Improving the Accountability of the EU Budget’s Multi-Level Implementation: Strengthening the Contribution of the European Court of Auditors

Abstract

EU spending—more than €1.800 billion for the next seven years—is spread over a large number of programs and financial mechanisms. Implemented under the Commission’s responsibility, its day-to-day management is mostly ensured by a plurality of actors, in particular by member states’ nominated bodies. This unique context places the responsibility to undertake influential audit work that could support the EU achieving longterm benefits on the European Court of Auditors (ECA). In this respect, this Article highlights a number of issues. First, this Article discusses the annual audit opinion, to which the ECA devotes at least 40% of its audit capacity—about 400 auditors—despite the limited assurance it provides. This Article argues that the audit opinion should focus on the operation of the Commission’s internal control framework and enlarge its scope to “value for money,” thus fostering responsibility at management level and sustaining the emergence of a performance culture. Furthermore, to fully capture the synergies, the risks of double funding and competition between different programs pursuing similar objectives—for example, through cohesion, transport, energy, and research spending—the ECA should undertake a scrutiny across its audit chambers’ thematic responsibilities. The ECA should also consider increasing the number of member states covered by its performance reports. Moreover, the ECA’s recommendations would benefit from an indication about their importance, and their followup should be extended at member states’ level. Finally, this Article welcomes the ECA’s intention to assess the added value of EU spending as compared to national spending alone, hence opening up the prospect of an ECA performance “assurance” assessment.

A. Introduction

Originating from the merger of a portion of each country’s national sovereignty made subordinate to the common interest,¹ the European Union (EU) acts as a complementary, rather than competitive, system of decision-making founded on the rule of law.² The very essence of what the EU is about is that, in certain areas, action at the EU level would make Europe stronger and achieve more than the member states could do acting in isolation. This means being additional or complementary to national efforts rather than filling in gaps left by shortcomings of national policies.³ This rationale is regularly evoked in the framework of the EU budget under the concept of “European added value” (EAV), which is exemplified by the expectation that “spending at EU level means a better deal for citizens than spending at national level.”⁴

A long-time key paradigm of the EU budget—the traditional capping of its overall resources slightly in excess of 1% of total member states’ Gross National Product (GNI),⁵ or about €160 billion/year (2021)—has been cleared away by the outbreak of the Coronavirus pandemic. To help the European economy back on its feet, member states have accepted a significant rise of EU funding for the next seven years, reaching a yearly average of about €260 billion.⁶ Although this is meant to be temporary, such unprecedented increase in funding will bring the volume of EU finances closer to the 2 to 2.5% of member states’ joint GNI that the MacDougal report considered—more than forty years ago—as a minimum to achieve a perceptible macroeconomic effect on the EU’s economy as a whole.⁷

In the EU institutional framework, the European Court of Auditors (ECA) is entrusted with the responsibility of scrutinizing the use of EU funds. This Article examines how the EU’s “financial conscience”⁸ provides assurance to taxpayers as well as objective and reliable information that can help responsible authorities save money and work more efficiently. The analysis also identifies some issues that would deserve consideration with a view to improving the ECA’s own performance and, ultimately, the EU budget’s accountability process.

The ECA’s mission has to be put in the context of unique budget arrangements that are designed to mirror the balance of powers and the share of competences between the EU as a territorial collectivity and its member states. A bird’s-eye view of this unequalled system, rather unsympathetic to reform,⁹ would point to three main features.

First, because the EU has not been given the power to raise taxes on its own, the EU and national budgets compete for the same revenues. This means that a portion of overall national taxation is assigned to the EU in form of member states’ contributions.¹⁰ Yet, as if EU revenue “grows on trees,” such transfer is made impalpable to EU citizens, thus lessening the risk for national governments to face a political cost to raise such revenue.¹¹ Even the unprecedented two-thirds increase of EU funds discussed above was not enough to breach the consolidated stance of keeping EU revenue outside taxpayers’ sight.

Second, the EAV principle recalled earlier implies selectivity, concentration of resources, and adequate implementation arrangements, as well as “clear and visible benefits for the EU and for its citizens” failing, which diminishes trust in the EU.¹² Indeed, “[w]hen ambitious objectives are pursued with limited resources and weak implementation mechanisms, we have a recipe for disappointment.”¹³ In this respect, when asked if they think that the EU budget provides good value for money, more than 40% of EU citizens believe that this is not the case. Most importantly, more than a quarter of Europeans express no opinion on this subject.¹⁴ Member states’ unanimity required to set the seven years “financial framework” (MFF)¹⁵ makes finding a compromise between different rationales and national stances inevitable. Such compromise is founded on the understanding that, as a counterpart to their contributions to the EU budget, most of EU expenditure is handed back to member states through a delicate balance of allocative, redistributive, and stabilizing measures covering around thirty policy areas and sixty spending programs.¹⁶ These measures are generally embedded with grandstanding and politically attractive all-inclusive objectives,¹⁷ yet often lack the critical mass to achieve and display a noticeable impact. This context provides leeway to configure EU policies according to national preferences, especially in the areas where funds are preallocated to member states by the MFF¹⁸ and the main management decisions are taken by their own bodies.¹⁹ Such context incentivizes funding of “Europeanized” national measures displaying their impact as much as possible within national borders, instead of measures with a transnational dimension—which are out of reach of any individual member state and therefore have a potentially higher EAV. Ultimately, reflecting a spending rather than a performance culture, funding may be allocated primarily where it is likely to be fully spent rather than where it addresses key needs and produces results.²⁰

