements. Within our audits and reviews, we have identified numerous accountability and audit gaps within the EU’s legal and institutional framework.’ For him, a recent and important example is special report 07/2023, relating to the Recovery and Resilience Facility (RRF). ‘We identified major assurance gaps at the level of the Commission.
And I come back to this existence of an audit trail which I find somehow missing in the RRF. The funding cannot be traced from the very top to the bottom. This is my major concern for the RRF and this should not continue in the next multiannual financial framework — the MFF. The Commission implements the RRF by direct management, meaning it has full responsibility. However, the Commission delegated even more responsibilities to member states than in the EU shared management arrangements. In my view, the Commission should remain fully responsible for this EU expenditure.’
…of an audit trail which I find somehow missing in the RRF. The funding cannot be traced from the very top to the bottom.
Mr Gregor expects that, in the next MFF, the ECA will be duly consulted about the design of future delivery mechanisms, as it has been in the past. ‘Before the Commission starts designing, we have a role to play to explain the accountability principles and our relevant audit findings. I believe there needs to be a distinction made between the normal funding systems and emergency instruments. The RRF was an emergency instrument but interfered with existing funding systems.’ He observes there should be a proper structure in relation to the EU budget. ‘For each spending area there should be one continuous funding system. This should avoid double funding, overlaps between the programmes, administrative burden, and limited transparency.’ He reiterates that a key principle should be that all funding be traceable all the way from the EU budget down to the final recipients, or even end users. ‘A full audit trail, which always was the major principle, until the Commission itself departed from this guiding principle through the RRF.’
For Mr Gregor, there is no convincing argument for the set-up of the RRF. ‘The ECA has made various recommendations on how to promote performance-based financing. But we were always thinking in terms of performance-based financing at the level of individual projects, not at top level member state financing, which in reality is not performance.’ Furthermore, performance-based financing should in his view be used in continuous funding systems, rather than in emergency instruments which, by default, are meant to be implemented very quickly. ‘Performance is only measurable after some time, such as after an MMF period.’ He refers to the ECA’s assessment of performance indicators. ‘We can distinguish between input, output, results and impact. Performance should be about results and impact. Measuring this in the short term for an emergency instrument is simply not possible.’
He explains that, from his time in the Czech Ministry of Finance, he has learned that there are two sides of public finance. ‘One is the financing operations, the treasury function. The second is the budget itself, with revenue and expenditure. These two sides of public finance should not be mixed. But within the RRF, they are.’ Another concern he has relates to keeping the decision-making for authorising payments detached from politics. ‘The authorising officer in a public administration needs to be able to act independently and to take responsibility. With the RRF, the system got politicised since payments have to be approved in cooperation with the Council. Such a system has no place in sound public financial management. No matter what the political decision is, the authorising officer should be held accountable.’ He observes that, in the past, the Commission would ‘teach’ member states about the full audit trail, the independence of financial actors. ‘And all of a sudden these principles are not followed by the Commission itself!’
No matter what the political decisions, the authorizing officer should beheld accountable.
ECA recommendations geared to improve accountability
One of the main platforms for the ECA to address accountability issues has been its annual report, containing the statement of assurance. Over the years this statement has developed, and Mr Gregor welcomes the changes it has undergone, including on the error rate estimates. ‘The error rate is our best estimate, based on our statistical sampling, of the problems that occur in the implementation of the EU budget.’ He explains that, in big spending areas, the ECA also assesses management and control systems. ‘So we can provide recommendations, ranging from revenue issues to, in the future, a new specific assessment of the EU spending under MFF 6 “Neighbourhood and the world”.’ He concludes that, with its statement of assurance and explanations, the ECA provides a good basis for the follow-up discussions of the discharge authorities, i.e. the Council and Parliament.
Regarding whether or not there is a trend of decreasing error rates, Mr Gregor looks at the long-term. ‘I recall double digit error rates, which was frightening. The overall error rate went down, not far from our materiality threshold. However, the error rate fluctuates over the years. In the 2022 financial year, the error rate increased. This is linked to the COVID-19 period. We report, in the area of cohesion, that roughly half of the errors we found were linked to the 100 % financing done during COVID.’ Another possible reason he identifies is that financial and control systems have been relaxed due to simplification or other arrangements, such as teleworking. ‘When we deem it important, we always have system recommendations for specific areas to improve. This directly ties in with improving accountability.’
In his view, the statement of assurance continues to apply pressure to improve, with many ECA recommendations taken up by the discharge authorities. ‘Discharge is not a formality. Furthermore, there is a deterrent effect, also at the level of final beneficiaries. We need to do as many missions as possible on the spot, where we find many errors which cannot be seen from the paperwork or in the system. The ECA can provide key added value here.’ He refers to an example in a recent annual report relating to SMEs. ‘Which in reality were not SMEs.’
