Court of Auditors: EU spending infested with errors well above the materiality threshold of 2%

Working lunch between Members of the European Court of Auditors and Members of the European Commission. Handshake between Vítor Manuel da Silva Caldeira, President of the European Court of Auditors in the foreground, 2nd from the right, and Neven Mimica, Member of the EC in charge of International Cooperation and Development, in the presence of Danièle Lamarque, ECA Member for Audit Quality Control, Baudilio Tomé Muguruza, Dean of ECA Chamber “Regulation of markets and competitive economy”, Klaus-Heiner Lehne, President-elect of the European Court of Auditors, Iliana Ivanova, Dean of ECA Chamber “Investment for cohesion, growth and inclusion”, Ville Itälä, Dean for Institutional Relations, Phil Wynn Owen, Dean for “Sustainable use of natural resources”, and Lazaros S. Lazarou, Dean of “Financing and administering the Union” (from left to right). Date:26/09/2016. Location: Brussels – EC/Berlaymont. © European Union, 2016/Source: EC – Audiovisual Service / Photo: Georges Boulougouris.

Last Thursday 13 October, the European Court of Auditors, the institution which carries out the audit of European Union finances, published its report on the implementation of the 2015 EU budget. In the chapter of revenue transactions the ECA found no errors. As expected though, the picture changed drastically when the Court audited the expenditure accounts. According to Vítor Manuel da Silva Caldeira, President of the European Court of Auditors, “As in previous years, we conclude that the 2015 EU accounts are reliable but spending continues to be affected by a material level of irregularity”.

Now, how can the accounts be reliable, but still be affected by materially important irregularities remains a European mystery or probably a miracle. In detail, the relevant passage ‘X’ of the report authored by the competent auditors states bluntly, “In our opinion, because of the significance of the matters described in the basis for adverse opinion on the legality and regularity of payments underlying the accounts paragraph, the payments underlying the accounts for the year ended 31 December 2015 are materially affected by error”. Yet, the President of ECA finds that the accounts are reliable. He must know something that we ordinary people cannot understand.

It’s 1% of all our GDP

Last year, EU spending reached €145.2 billion, or around €285 for every European citizen. Traditionally, the EU expenditure equals 1% of the total GDP or 2% of the aggregate spending of the 28 governments. The volume of EU budget is agreed every year by the European Parliament and the Council, after a relevant proposal of the Commission. However, the yearly accounts come under a seven year financial framework, which more or less foresees the annual expenditure and sets a firm limit for the total amount to be spent under this long-term plan.

Reading through the densely printed two column 320 pages of the ECA report, one will be struck with this observation of the competent researcher: “Our estimated level of error for payments underlying the accounts is 3.8%”. Mind you, the Court checks a sample of accounts in every chapter of the budget and the results take a statistical form. It’s easy then to calculate that this 3.8% error margin, on a total budget spending of €145.2 gives a stunning amount of €5.51bn of payments, infested with errors. Obviously this is misspent money.

Over and above the tolerance margins

The ECA has more to say about that. President da Silva Caldeira observes candidly that “Our estimate of the overall level of error in 2015 is 3.8 %, which is an improvement on recent years but still significantly above our materiality threshold of 2 %”. This simply means that EU misspending is almost double the acceptable error margin of 2%. In 2014, misspent money was 4.4% of the total. If this tempo of improvement is maintained, there is a long way the EU has to cross in order to put its accounts in order.

As for the Commission’s response to the audit report, there is in it concealment of the truth, distortion of the truth and a direct lie. Let’s take one thing at a time. The corresponding Press release firstly contains concealment of an important conclusion of the Court’s auditors. Not a word that the 3.8% error margin found in 2015 EU spending is almost double 2%, a value which the ECA has defined as the materially important error threshold. In short, the EU spending is materially in disorder. Again not a word about this either.

Accounts in disorder

Another Commission’s swindle of truth is found in its Press release. It says :“The Court found that, in particular in cohesion policy and agriculture, the overall estimated level of error for payments has further declined from 4.4% in 2014 to 3.8% in 2015”. This may lead the unsuspected reader to the conclusion that the 3.8% error margin may refer only to cohesion and agriculture expenses. The truth is that in Cohesion policy accounts the error margin in 2015 was much higher at 5.2% from 5.7% in 2014.

Last but not least the Commission tells a flagrant lie. In its Press release an interesting passage says: “As the ECA points out itself, the “level or error” is not a measure of fraud, inefficiency or waste”. The truth is that, legally the ECA cannot tell if the error means fraud, inefficiency of waste. This is the exclusive duty of the Commission to find out, and only in certain cases is done adequately.

Lying about what an error is

What the ECA has to say about that is the following: “Typical errors in this area include: *ineligible costs included in cost claims, *ineligible projects, activities and beneficiaries and *serious infringements of public procurement rules”. Every first year student of law knows that all these simple ‘errors’ may conceal serious crimes. Despite that the Commission wants us to believe that the term ‘error’ is quite innocent and doesn’t mean fraud, inefficiency or waste, this may very well be the case.

In conclusion, the European Court of Auditors has performed its duty by identifying the payments which may conceal serious financial crimes. It’s the Commission’s duty to dig into that. As the ECA plainly states, “The Commission bears the ultimate responsibility for the legality and regularity of the transactions underlying the accounts of the European Union (Article 317 of the Treaty on the Functioning of the European Union – TFEU)”.

This is a kind of direct conflict of interest; the Commission being the erring part and at the same time being the supervisor of that. But in Brussels one may encounter many miracles, because this is the city of illusions. The most renowned illusion being George Orwell’s that “All are equal, but some are more equal than others”. It seems that ‘1984’ was delayed for some time but is finally here.