Third, despite the multi-level structure applying to most of EU spending,²¹ the unitary and self-standing nature of the EU budget relies on the Commission’s role of promoting “the general interest of the Union”²² and executing “the budget and manage programmes,” which it is alone responsible for, regardless of whether or not it manages the funds directly.²³ Yet, regarding member states’ responsibilities, the Commission discards the ownership for budgetary implementation as a whole. At the same time, national bodies in charge of EU budgetary tasks remain accountable to their governments, which in turn are accountable either to their national parliaments, or to their citizens.²⁴ Yet, the key features of the system—such as the MFF agreed unanimously as a global package of mostly pre-allocated expenditures and also citizens’ tax unconsciousness—do not play as an incentive for national governments in rendering an account at national level for the use of the revenue transferred to the EU. This means that while in principle EU citizens should be able to hold each layer of government separately accountable for its activities, in practice, there is an accountability gap that undermines the possibility to initiate timely and effective redress, as well as to hold those responsible to account. The increased risk of waste and misuse of power puts the EU budget’s legitimacy in the eyes of EU citizens at stake, and this loss of trust in EU policies and institutions represents a key future challenge for the EU.²⁵

In light of these challenges, the aim of this Article is to examine the ECA’s contribution to the accountability of the EU budget’s multi-level implementation. To this end, this Article starts with a description of the ECA’s audit mandate and audit powers in Section B. It subsequently examines the concept underlying the establishment of its annual audit opinion, the ECA’s priority task. In this respect, this Article brings forward two main issues. First, the narrow scope of the ECA’s annual audit opinion limits the assurance that it can provide over the proper use of EU expenditure in Section B(I). Second, the approach based on “error rates” routinely employed by the ECA risks to provide support for wrong incentives and ineffective protection of taxpayers’ money in Section B(II). This Article argues that the time is appropriate to rethink how the ECA produces its annual audit opinion. Section B(III) further discusses the significant and growing effort undertaken by the ECA to respond to the demand for performance assessment across policy areas. Acknowledging the crucial contribution of the ECA’s performance reports, this Article argues that where the EU budget pursues similar objectives in a cross-cutting perspective—e.g., through cohesion, transport, energy, and research spending—a scrutiny across the ECA audit chambers’ thematic responsibilities may be needed to fully capture the synergies and risks of double funding and competition between different programs. Furthermore, broadening the geographical scope of the audit work would enhance the possibility of drawing conclusions beyond the current limited number of member states visited.

Section C deals with the extent to which the ECA’s recommendations are accepted and implemented, a key indication of the institution’s effectiveness. This Article argues that insufficient information is provided in order for a full picture of compliance to emerge. This pertains to lack of indication as to the significance of the recommendations and the reasons behind the rejection of some of them, as well as the absence of follow-up of recommendations addressed to member states. This raises the question of whether national audit offices should be involved in the follow-up process and, more generally, whether the ECA should have an open data platform of its recommendations to raise public awareness and induce better accountability from those responsible for action.

Section D provides recommendations as to how the ECA could further contribute to the accountability of the EU’s budget implementation. First, it deals with the ECA’s institutional relevance and describes the main elements to enhance the added value of its annual audit opinion through a wider concept of compliance encompassing “value for money,” thus supporting the emergence of a performance culture in Section D(I). In addition, focusing on the effectiveness of internal control arrangements and the reliability and relevance of the Commission’s financial and performance reporting, the annual audit opinion will foster responsibility at management level. The last part, Section D(II), deals with the EAV’s assessment of EU spending and how the ECA can contribute to make this concept operational. This Article argues that, in consultation with the Commission, the ECA could develop audit criteria that identify whether EAV has been achieved.

B. The European Court of Auditors, a Fundamental Pillar of EU Accountability

The ECA is a collegial body made up of twenty-seven members—one for each member state—and organized into five audit chambers. It has an overall yearly budget of approximately 150 million euros, or about 1.5% of the EU’s institutions administrative expenditure.²⁶

The ECA is a fully independent EU institution with a broad and global mandate, encompassing financial, compliance, and performance audit.²⁷ The Treaty leaves the ECA to determine and implement its own duties. It thus enjoys a discretionary power in deciding audit priorities, applying standards and methodologies as appropriate to the EU context, and allocating its resources accordingly.

The ECA audit mandate is exclusive. By contrast with the EU budget implementation, there is no such thing as a “shared” audit function. To carry out its audits, the ECA can take advantage of national audit offices’ cooperation,²⁸ but in reality this is limited to the exchange of best practices and discussion of EU-related issues.²⁹ Despite initial intentions,³⁰ the possibility that national audit offices would audit EU funds in their country on behalf of the ECA has not materialized.³¹ Apart from sporadic cases, the possibility of cooperative audits has not been considered mutually advantageous and cost-effective.

The ECA can perform audits anywhere within and outside the Union, including in the premises of physical or legal persons having received EU funds or being responsible for its revenue. It has a right of access to all documents necessary to its work, starting from the very first act potentially generating revenue or expenditure.³²

The diffused responsibilities for the budgetary implementation discussed earlier³³ have prompted the ECA to consider both the Commission, as “main auditee,” and the competent authorities, “other auditees,” as subjected to its audit. This implies that the ECA has to seek the information “necessary to carry out its task”³⁴ from a plurality of counterparts whose readiness to provide timely and full information is not always ensured.³⁵ Lack of cooperation negatively affects the planning and scope of the audit work, delaying ultimately the finalization of audit reports. Furthermore, the clearing of audit findings concerning multi-level managed programs generally requires two stages, first with the delegated bodies and then with the Commission.³⁶

In addition to its two main annual reporting obligations,³⁷ the ECA can submit observations at any time. There is actually no month without an ECA publication reporting the outcome of its audits or assessing draft legislation. This provides a major input to the legislative and political process. ECA’s observations do not constitute res judicata—an exclusive competence of the European Court of Justice³⁸—and can therefore not compel EU institutions and states to follow its pronouncements. Nevertheless, the latter carry reputational weight and represent an authoritative opinion at the basis, inter alia, of the annual discharge process before Parliament and Council.³⁹

In the remainder of this section, this Article will discuss the challenges that are currently impairing the capacity of the annual audit opinion to work as a functional accountability mechanism in the EU multi-level governance system. It will thereafter examine the impact of ECA’s performance reports and the room for broader coverage of EU policy objectives.

