THE EU’S FINANCIAL LANDSCAPE REPORT: CHALLENGES IN AUDITING ACCOUNTABILITY FROM AN AUDITOR’S PERSPECTIVE
The ‘EU budgetary galaxy’ and the reasons for auditing it
In 2023, the ECA published special report 05/2023: ‘The EU’s financial landscape — A patchwork construction requiring further simplification and accountability’. Head of Task José Parente, provides insights into the way in which the audit was developed, highlighting some of the challenges faced by the team, which included assessing aspects of accountability in the EU’s financial landscape. He illustrates how auditing accountability arrangements touches on principles that directly relate to the democratic fundamentals of oversight and transparency.
By José Parente
While our special report 05/2023 refers to the EU’s financial landscape, the working title during the audit was ‘the EU budgetary galaxy’. This term was first introduced by Jean Arthuis, a former chairman of the European Parliament’s Committee on Budgets. In an article published in the ECA journal No 4 in 2019, Jean Arthuis explained the genesis of the term ‘EU budgetary galaxy’. He also presented the diagram (see Figure 1), which he asked the European Parliament’s secretariat to create in order to illustrate the complexity and the lack of transparency in the EU’s budgetary system.
This attracted attention and prompted several publications by academics on the issue. The complexity of the system, coupled with a further increase¹ in the number of financing instruments² over recent years (see Figure 2), justified analysis by the ECA.
Planning this audit required a substantial amount of preliminary work and contact with several stakeholders (the European Parliament, the Council, the European Stability Mechanism (ESM) and the European Investment Bank (EIB)). We also had to make a number of important decisions before establishing a final audit plan, which included the following.
What is the EU’s financial landscape and what should we audit?
We started by collecting information on all instruments with any relation to the EU budget or EU policies. We used several sources for this, including official EU publications, academic studies, and publications (such as the ‘EU budgetary galaxy’ diagram above). We prepared a database comprising 63 instruments, ranging from EU budget programmes to private endowments fully financed by EU funds. This database included a short summary of the instruments’ main characteristics to provide us with an overview and allow us to make an informed decision on how to further analyse them.
Although we had identified these 63 instruments during the planning phase, in the course of the audit we established criteria to define the limits of what we would consider the EU financial The EU’s financial landscape report: challenges in auditing accountability from an auditor’s perspective 67 landscape. We decided to include all of the instruments that finance projects or actions related to EU policies which were actively operational, or which continued to generate significant assets or potential liabilities for the EU or its member states by the cut off date of 01 January 2021.
From the outset, we understood the importance of providing a visual representation of the EU’s financial landscape. We wanted to accurately present the complexity of the system (as shown in the ‘EU budgetary galaxy’ diagram), while at the same time providing the reader with simple yet valuable information. We worked with the ECA’s graphic design team from an early stage in the audit process and after several versions we established the reference diagram for the audit (see Figure 3).
As it would have been unfeasible to audit all of these instruments, we decided to limit the scope of our audit to the instruments which lie mainly outside the EU budget. Our audit work did not cover the instruments that are fully integrated into the EU budget and do not generate contingent liabilities, or are not based on external assigned revenue. Moreover, our work also excluded nonEU countries’ grants and contributions to the EU budget, and member states’ EU emissions trading system (ETS) revenues (since these are directly spent by member states).
Who is our auditee?
As is the case for many ECA audits, our main auditee was the European Commission. However, because the European Parliament and the Council play a very important role in shaping the EU financial landscape by proposing or approving many of the instruments, we decided to consult these institutions and take their roles into consideration as part of our analysis. In addition, we also consulted the EIB Group and the ESM, due to their prominence in the financial landscape.
Audit criteria and what to assess
Defining good criteria often proves a key factor in the quality of the final result of an audit. In this task, the budgetary principles laid down in the treaties and the EU’s financial regulation provided a very useful source for these criteria.
As additional benchmarks, we used international standards, best practices, and recommendations on good budgetary governance and public finance management from the Organisation for Economic Co operation and Development (OECD), the International Monetary Fund (IMF), and the Public Expenditure and Financial Accountability program (PEFA). The audit team’s participation in training and bilateral meetings with specialists from the OECD and the IMF proved to be instrumental in defining the best way to apply the benchmarks we identified.
Based on these criteria and benchmarks, we decided to assess whether there were legitimate reasons for not fully integrating all instruments under our audit scope into the EU budget when they were established. Furthermore, we assessed whether adequate provision had been made to ensure the public accountability of these instruments, and whether appropriate action had been taken to increase their level of integration over time.