We need to do as many missions as possible on the spot, where we find many errors(…)The ECA can provide key added value here.
Applying and advising on the accountability framework for EU expenditure
Mr Gregor explains that, for efficiency reasons and to decrease the audit burden, the ECA tries to use work done by other auditors. ‘Although this is not that easy in practice since basic conditions have to be fulfilled, such as whether the auditors could work in full independence and objectively, and whether the scope of the audit work was adequate for the ECA audit objectives.’ As examples where the ECA could build on the work of private auditors, he refers to the audit on the reliability of the accounts of EU agencies and joint undertakings, or on the European Schools. But it proves to be more challenging in other areas. ‘Some years ago, when reviewing the work of certification bodies in agriculture, we concluded we could not rely upon it for our audit purposes. For cohesion expenditure we are still in a pilot project, running for some years now. We cannot rely on the audit authorities, but we sample on the basis of their samples and we reperform their work. We are still reflecting on whether to continue this approach. If I recall the figure from the annual report, 61 % of the audit work we reviewed could not be relied upon, which is high. In the end it is our own responsibility to provide reasonable assurance.’
…61 % of the audit work we reviewed could not be relied upon, which is high
When it comes to using the work of the Commission’s Internal Audit Service (IAS), Mr Gregor explains that the ECA has access to the repository of IAS reports. ‘This can be used for our statement of assurance work, analysing the IAS work plan and seeing whether the results can be used to avoid overlapping.’ He points out that it does not make sense for the ECA to carry out an audit soon after the IAS has done so. ‘I think it is functioning, but there is always scope for improvement.’
The IAS was also mentioned in the ECA’s special report 27/2016 on governance at the European Commission. ‘The principles we used in our 2016 governance assessment are still valid, and from time to time we need to remind the Commission of these principles, as we did in 2018 with our observations on the new MFF.’ He expects that the ECA will provide input on the new MFF in two stages: during the consultation and after the new Commission has published its formal proposal. ‘I think this input will also include reference to principles related to governance. More specifically, regarding the RRF, the ECA has decided to produce a synthesis review on the RRF, highlighting the gaps and deficiencies that we are finding in both our compliance and performance audits. This review is planned in our 2024+ work programme. As I said before, it will also be about governance, about what should remain the responsibility of the Commission and what it can delegate.’
…the AMPR gives examples of good performance but not always an overall and balanced picture.
While he is now the ECA Member with the key responsibility for the annual report, Mr Gregor also used to be the reporting Member for the ECA’s annual report on performance. He explains that the Commission introduced its annual management and performance report (AMPR) in response to the ECA’s recommendations that it improve its performance reporting. In the AMPR the Commission gives its management perspective on policy results and impact. ‘We indicated how the Commission can improve this reporting, which was also the idea behind the ECA annual report on performance and continues now in our annual review report. One of our concerns is that the AMPR gives examples of good performance but not always an overall and balanced picture. I think that the AMPR can further develop by indicating challenges and lessons learned, and where further developments can take place.’ He explains that this is what the ECA does in its review of the AMPR, published in November each year. ‘Which is taken into account in the discharge discussions.’
EU added value goes beyond providing EU funds
With elections for a new European Parliament coming up, Mr Gregor hopes that its Budgetary Control Committee (CONT) can continue to play its traditional role. ‘The CONT is an important counterpart for the ECA, and since we publish many special reports we should also be able to approach, in coordination with the CONT, the specialised committees, as we do now. All in all, it works reasonably well, although due to COVID we could not have the regular meetings with CONT we had before.’ He hopes that the ECA can quickly establish its relationship with the new parliament. As for the ECA’s reports, he strives to make them as relevant and impactful as possible. ‘We need to strike the right balance between budget related reports and performance in the budget areas, but also reports on policies — that is also our role — also through our opinions.’
As for the work for the statement of assurance, Mr Gregor sees a benefit in more audit missions rather than fewer. ‘Particularly at the level of member states, I believe the ECA has a role to play by showing our presence to stimulate sound financial management and see the reality on the ground. That is what the budgetary authority and the public expect from us.’
Sending millions of euros for vaguely defined milestones and targets is for me, as an auditor, difficult to digest.
An important point for him is that all EU funding should be traceable. ‘The worst-case scenario would be that the Commission would provide more budget support to member states. In my view, this has no place within the EU because this hampers accountability as well as the EU’s added value. Sending millions of euros for vaguely defined milestones and targets is for me, as an auditor, difficult to digest.’ He argues that it is better to keep the delivery mechanisms of the traditional policies, which have been developed over decades, bringing results and impact. ‘Contributing to the cohesion of and in Europe — one of the key issues the EU is about!’
This article was first published on the 01/2024 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.