I. The “Statement of Assurance” on Legality/Regularity: A Limited Assurance

The “statement of assurance”⁴⁰ (annual audit opinion) has been introduced by the Treaty of Maastricht (1992). The absence of precedent in national audit offices ventured the ECA into the unknown,⁴¹ requiring it to exercise significant judgement regarding the type, scope, and methodology of its annual audit opinion. While the Treaty eventually gave considerable margin for interpretation as to what was required, the ECA set up an elaborate construction and made the annual audit opinion its priority task.

Built on a quantitative approach, the annual audit opinion’s methodology is based on testing a random, statistically representative, sample of financial transactions with a view to calculate a global estimate of non-compliance in the form of a percentage of “error.”⁴² This approach revealed a number of uncomfortable frailties and uncertainties.

The exclusion from the scope of the annual audit opinion of sound financial management, or “value for money,”⁴³ a concept raised as a criterion for the budgetary implementation by the same Treaty of Maastricht,⁴⁴ bears witness to a narrow interpretation of the requirements for EU spending, matching furthermore the ECA audit mandate only partially.⁴⁵ The ECA’s first-ever report on the overall performance of the EU budget adopted in 2020⁴⁶ does not bridge this gap in the audit scope, as it does not represent a “performance statement of assurance,” or an “assessment of the soundness of financial management”⁴⁷ of spending programs against performance criteria. It also provides no attestation on Commission’s performance reporting.

The consequence of the misalignment between compliance and performance audit can be illustrated by the EU fully funding direct payments to support farmers’ incomes. This spending area, for an annual cost of more than €41 billion, is considered by the ECA annual audit opinion as “free from material error.”⁴⁸ Yet, due to the scope limitation mentioned earlier, this does not mean that resources have been spent wisely. On the contrary, the ECA’s performance audits indicate that such a scheme is neither the most efficient way of ensuring a viable income nor appropriate for addressing many environmental and climate concerns, bringing about a minor impact in changing farming practices and improving biodiversity.⁴⁹ The above raises the question as to what extent an expenditure can be considered legal or regular if it does not meet “value for money” requirements.

Due to the legislative arsenal of EU and national provisions ruling the budget implementation, compliance of a given financial transaction is often a matter of interpretation. It is not uncommon that the ECA needs to reassess its initial conclusions on the basis of counter-assertions put forward by member states’ bodies and the Commission.⁵⁰ Cases of persistent disagreements between the ECA and the Commission are sometimes acknowledged in the ECA annual report.⁵¹

The sample of transactions underlying the estimate of non-compliance is set on the assumption that the different spending areas form a coherent whole and there is one single delivery system for the whole budget. In reality, EU budgetary areas are rather heterogenous and their annual spending path can be uneven, due, for example, to the natural time lag needed for the completion of funded projects. Furthermore, the implementation chain is diffused among a range of administrative models of varying effectiveness. In any given year only few of them are sampled, and not in every beneficiary state and region. In such a complex and diverse underlying background, the “error rate” cannot provide a persuasive “geography” of the legal or regular budgetary implementation across member states—let alone individual delegated bodies. Furthermore, the trend over time of the “error rate” cannot go beyond broad-brush comparisons from year to year and can only leave one guessing the reasons for the ups and downs.⁵²

The ECA uses a 2% “one size fits all” materiality threshold for its annual opinion across policy areas, independently of their risks and peculiarities.⁵³ Such threshold has become a de facto synonym for “tolerable risk of error.”⁵⁴ Derived from financial audits in the private sector, such threshold is not tailored to the EU budget framework, not least because the level of irregularity varies across policy areas. In this respect, it would seem sensible to consider whether the 2% threshold represents an unreasonable obstinacy for half of EU spending that is characterized by complex funding arrangements. The question is notably whether such complexity can explain that the ECA “error rate” in Cohesion spending is more than twice as much as that for direct payments to farmers. In this respect, the national audit offices could provide useful insight as national budgets fund the same typology of EU measures. At the same time, this could shed light on the comparative cost-effectiveness of EU internal control arrangements in relation to national ones.

Despite conceptual stretching, the “error rate” has no way of speaking for itself. It ultimately represents a symptom whose multiple possible causes and potential spread to the spending area concerned would require further investigation. As this is generally not part of the audit work, the “error” leads mainly to quantify, whenever possible, the financial impact of an irregularity, but it does not identify appropriate treatment avoiding its recurrence. In particular, the quantitative approach is not designed to gather data on the frequency of “errors,” and therefore on their systemic character.

For multi-annual programs, characterized by multi-stage payments over several accounting years,⁵⁵ the ECA annual assessment of legality/regularity is provisional by nature, as financial corrections may take place at a later stage, once transactions have been checked by all internal controls⁵⁶ in place and have undergone Commission’s clearance.

