VI EUROSAI Training Event:
Seminar on “BETTER AUDITING OF PUBLIC AIDS AND SUBSIDIES”

Prague, 6-8 November 2006

PAPER 2
Audit by SAIs of EU Funds
EU Funds concerned and their characteristics
Member States
Member States benefit from a range of measures financed by the EU budget. The most important financially are in the fields of Agriculture and Structural Policy. Both of these are characterised by complex regulations and heavy administrative procedures, and their management is shared by the European Commission and the Member States, who are responsible for their administration in the Member States. The EU agricultural expenditure is largely 100% funded by the EU, whereas the Structural & Cohesion Funds are co-financed by the EU and the Member States concerned. The EU funds concerned generally pass through national and/or regional budgets.

EU expenditure in the field of Internal Policies consists of grants to organisations in the Member States, primarily in the fields of research and technological development, training and industry. These grants are directly managed by the European Commission and the projects concerned are co-financed by the EU and the beneficiary organisations. The EU funds are paid directly to the organisations concerned in the Member States.

Candidate and other neighbouring countries
Candidate countries benefit from several Pre-accession Instruments (SAPARD, PHARE, and ISPA) intended to help in preparing for accession to full membership of the EU, and in preparing to administer the EU Agriculture, Structural and Cohesion Funds. 
The EU’s Neighbourhood Policy covers measures intended for neighbouring countries that are not (or not yet) candidate countries (such as TACIS).
 
The interests of the EU
The primary interest of the EU is the achievement of the major objectives associated with the EU measures concerned (such as agricultural self-sufficiency, protection of the environment, economic convergence, technological development, etc.).
The EU also requires common criteria to be applied throughout EU Member States and/or other beneficiary countries when deciding what programmes, projects or individual beneficiaries should have EU funds allocated to them. It further requires that the rules laid down to define eligible expenditure for different EU measures are applied in the same way throughout the Member States or other beneficiary countries.

EU supervision and audit
The European Commission provides guidance to administrative bodies in Member States. It also carries out control visits to MS, and applies the appropriate clearance procedures in respect of expenditure declared by Member States and financed or co-financed by the EU. These procedures can result in declared expenditure being disallowed due to ineligibility or failure to apply applicable EU or national rules (for instance, in respect of tendering procedures). There can also be flat rate corrections (reducing declared expenditure by a fixed percentage rate) for failures or weaknesses in Member States’ systems for administering EU funds (for instance, poor understanding of EU regulations, inadequate information systems, lack of adequate audit trail, insufficient checks on projects at ground level).
The European Court of Auditors (ECA) carries out an external audit role, by which it examines the use and administration of EU funds by the European Commission, as well as by the Member States and other beneficiary countries. The EU Treaty requires the ECA to carry out its audit visits to Member States in liaison with SAIs or other competent bodies in the Member States. The EU Treaty also states that the ECA and the Member State SAIs are to cooperate in a spirit of trust while maintaining their respective independence. More information on the topic may be found here. 

The interests of Member States or other beneficiary countries
The primary objective of Member States and other beneficiary countries is to ensure that EU funds are used to the best possible effect in their own country in the context of the broad EU objectives mentioned above. They also have an interest to ensure that EU funds are soundly administered in their countries to avoid repayments to the EU of funds already received and disbursed. This can happen due to declared expenditure being found to be ineligible or to failures to respect EU rules (tendering etc.). Often such repayments result in significant unexpected charges to the national budget, as it is usually too late or impossible to recover the funds from individuals or organisations to which the funds were disbursed. 

What SAIs can do to contribute
Although the mandates of SAIs naturally relate to national income and expenditure, some mandates of EU Member States (and candidate countries) contain specific provisions relating to EU funds. Even when they do not, SAIs can have a major role to play, as the main EU funds generally pass through national budgets, and some require significant levels of co-financing by national or regional governments.
Traditional audits of the regularity of EU expenditure can contribute to detecting cases of ineligible expenditure before eventual detection by the European Commission or the ECA. 
Performance audits can focus on the effectiveness of the use of EU funds to achieve the overall purpose of the measures concerned in the context of the country concerned. In the case of EU Member States such audits can legitimately raise questions concerning the appropriateness and efficiency of the instruments chosen by the EU. Examples of audit reports produced by EU Member State SAIs in this field are the UK NAO’s “Financial management in the EU” and the Netherlands Rekenkamer’s annual “EU Trend Report”.
There is also scope (particularly for new Member States and candidate countries, but also in the case of new EU instruments) for preventive audits of the preparation for, or the early implementation of, EU instruments and measures. These can focus on the adequacy of the systems set up and the administrative resources provided for the implementation of the EU funds. Such audits can encourage early improvements in weak practices, which would help to avoid problems arising at a later stage.
Some EU Member State or candidate country SAIs have chosen to act as certifying bodies (in the context of EU agriculture funds). Where this is the case the SAI is acting as an agent of the EU and there is a need to take measures to avoid any conflict of interest and loss of independence. 
SAIs can also contribute to improving EU regulations, by simplifying and clarifying them. SAI auditors are often in a good position to see clearly the negative effects of poorly conceived regulations. For their views to be taken into account, SAIs should ensure that they are consulted on any proposals for new regulations (whether EU or national) involving the implementation of EU funds. In this way their views can be made known to national legislators (and, in the case of EU Member States, to EU legislators). 
SAIs can contribute to generally improving the control and audit of EU funds in Member States, by supporting the EU proposals for developing of a better functioning “chain of control” and “single audit” systems, and the wider use of the COSO framework concepts in the establishment and development of Public Internal Financial Control (PIFC) systems in Member States. The attached annex provides a relatively brief and useful “Basic Understanding of Internal Control Concepts and Categories” in this context.

By Colin Maynard (ex ECA)