Our audit approach
Given the large number of instruments that we analysed (we carried out a detailed assessment of 31 instruments), it was important to plan and organise the audit fieldwork in the most practical way. We decided to use a two stage approach:
- We started by checking each of the selected instruments individually against a pre determined list of parameters. These included characteristics such as: the reason for its creation; governance arrangements; audit arrangements; reporting requirements; democratic scrutiny.
- • Afterwards, we verified whether the characteristics we analysed individually were consistent across the various instruments. With this, we created a table of characteristics and instruments that allowed us to identify key differences and draw relevant observations and conclusions.
Main audit conclusions and reasoning
The key conclusion of our audit was that the EU’s financial landscape is a patchwork of different components. Our analysis revealed that there were legitimate reasons for creating new instruments, but we are faced with a range of governance arrangements, sources of funding and contingent liabilities.
Another important conclusion was that the potential for simplifying the EU’s financial landscape has not been fully exploited. We acknowledged that good progress has been made in terms of streamlining the EU’s financial landscape in the 2021 2027 multiannual financial framework. For example, we welcomed the integration of the European Development Fund into the EU budget. However, we noted that the financial assistance instruments were not subject to a similar consolidation or integration exercise. This is why several financial assistance instruments remain active, as shown in Figure 3. Moreover, despite following similar approaches, there are still a number of unjustified differences.
Finally, we also concluded that the EU’s financial landscape is only partly publicly accountable. In the following paragraphs I will provide further detail on how we covered the issue of accountability in our audit and how we reached this conclusion.
How did we audit accountability?
We assessed three aspects that we considered were important to ensure accountability, through submitting to the appropriate external scrutiny:
- reporting;
- 2. auditing; and
- 3. democratic scrutiny.
We examined these three aspects for all of the selected instruments, and verified whether they followed the criteria we had determined, and if not, whether there were appropriate reasons for not doing so. Below is a short summary of the main results of our analysis.
We analysed the reporting arrangements for all of the instruments and concluded that the vast majority did have a sufficient level of individual reporting. However, we noted that there is no clear, concise resource for reporting on the EU’s entire financial landscape.
The EU treaties establish the ECA as the EU’s external auditor and the International Standards for Supreme Audit Institutions (the INTOSAI standards) state that all public financial operations should be subject to audit by supreme audit institutions, regardless of whether or how they are reflected in national budgets. We identified the instruments for which the ECA does not have audit rights (see Figure 4) and verified whether appropriate audit arrangements were in place.
We have already covered this issue in previous publications. For example, in a 2014 ECA landscape review we advocated that ‘public audit mandates should be established for all types of financing for EU policies’ and that ‘the ECA should be invited to audit all bodies created through agreements outside the EU legal order to implement EU policies. This includes the ESM and the EIB’s non-EU budget-related operations’. In ECA opinion 02/2018, we also recommended that the ESM grant a mandate to the ECA to address the gap we identified in relation to auditing performance. Our work confirmed that the conclusions we had previously published were still valid.
This aspect of the audit revealed different positions. For example, we noted that the European Parliament had made several calls for greater ECA involvement in EIB and ESM audits. However, both the EIB and the ESM consider that their audit arrangements are adequate.
Public democratic scrutiny is essential to ensure that the financing instruments are legitimate, justified and accountable. We found that the European Parliament has general oversight rights over many instruments, but not all (see Figure 5). For instruments over which the European
Parliament has no formal oversight rights, democratic scrutiny can only be exercised by national parliaments. However, this creates a gap, since the nature or degree of public scrutiny — and therefore accountability — may vary according to the type of financing instrument used.
Driving change through greater awareness
Coordinating an audit which included several different instruments, interacting with many Commission services and various stakeholders, and balancing different views were among the many challenges we faced in the course of this audit. Our findings on accountability were particularly sensitive points and were not always easily accepted by the auditees.
Nevertheless, I believe that the added value of such a report is significant. Drawing attention to the inconsistencies that we detected in the EU’s financial landscape, together with the proposed simplifications, can help to drive much-needed change. Working on this audit allowed me to better understand the political dimension of the EU’s decision-making process. It also emphasised that the existing balance of power between the different EU institutions should not be underestimated, particularly in relation to a principle as fundamental as accountability.
[1] Since the publication of ECA special report 05/2023 in March 2023, a number of new instruments have been proposed by the Commission. For example, to address the need to provide financial assistance to Ukraine (MFA+ and Ukraine Facility) or support for businesses and people affected by the CO2 emissions targets (Social Climate Fund).
[2] In ECA special report 05/2023, we use the term ‘instrument’ to refer to all types of financing for EU policies, which are called ‘instruments’, ‘mechanisms’, ‘funds’, ‘facilities’ or ‘endowments’ in EU legislative acts. We also use the term ‘instrument’ to refer to specific types of financing provided by institutions such as the European Stability Mechanism and the European Investment Bank.