II. The Proliferation of Error Estimates and the Risks of an “Error”-Centric Culture

The ECA annual audit opinion has been instrumental in embedding in EU spending programs the concept of “error rate” as a compulsory instrument for measuring compliance. In particular, the Commission has a duty to monitor the level of error during implementation and to provide each year to the budgetary authorities an estimation of such level as well as an estimate of future corrections.⁵⁷

While the ECA provides several estimates of error,⁵⁸ the Commission uses different concepts such as the “risk at payment”—close to the ECA estimate for the level of error— complemented by an estimate of “risk at closure” which takes into account projected future corrections and recoveries. In specific areas, the Commission establishes each year also “residual” error rates per program—or other relevant segments—at member state level taking into account financial corrections that have already been made.⁵⁹ Perceived as a duplication of audit work, such different approaches in presenting “error rates” create the conditions for a “beauty contest,” with a potential for divergence⁶⁰ and ultimately confusion as the differences—and their consequences—would remain obscure to most observers. One may wonder whether the exponential increase and variety of audit opinions induce more accountability or just multiply the number of hypotheses to investigate. It is not surprising that Parliament and Council have asked for consistency in assessing legality/regularity.⁶¹

The “error rate” has become the mainstay of the Commission’s “fire alarm” oversight of the budget implementation, reacting ex post to individual warnings, in particular as a result of the ECA’s audit work. As an accountability’s shortcut, the protection of the EU budget from expenditure incurred in breach of law is meant to be ensured by disallowing EU funds—financial corrections—when the degree of non-compliance exceeds the “tolerable” error.⁶² Yet, a large part of these corrections result in shifting money across projects and measures, with no impact on member states’ overall MFF envelopes. Secondly, when these corrections translate into a net loss of funds for member states, these are generally put at the charge of national budgets rather than of EU funds beneficiaries. Thirdly, the deterrence of this instrument and its effectiveness in causing structural repairing effects must be limited if—for example, despite many corrections applied, together with Commission’s action plans and guidance—failure to comply with public procurement rules and State aid legislation remains a significant source of errors. Ultimately, financial corrections represent an indicator of failure and missed opportunities, because the objectives initially linked to these funds would not be achieved. They might well put the EU accounts formally “in order,” with the risk however of working as a “painkiller,” without true healing and relief for the taxpayer.

As “audits do not operate neutrally and have effects on the auditee,”⁶³ they should not be oblivious to their impact and possible dysfunctional effects. Due to its uncertain interpretation,⁶⁴ the “error rate” can be imbued with meaning to support stereotypical thinking and inconclusive fault-finding debates. As if “the errors reported indicate that the spending of the EU budget is seriously affected by fraud and corruption, adversely affecting public confidence in the EU institutions.”⁶⁵

The “error rate” has become a benchmark for “success” and “blame,” with the risk, on the one hand, to increase the scope of legal requirements beyond needs—“gold-plating”—and, on the other hand, to “reinforce the existing conservatism of organizations which are aware of the unsympathetic political and media responses to perceived failure.”⁶⁶ The “error rate” logic tends to give importance to what can be measured, rather than measuring what is important. It risks providing support for wrong incentives, and encouraging responsible managers toward “creative” compliance to maximize funds’ absorption,⁶⁷ rather than achieving results in line with the funding objectives. As it has been observed, “[a]lthough there may be some merit in doing the right thing badly, there is none whatsoever in doing the wrong thing well.”⁶⁸

III. Performance Reports: Room for Broader Coverage of EU Policy Objectives

The ECA’s special reports look into the achievement of policy objectives of the around thirty policy areas according to “value for money”—economy, efficiency, and effectiveness.⁶⁹ The audit requires setting up criteria directly derived from legislation or based on best practices—for example, standard costs applied by technical professions—and which are appropriate given the economic context. This may involve the use of data from different sources. The ECA’s work, focusing on the achievement of broader policy objectives, goes beyond a “lawful versus unlawful” or “right versus wrong” assessment. Its conclusions are not simple and clear-cut, putting emphasis on specific issues of concern.

A systematic and structured examination of performance across the different areas of EU spending has been developed since 2000. The ECA auditors have progressively built-up new skills and accumulated broad knowledge and capacity of analysis, often drawing on outside expertise. The ECA’s special reports cover a range of subjects considered to be high impact because of their financial importance, forthcoming developments, and political and public interest. Between 2015 and 2020, the ECA has published 175 special reports.⁷⁰ They generally attract significant attention from the media and institutional stakeholders.

The wide awareness of performance concerns created by the ECA’s special reports has promoted the application of “value for money” in the budget implementation, a concept introduced by the Treaty of Rome (1957) but long neglected until the 1990s. The ECA’s special reports have become a key input of the discharge procedure—Treaty of Maastricht (1992). The Commission has furthermore been required under the Treaty of Lisbon (2007) to submit each year to the European Parliament and to the Council “an evaluation report on the Union’s finances based on the results achieved.”⁷¹ This prompted the Commission to start in 2015 the “EU budget for results” initiative, whose aim is to put performance at the core of the EU budget and its implementation, which includes promoting a performance-centric culture. Hopefully, this will contribute to moving progressively away from the “error” centric culture discussed earlier.⁷²

As acknowledged by the Commission’s spending review, the increase in the number of spending programs over time has resulted in fragmentation, overlaps and inability to fully exploit the synergies between different funding sources.⁷³ The ECA is well aware of the risk of poor cross-cutting coordination, misalignment of objectives across policy areas, and double funding.⁷⁴ Nevertheless, its special reports generally have a “vertical” focus and cover specific spending programs according to the areas of responsibility of its audit chambers. This provides a partial view of EU policies’ achievements, especially in the case of mainstreaming cross-cutting priorities, such as “[c]limate change adaptation and mitigation” and “[b]iodiversity,” that entail significant funding through numerous spending programs with similar objectives.⁷⁵ Conversely, an “aerial view” across spending programs would allow assessing consistency over different intervention areas and reveal possible unintended outcomes. This would strengthen the impact of the ECA recommendations in improving the set-up and rationale of the programs concerned.

An adequate coverage of the broad range of administrative models implementing EU spending programs⁷⁶ with different strengths and weaknesses represents a key factor to ensure the representativeness of the ECA performance audit work. Its special reports show, however, that audit visits take place typically in four to five member states—normally those states with the highest funding allocation. While financial importance is one sensible criterion, such limited number of member states visited reduces objectively the overall perspective of the ECA audit findings. The representativeness of the ECA samples is further limited when it includes countries with a regionalized structure, with the audit conducted in one or two regions only. As audit represents ultimately a learning process for the benefit of managers, a wider range of member states—and delegated bodies—could enhance knowledge for all interested parties, in particular concerning best practices. In turn, this could enlarge the scope—and therefore the effect—of the ECA recommendations beyond the member states visited.

