Libertas.org

by Dr. Constantin Gurdgiev exclusively for the Libertas.org

While the European Commission is keen on preaching the virtues of corporate accountability and transparency, it is a well-established fact that the EU's own financial dealings fall short of the standards imposed onto private sector.

Even small companies operating within the European Economic Community area are expected to file fully and independently audited accounts – for tax purposes and/or for the purpose of public disclosure. While such requirements impose serious burdens on companies and entrepreneurs, they are widely deemed to be necessary to ensure investor and public confidence in the functioning of the private sector. The same standards must apply to the public sector finances – although for different reasons. Transparent and fully independently audited public accounts establish trust between the electorate and the Exchequer.

This month, for the thirteenth time in a row, the European Court of Auditors (ECA) annual report on the EU's expenditure refused to certify the European Union's own financial arrangements. The auditors' report – hardly a fully independent body – once again made the claim that insufficient public standards can be traced to virtually all articles of EU expenditure. The auditors complained of neglect and alleged fraud. In fact, errors or violations of legality and compliance with standard norms continue to persist in the EU's €106bn annual budget.

Although the auditors stated that there has been a marked reduction in the estimated overall level of errors in the Common Agricultural Policy (CAP), the certifiable expenditure amounts for only 70% of the CAP spending and less than 40% of all EU expenditure.

The second largest budgetary line of spending – with €32.4 billion in total expenditure – is regional development funding. This line of spending has seen practically no improvement since 1994. The ECA estimates that at least 12% of the total paid out under regional aid programmes was affected by errors and plagued by poor control by member states.

The commission is responsible for overseeing the handling of the budget and the auditors praised the "considerable efforts" made to address the weaknesses in its management of risks to EU funding. One can only wish for this praise to be meaningful!

Between CAP and regional aid, ECA has explicitly declined certification to over €16.6 billion in 2006 spending. Much of the rest of the EU budget is also suspect, with the auditors refusing to give full clearance to all but 40% of the entire spending. This leaves some €47 billion in spending programmes in a sort of an audit limbo – neither deemed to be in violation of regulations, nor accepted by the ECA. Overall, some €63.5 billion in European taxpayers' money remain under suspicion of either irregularities, or illegalities or outright fraud.

In a farcical twist of rhetoric, the EU Commission blamed the member states for audit failure and suspended payments to English regions in a sign of what can only be interpreted as a strangely one-sided retaliation for criticism.

If even for a second one were to imagine a, say, EuroStoxx100 company failing to certify 60% of its annual accounts – the new Enron-sized scandal will be certain to erupt, with the Commission foaming at the mouth at fraud and criminal violations in the corporate sector. Yet, thirteen years on and the EU itself is failing to deliver on the laws and regulations it set out for others.

The claim that things are improving – based on the fact that just three years ago the ECA refused to certify some 94% of the EU's expenditure – is a ludicrous assertion. In this day and age, for European Union to progress from being a budgetary equivalent of the Palestinian Authority to that of Syria is hardly an improvement to be pleased with.

After thirteen years of failing to live up to its own standards of transparency and accountability, it is time the European Union got tough on sovereign violations in both the member states and the EU itself. The EU must propose, develop and present to the member states and the Parliament a set of comprehensive proposals for establishing a system of independent audits of public accounts. This system should include an automatic dismissal clause that would trigger resignation of the EU Commission if it fails to pass annual accounts through the ECA. Only under such direct and strict standards can the EU continue in its role as a regulator of private sector activities.

Dr. Constantin Gurdgiev is a leading economist and journalist, and is a member of Libertas.