Auditing the EU
Author:
Patricia Barker
There are some fundamental differences between the audit of the public sector and the audit of private entities. They may be summarised as follows:
1. In the public sector, it is part of the auditor's job to ensure that expenditure has been incurred only on specifically authorised items. Although private sector entities are governed by the rule of ultra vires, their objectives are normally very widely drawn and the focus of the audit is on assessing internal control and forming an opinion on income and position rather than assessing the expenditure against that specifically authorised.
2. Although public sector auditors have no duty to form an opinion on the appropriateness of the expenditure authorised by the parliamentary decision makers, they generally (and, in particular, in Ireland) have a responsibility to assess value for money within the framework of that authorised expenditure. However, private sector auditors have no general duty to assess VFM.
3. Public sector auditors may be seen as more independent than private sector auditors in the sense that they are public servants with a fixed pay scale and no interest in non-audit services to their 'client'.
4. The public sector auditor sees his / her 'client' as the elected representatives of the public, whereas the private sector auditor, in substance if not in form, sees the client as the directors of the entity being audited.
5. Public sector audit has traditionally been seen as less complex due to the forms of accounting employed in the public sector.
However, although these fundamental differences exist, they are less striking now than previously. Public sector accounting systems are, for example, moving towards accruals accounting; sophisticated forms of treasury management are increasingly being employed; private sector accounting standards are being adopted and standards of auditing are converging with those employed in the private sector.
Current EU Audit
The audit of the expenditure of the European Union is the responsibility of the European Court of Auditors (ECA). The name 'court of auditors' is taken from the continental system of a court with judges overseeing the audits and having power to make judicial rulings. The ECA is managed by 15 Members, one national from each Member State. This year, the Membership will increase to 25 with the newly admitted Member States. The qualification required for Membership is that one should belong, or have belonged, to external audit bodies or be 'especially qualified for the office'. In practice, this has been interpreted as meaning that, to be considered, one must be 'an honourable citizen'. Some Member States nominate their Member from their national audit offices, others nominate a qualified professional auditor, others appoint a civil servant from the Treasury and still others appoint a politician with experience of budgetary matters. Each Member has the right to make five appointments to form his/her team: a Chef de Cabinet, a deputy Chef de Cabinet, two secretaries and a chauffeur.
As one would expect, this has resulted in a fairly mixed bag of skills and competencies since the establishment of the ECA in 1977. Given the generally high work ethic and good level of parliamentary and professional experience (albeit with a low proportion of professionally qualified auditors), the Members have provided a robust and fearless audit service. We are all familiar with the annual qualification of the financial statements of the Commission and frank specificity about the accounting problems in the Commission.
Need for change
The current confluence of two factors prompts the need for a review of the system outlined above. One factor is the increase in the number of member states, with the associated increase in the executive management team of the ECA to 25. There is the potential to increase further in the short term. The second factor is the internationalisation and increasing sophistication and complexity of systems of financial reporting and auditing in response to change and development in global business and public sector structures. Although the structure of the ECA has served us well in the past, it is now appropriate to examine that structure and take the opportunity presented by the enlargement of the EU to re-configure for the future.
Summary of recommendations
The group considered the current structure. It did not perform any assessment of the work of the individual Members or staff of the ECA. So the recommendations are based on structure only and not on individual performance.
The recommendations are of two types, those requiring Treaty Change (indicated as * below) and those requiring no Treaty Change that could be implemented with immediate effect. They come under four headings, as follows:
1. Management of the ECA
1.1. The system of appointment should be changed from one Member from each member state to a professional grouping of five Auditors-General, supported by a Supervisory Board of twenty-five (i.e. one from each member state). *
1.2. The five AGs should be selected by international competition and appointed based on specified competencies. *
1.3. The name of the ECA should be changed to European Audit Office. *
2. Competencies of the Auditors General
2.1. The competencies and skills of the group of five should be specified. The suggested list is shown in Table 1.
2.2. A comprehensive programme of CPD should be introduced to ensure the regular updating of those skills and competencies.
3. Collaboration with National Audit Offices, Internal Audit Service of the Commission and European Anti-Fraud Office
It is not desirable that the work of managing the economies of the Member States be impeded by an unnecessary burden of duplicated auditing. So, a better collaboration between the audit agencies should be explored. This would involve:
3.1. A commitment to internationalisation of the standards, principles and guidelines in auditing and financial reporting across the Member States.
3.2. A systematic approach by the ECA to quality assessment of the NAOs and IAS to allow it to assess the extent to which it could rely on their work and vice versa.
3.3. The establishment of partnership/joint auditing in areas where there is common interest.
3.4. An exploration of the possibility of commercial sub-contracting of the work of the ECA to NAOs.
3.5. The establishment of a more active grouping of NAOs, IAS and ECA (creating links with international standard setters, research institutions and third level colleges) at a policy level to drive forward changes leading to the internationalisation of standards and procedures.
4.Staffing and professional standards arising from enlargement
Under the present arrangement, with ten new member states, there will be ten new Members with their staff and a concomitant increase in the professional and translation staff in the ECA. It is recommended that:
4.1. Rather than increase the staff in this formulaic manner, a review of the competencies and qualifications of the staff required be conducted to inform the staffing increase decision.
4.2. In accordance with the best practice in change management, the staff be involved in the planning and implementation of change.
4.3. The work of the ECA be subjected to external peer review.
4.4. Concentration be focussed on the establishment of reliable AIS for the Commission and consideration be given to devolving the VFM work to the Internal Audit Office.
4.5. The ECA should publish guidelines for potential whistleblowers.
Watch this space!
It is intended to bring these recommendations to the European forum and to have them debated there during Ireland's presidency. However, there are some political and cultural issues that need to be addressed, and the decision will not be made based purely on the technical content of the recommendations.
Accountancy Ireland Vol 36 No 1 Feb 2004.