C. To What Extent is the ECA Heard by the Addressees of its Recommendations?

Once they become public, external audit findings are likely to attract wide attention and call for solutions. It is therefore of the outmost importance that the ECA observations come with workable recommendations for those called to action. These depend on a clear assessment of the causes of the problems uncovered—such as whether these problems refer to the design of spending systems and their management arrangements, or to somewhat negligent implementation due to lack of preventive action or failure to act. Indication of the level of significance of recommendations should also be part of such assessment.⁷⁷ The extent to which the ECA recommendations are accepted and subsequently implemented can be considered an indicator of the EU external auditor effectiveness.⁷⁸ Similar considerations have prompted the U.S. Government Accountability Office (GAO) to give public access to its database of open recommendations, identifying those warranting priority attention. The GAO even quantified the amount of public money saved by their work.⁷⁹

As a reflection of the EU budget’s multi-level management, and inspired by the wish to clarify who and what is addressed by each recommendation—and who is responsible for taking any initiative and competence for implementing them—the ECA makes a distinction between the Commission and the member states when the latter exercise delegated management functions. While the Commission generally regards recommendations addressed to member states as being outside its responsibility, their follow-up is not an ECA priority.⁸⁰ This risks contributing to the ambiguity about responsibilities for the use of EU funds discussed earlier, and ultimately to the “immunity” of financial actors.⁸¹ This issue could possibly be examined within the framework of the cooperation between the ECA and national audit offices,⁸² the latter potentially being in a better position to carry out such a follow-up.

In a given year, the ECA issues a significant number of recommendations. For example, the thirty-five special reports published in 2018 contained 380 recommendations on a wide range of topics. Mostly addressed to the Commission, the latter accepted 78% of the recommendations. Yet, the ECA does not comment on the reasons for the Commission rejecting some recommendations, in particular concerning their feasibility and cost-effectiveness.⁸³

For the last several years the ECA has published the degree of implementation of its recommendations. For 2019, it stated that 57% of the recommendations made in the annual report concerning the financial year 2015 and 76% of the 184 recommendations made in the twenty-five special reports published in 2015 had been implemented by the Commission either in full or in most respects.⁸⁴ In 2020, the ECA observed a similar situation for thirty-three special reports published in 2016.⁸⁵ These figures, which do not include recommendations to member states,⁸⁶ make no distinction on the basis of the significance of the subject matter—“critical, very important, important, desirable.” There is also no explanation for the noteworthy discrepancy between the annual report and special reports. One may note in this respect that the annual audit opinion for 2019 issued a more negative compliance assessment—adverse opinion—than in the previous three years, when the ECA perceived signs of improvement in the management of EU finances.⁸⁷

While the figures indicated above seemingly show a large degree of acceptance and implementation of the ECA’s recommendations in performance reports, one should note, however, that as an illustration of the rather “reform adverse” environment observed earlier,⁸⁸ key issues are repeatedly raised. For example, failure to comply with public procurement rules and state aid legislation is a perennial and significant source of error. The ECA performance reports refer regularly to: Difficulties caused by the input-based nature of spending schemes, based on resources spent rather than results achieved, and by the absence of meaningful indicators; the need for clarity about the purpose of the funding and its possible impact given the lack of critical mass for most spending programs; the broad objectives and the need to prioritize the measures; the absence of a specific EU dimension over and above current national measures; the non-availability of reliable information about what was actually achieved and the benefits brought. In several reports the ECA has concluded that good intentions for more and better performance-oriented spending remained on paper.⁸⁹

Also, the ECA’s plea for making the EAV a core objective of the next MFF and demonstrating such value as a critical condition for earning citizens’ trust in the EU,⁹⁰ has not received the attention that it deserved. The spending review carried out by the Commission in preparation of the next MFF 2021–2027⁹¹ did not provide an assessment of each spending program based on the criteria that the Commission itself defined for EAV.⁹² The new programs’ objectives, presented as narrative mission statements, are not quantified and lack specificity. Therefore, they do not provide much insight to guide future funding decisions by the EU legislator. The legislative proposals for the two main spending areas—agriculture and cohesion—do not witness a decisive shift towards value for money, in particular by translating high level policy objectives into operational objectives showing the results that the EU wishes to achieve, thus leaving to member states the responsibility to define strategic goals for the funds concerned. Ultimately, policy objectives follow the funding and not the other way around.⁹³

This raises the question whether, like the GAO, the ECA should have an open data platform of its recommendations. Drawing public awareness to their importance and level of implementation would potentially induce better accountability from those responsible for action.

D. EU Added Value and the ECA’s Institutional Relevance

Having highlighted the current challenges that the EU’s budget multi-level implementation is facing, this section explores how the ECA could strengthen its role in order to ultimately enhance the whole accountability process.

All public office holders are indeed both servants of the public and stewards of public resources. They are accountable to citizens for their decisions and actions and must submit themselves to the scrutiny necessary to ensure this.⁹⁴ Their relevance cannot be assumed per se, regardless of their performance. Earning trust implies for EU institutions to lead by example in applying the EAV principle of achieving through the EU level more and better results that member states acting alone. In particular, EU institutions should use public funds at their disposal “as efficiently and as effectively as possible, and according to the principles of sound financial management.”⁹⁵

As an independent institution⁹⁶ with extensive audit powers and large discretion in fulfilling its audit mandate,⁹⁷ the ECA’s relevance and legitimacy depends on its ability to make a difference and create value for society by responding to expectations, emerging risks, and changing circumstances. Specifically, the ECA’s contribution to good governance as a credible voice to create incentives for beneficial change requires providing knowledge unavailable elsewhere, comprehensive analysis, and well-founded recommendations for improvement.⁹⁸ Two issues seem relevant in this respect.

