There is no culture of transparent, independent and effective auditing of EU spending

Copyright: European Court of Auditors -, Public Domain,

In a new Policy Paper, Dr. Adriaan Schout, Senior Research Fellow at Dutch think tank Clingendael, takes a closer look at the effectiveness and legality of the EU budget (MFF). His executive summary of the paper

This Policy Paper addresses a paradox in cohesion policy. Despite being one of the most evaluated EU policies, a culture of transparent, independent, and effective auditing has not emerged. The question needs to be asked why evaluations do not lead to change in outputs and the required improvements. Evidently there are (national) interests that block reforms. Yet, this does not provide a sufficient explanation as in other EU policy areas comparable difficulties existed before new structures were implemented and the issues were solved.

Competition for EU funds is increasing as new strategic priorities have emerged with enlargement on our doorstep, the war in Ukraine, and the needs to move towards sustainable growth and new energy infrastructures. To remain viable and credible, effectiveness, and legality of EU spending must be properly accounted for. Despite the many adaptations in governance, the EU added value (effectiveness) of cohesion funds (35% of the EU budget) is still hard to establish. These developments trigger further scrutiny of the effectiveness and legality of EU spending.

The argument developed in the Policy Paper starts from the difference between single-loop learning and second-loop learning. Single-loop learning concerns limited changes aimed at improving the system as it is. Double-loop learning starts when the realisation sinks in that the underlying values of the system need to be changed such as transparency, subsidiarity/decentralisation, independent monitoring, redesign of functions.

The first conclusion from this analysis concerns these good governance values. They offer a different reform agenda for cohesion funds than starting from the extensive list of issues identified in the many existing evaluations. It are first of all the member states that need to be able to audit their expenditures in terms of effectiveness and legality. The member states have so far lacked interest and capacities, and mutual trust in the member states is low. One way to build capacities is through the involvement of national bodies in a network of independent auditors and through transparent mutual inspections at arms-lengths of governments and Commission.

The second conclusion concerns the question: How to break away from the status quo? The current governance of cohesion is not future proof. The centralised ways of working of the EU Commission and European Court of Auditors (ECA) conflict with the reasons why subsidiarity is important: building a professional auditing community, capacity building in member states, creating ownership, ensuring first-line control. Other EU policy areas succeeded in creating decentralised network structures when confronted with serious crises. Without a serious (political or financial) crisis in cohesion funds, serious reforms will demand change-leadership. In an environment characterised by vested interests and a focus on just retour rather than on effectiveness, it is hard to see who has the incentives to initiate real reforms.

Thirdly, the question needs to be addressed: where to start structural reforms? The position of the Joint Audit Directorate from DG EMPL and DG Region inside the Commission is hard to reconcile with independent and depoliticised auditing. The first step to take could be to put the Joint Audit Directorate (DAC) at arms lengths, reduce it in size, and turn it into a European agency working with and through independent national Audit Authorities and reporting to the Commission. The Commission’s primary tasks are policy making and acting on the basis of the transparent independent auditing reports (comparable to the practice in other EU agency networks).

The fourth conclusion is that ECA could be transformed into a subsidiarity-based network working closely with national auditors and possibly the national Supreme Auditing Institutions (SAIs). Mirroring other tried and tested European network-based monitoring agencies, ECA could be changed in a European authority (called for example the European Budget Assurance and Performance Authority). While DAC seems to be well placed as independent network ‘agency’ under the Commission, ECA as ‘authority’ reports to EP and Council. Yet, to strengthen national audit institutions, ECA could be turned into a networked (subsidiarity-based) authority working the SAIs. A subsidiarity-based network would reinforce the independence from national governments and would support the development of a professional auditing culture throughout the EU. Whether the national Supreme Auditing Institutions are willing to take a role in such an integrated auditing network remains to be seen. SAIs operate on the assumption that they are independent and stand-alone auditors of the national public sector. The realities of shared management and of co-financing however raise questions about how to deal with independent auditing of EU funds at the national level and whether SAIs could have a role to play.

Each level has its responsibilities for auditing. Member states need to deliver reliable assurances. Independent national authorities can audit each other in teams comparable to practice in other EU policy areas. The EU Commission can use these transparent assurance reports for its annual statements. Finally, ECA produces the Annual Report on the EU’s finances to the Council and EP, and ECA writes Special Reports. In its activities it can involve national auditors to strengthen a European culture of independent auditing. For inspiration, attention should be paid to subsidiarity-based governance of monitoring and enforcement in other EU policy areas.

Finally, for the time being there seems to be little sense of urgency nor an appetite for structural reforms of cohesion funds. Few have an incentive to reform nor an appetite for strengthening independent auditing. Yet, when it comes to the assessment of national and EU added value, it is doubtful whether the current system of input and output indicators, and reports from the national authorities and from the EU Commission, offer sufficient and reliable insights.