The ECA annual audit opinion, its priority task, provides a limited assurance on the use of EU funds.⁹⁹ This refers in particular to the exclusion of “value for money” from its scope, the difficulty to wrap-up EU heterogeneous policy areas, and implementing arrangements in a percentage that cannot speak for itself, and the lack of information on the reasons underlying the established irregularities so as to take specific remedial action. The “error rate” based approach risks also to provide support for wrong incentives, at odds with the objective of achieving results in line with the funding objectives. Furthermore, the need for the current plurality of “error rates” by the ECA and the Commission is not established.¹⁰⁰

As it will be discussed in the following paragraphs in section D(I), the ECA annual audit opinion should rely on a wider concept of compliance encompassing “value for money” and meaningfully redirect its focus on the operation of the internal control framework and the management information provided by the Commission.

The concept of EAV—as seen in the introduction to this Article —is the cornerstone of the whole EU construction and embodies the raison d’être of the EU budget. The ECA’s intention to proceed in the future towards assessing “if action at EU level was the best way to achieve the desired outcome and whether more or less EU-level intervention would be needed in view of the objectives of the funding or policy” is a most welcomed development.¹⁰¹ As observed further in Section D(II), the ECA’s broad knowledge and capacity of analysis in performance audits would allow to operationalize progressively the EAV assessment. Such a new perspective would indeed “help EU citizens decide if they can trust EU institutions to deliver results for them”¹⁰² and potentially play a triggering effect in enforcing better accountability from those called to action.

I. The ECA Annual Audit Opinion: A Focus on Assurance Provided by the Internal Control Framework

While providing absolute “assurance” that expenditures comply with established rules and that funds are used to best effect is out of reach for both the external auditor and internal control,¹⁰³ the latter is the most effective tool towards ensuring a high level of assurance. Indeed, unlike an external audit that intervenes by definition ex post, internal control is not one event or circumstance, but a built-in dynamic process that permeates an entity’s activities. It can deploy its effects in the day-to-day management by taking timely corrective action in specific transactions or weaknesses of the systems themselves. This makes of an effective internal control the primary response to risks.¹⁰⁴

Over the last twenty years, the EU budget’s internal control arrangements have been the subject of significant investment and related costs¹⁰⁵ triggering consequential progress notably by setting common principles and standards. Endorsing the ECA’s recommendation to entrust internal controls with the task of providing assurance on legality/regularity and value for money,¹⁰⁶ the EU framework lays out that, “pursuant to the principle of sound financial management,” internal control systems shall be applied at all levels of management, and designed to provide: Reasonable assurance of achieving value for money of the operations; reliability of reporting; safeguarding of assets and information; prevention, detection, correction and follow-up of fraud and irregularities; and adequate management of the risks.¹⁰⁷

As stated by the ECA, the application of such framework is founded on the Commission’s supervision of decentralized bodies charged of the day-to-day management.¹⁰⁸ The establishment, in April 2000, of the Internal Audit Service (IAS)¹⁰⁹ has represented a milestone for such supervision because the IAS’ primary objective is “to provide the Commission with assurance as to the effectiveness and efficiency of the risk management, control and governance processes.”¹¹⁰ As indicated by Middelhoek, a former ECA president, it was precisely the absence of a proper internal audit function providing assurance “as to the truth and fairness of the Commission’s reporting” that conditioned the ECA’s initial choice to base its annual audit opinion on its own direct testing of transactions, instead of examining reporting established by the Commission.¹¹¹ Along the same lines, Power argued that

[I]f the Commission could demonstrate that it monitors and evaluates the activities of member states, then the Court could rely on this “internal audit” function and audit the reasonableness of this work…. This will make the external audit of the EU budget possible in a different way, a shift from sampling to systems.¹¹²

Time seems ripe for forfeiting the dividends of such a wide-ranging reform of financial management and control. With the aim that the ECA and Commission’s work should complement rather than unnecessarily duplicate each other, the ECA could build its annual audit opinion on the assessment of the operation of the internal control framework as supervised by the Commission, whose effectiveness is currently outside the scope of its annual audit opinion.¹¹³ As discussed in the following sections, such new concept of audit opinion is based on two key reforms.

II. Assessing the Reliance of Management Information

In line with the ECA’s goal to move towards an “attestation” approach,¹¹⁴ and subject to the necessary professional skepticism and professional judgement,¹¹⁵ the ECA’s assessment should be concerned with how the Commission performs its supervisory functions, and in particular whether the management information it presents¹¹⁶ gives a “true and fair view” of the budgetary implementation, so as to underpin confidence of intended users.

To avoid confusion of duties, while drawing attention to possible material misrepresentations or inconsistencies in such reports, the ECA should not supplant the Commission by attempting to present different evidence through its own testing. As a result, the ECA’s audit work should not aim to establish an “alternative” error rate to Commission’s error estimates.¹¹⁷ This is typically a management instrument to set possible financial corrections—by the Commission and member states—for which the ECA has no role, not least because its findings are not binding. As a matter of fact, one should note that the Commission’s overall estimate of error is slightly below that of the ECA.¹¹⁸ As discussed previously in Section B(I), the relevance of different estimates between the ECA and the Commission for multi-annual programs can only be assessed after the latter’s final clearance.

The ECA should assess in particular the risks and estimates of error that the Commission establishes at two key stages in the budgetary implementation cycle, at payment and at closure, as well as the procedures in place to ensure that the “tolerable risk of error”¹¹⁹ is or can ultimately be respected after Commission’s final clearance. This means that for the significant part of EU expenditure characterized by multi-stage payments spread over several accounting years, the ECA may have to perform, at closure, direct testing of final balances that are at much greater risk of error. The extent of such ECA testing would depend on the assurance provided at regular intervals throughout the program period, with a view to check the adequacy of procedures in place.

As for compliance, the ECA should assess, through appropriate testing, the degree of assurance about performance of EU spending. In this respect, the ECA annual opinion should assess the reliability and relevance of Commission’s reporting, in particular the process underlying the report “on the results achieved”.¹²⁰ This would also provide the opportunity to evaluate the progress of the Commission’s “EU budget for results” initiative.¹²¹

While the ECA has to establish an audit opinion each year, the reality is that the assurance may only be built on a multi-annual basis. Given the relative stability of the management and control framework within the programming period, the ECA could examine the different policy areas on a rotational basis, with a view to cover all of them within the MFF duration. This also means that the structure of the annual audit opinion may not be the same from year to year.

1. Setting Appropriate Materiality Criteria

Detecting every irregularity is not feasible, not least because of the prohibitive costs it would entail. Defining a materiality threshold above which the auditor would qualify its opinion involves a judgement on the needs of the users and the effect on decisions of the addressees of the audit opinion.¹²² While auditors set often materiality in terms of value only,¹²³ the concept also involves qualitative aspects, such as the sensitive nature of certain transactions or programs, the public interest, the need for effective legislative oversight, and the type of irregularities.¹²⁴

Being an authoritative pronouncement carrying reputational weight about what matters most, the way in which materiality is set by the external auditor can have a “cascade effect,” as demonstrated by the fact that the ECA’s current threshold has become the de facto standard for EU spending’s compliance.¹²⁵ This shows that the desire to promote a performance culture at both EU and member states level should go hand in hand with a wider concept of compliance encompassing “value for money.” As a result, the concept of annual audit opinion sketched above, aiming ultimately at assessing the assurance provided by the EU budget management according to legality/regularity and value for money, would require the ECA to reconsider its definition of materiality.¹²⁶ This would imply setting a materiality threshold beyond a purely quantitative benchmark, to integrate qualitative concerns of nature and context in a given spending area that should warrant consideration in the final assessment. This would avoid, as in the case of EU support for farmers’ incomes,¹²⁷ such expenditures being considered “free from material error” and, at the same time, an ineffective spending scheme.

Finally, the external auditor’s materiality threshold should be distinguished from the concept of “tolerable risk of error.”¹²⁸ The latter is a matter for the political authorities that may wish to give weight to policy imperatives, reputational risks or the benefit-to-cost ratio for reducing irregularities through more controls. Despite the current de facto equivalence between the ECA’s materiality threshold and the “tolerable risk of error,” these concepts are distinct and refer to different needs and responsibilities. Therefore, their definition does not have to be the same.

2. Assessing the European Added Value and the Expectation Gap

EAV represents the raison d’être of the EU budget and a condition for the legitimacy of the revenue raised to fund it. The expectation that “spending at EU level means a better deal for citizens than spending at national level,”¹²⁹ a goal reflected in the Commission’s duty to provide an evaluation report “based on the results achieved,”¹³⁰ calls for evidence-based policy making. As observed by the ECA, “trust in the EU diminishes if added value is not demonstrated.”¹³¹

The ECA has long time advocated the need to embody the concept of EAV in a suitable political declaration or in EU legislation, with a view to provide criteria for the guidance of the Union’s political authorities.¹³² The ECA further observed that this is necessary not only to allocate resources but also to design and evaluate spending programs on the basis of a comparison of their performance.¹³³

Used in different contexts and with distinct meanings, the concept of EAV is still unspecified at EU political level. In the current framework where the MFF represents a compromise between different rationales and national stances, with funding spread across a large number of policy areas and spending programs,¹³⁴ a firm definition of EAV could be seen by political authorities as a constraint rather than an opportunity. The fact that, as recalled earlier,¹³⁵ the spending review carried out by the Commission in preparation for the next MFF 2021–2027¹³⁶ did not provide an assessment of each spending program based on the criteria that the Commission itself defined for EAV¹³⁷ seems to confirm this stance. Furthermore, the fact that significant spending programs were approved in the absence of an impact assessment supports this stance as well.¹³⁸ This shows that while being a popular subject for academic debate, this prominent concept is over-shadowed by other pressing priorities and is still too low in the “to-do” list of the EU’s legislature.

The ECA has provided a definition of EAV in some of its special reports,¹³⁹ encapsulating the key elements of this concept defined as “the value that an EU action adds through EU policy, regulation, legal instruments and spending, over and above that created by Member States acting alone.”¹⁴⁰ This definition clarifies two key aspects. First, EU funding is only one among possible options of EU intervention. In fact, EU objectives are mainly pursued through legislative and coordination actions that are often the main drivers for bringing in line member states’ economic, social, and political structures. Second, EAV has to be “over and above” national efforts. Such conditions exist when the actions of member states are not sufficient—known as the “criterion of need”—and when benefits are generated for the entire Union—known as the “effectiveness criterion.” This means an added value beyond borders and benefits for a large part of the EU population. From an economic point of view, not only the benefits should exceed the costs of public spending. Those benefits should also be larger than those at the national level. Achieving value for money¹⁴¹ is therefore a necessary, although not sufficient condition for EAV.

The ECA has indicated the intention to “assess, whenever possible, if action at EU level was the best way to achieve the desired outcome and whether more or less EU-level intervention would be needed in view of the objectives of the funding or policy.”¹⁴² This opens the door to an assessment of the EAV that could be particularly helpful “in view of reform pressures on the EU,” as the ECA itself pointed out.

The significant knowledge and capacity of analysis accumulated through its performance audits allows the ECA to move forward in defining progressively a standard performance assessment approach as a basis for operationalizing the EAV concept. In particular, in line with international audit standards and a “no surprises” approach,¹⁴³ the ECA could examine with the Commission the specific elements bearing witness of EAV in a given spending area and develop accordingly the audit criteria that would permit to assess whether, and to what extent, EAV has been achieved in practice. Impact assessments and evaluations could provide relevant indications in this respect. Placing the EAV discussion at the operational level would probably facilitate the identification of what it is possible to demonstrate in practice, thus contributing to “deglamorize” a concept that is often used as a buzzword.

On the basis of the ECA’s own recurrent findings,¹⁴⁴ three levels of assessment seem pertinent. The starting point is whether EU funding bears witness to the established needs that are relevant to EU objectives and could not be satisfied by regulatory instruments only. This implies ascertaining whether there are clear and specific objectives addressing those needs, compatible with both available funding—or “critical mass”—and the relevant regulatory frameworks—particularly in case of cross border measures. It would also be relevant to examine to what extent financial support is made conditional to deliver specific and measurable results, and it reflects the priority of the different types and areas of intervention—for example, through progressive co-financing rates. A second level of examination could be whether EU funds are used consistently within and across policy areas—i.e., whether there are risks of overlapping or duplication, taking account of other levels of intervention, such as the European Investment Bank and national and regional budgets. A key point in this respect is whether there are indications that EU funds are used as a substitute for national funds, thus releasing national resources for use elsewhere, or for measures that would have been undertaken anyway. A third level of examination could deal with sustainability of funded measures and durability of results.

The ultimate aim of such assessment would be to ascertain the degree of EAV of spending programs, as the Commission initially envisaged,¹⁴⁵ and to check whether commitments for results-oriented spending have materialized.¹⁴⁶ This would open up the prospect of an EAV “assurance” assessment by the ECA that would “increase accountability and allow for an informed public discussion on how the EU budget is used,” opening the door to concerns and expectations of European citizens as a major factor in shaping future budgets.¹⁴⁷

E. Conclusion

As observed in the introduction to this Article, the EU budget has a unique nature. Mostly funded—although invisibly—from national taxation, EU spending is set in a long-term plan with a large number of programs and objectives, yet concentrated on two main areas—agriculture and cohesion—for which member states nominated bodies ensure the daytoday management. The Commission, which is responsible for the budget implementation in all circumstances, manages directly less than one fifth of the funds.

Such framework is based on three main principles. As for any EU action, impact assessments should determine whether or not Union action is needed. In particular, EU spending is meant to achieve more than national spending alone, a concept known as European added value (EAV). Furthermore, EU spending should be managed at all levels according to common rules and standards. Delegated management bodies should have in place “internal control systems” designed to provide reasonable assurance that spending complies with legality, regularity, and value for money. The Commission should supervise the operation of such framework and report on the results achieved by EU spending. Finally, the European Court of Auditors (ECA) is responsible for auditing the budgetary implementation and reporting to the European Parliament and the Council, whose scrutiny culminates in the annual discharge procedure to be given to the Commission.

Figure 1. EU value added and funding from the EU budget¹⁴⁸.

In practice, however, the notion of EAV is not defined at EU level, which provides the ground for applying different rationales. Impact assessments, at the heart of evidence-based policy and legitimacy of EU action,¹⁴⁹ do not play as a strict filter for EU spending programs, in particular concerning translating high level political aims or policy objectives into operational objectives. In several cases, measures are not based on an impact assessment.¹⁵⁰ The Commission has no active role in the budgetary implementation entrusted to delegated bodies and in the main management decisions they take, for which it discards responsibility. Its supervision, limited by its remoteness from the ground field, focuses on the respect of financial compliance, in other words, that irregularities do not exceed 2% of the expenditure. Concerning results achieved by EU spending, the Commission has to rely on third-parties’ reporting whose reliability is uncertain.¹⁵¹ It has not been able so far to demonstrate convincingly that “spending at EU level means a better deal for citizens than spending at national level.”¹⁵² This notwithstanding, the risk for the Commission to be refused discharge seems rather theoretical.¹⁵³ The fact is that the Commission is given discharge each year despite the ECA standing qualification of the legality/regularity of the EU expenditure in the last twenty-five years and its recurrent criticism on EU spending’s performance in all policy fields.

This Article examined the way in which the ECA discharges its responsibility for auditing EU funds. It observes that for several reasons¹⁵⁴ the annual audit opinion, its priority task, provides a limited assurance. Furthermore, the approach based on “error rates” risks promoting the wrong incentives and ineffective protection of taxpayers’ money. At the same time, this Article acknowledged the important and growing effort undertaken by the ECA to respond to the demand for performance assessment. It drew attention to the significant funding allocated to cross-cutting priorities where similar objectives apply to areas such as cohesion, transport, energy, and research. The inherent risk of poor coordination and overlapping measures would recommend a scrutiny of spending programs across audit chambers’ thematic responsibilities. Furthermore, this Article highlighted a limited geographical representativeness of performance reports, covering a handful of member states only. Finally, the picture provided by the ECA concerning the implementation of its recommendations seems too optimistic, because the lack, or inadequacy, of key conditions for ensuring “value for money” is recurrently raised in its performance reports. This Article also noted that the ECA’s choice of addressing recommendations to member states has not yet resulted in an adequate follow-up. This raises the question of whether national audit offices should be involved in the follow-up process and, more generally, whether the ECA should have an open data platform of its recommendations to raise public awareness and induce better accountability from those responsible for action.

As a result of the Coronavirus pandemic, nothing has stayed the same. The unprecedented increase of EU funding decided for the period 2021–2027, amounting to more than €1.800 billion, means that already in 2021 EU expenditure is expected to reach about €380 billion, complemented by up to €133 billion in loans to member states. The demand for accountability and protection of taxpayers’ money will increase proportionally, as well as the risk of frustrated expectations betraying the public trust. As the ECA recently pointed out, providing funding to member states is not enough by itself, stressing the need of adequate administrative capacity to make good use of it.¹⁵⁵

This will add a challenge to the ECA’s already broad audit field with a growing number of financial instruments. Furthermore, it is not impossible that such audit field will be further expanded, following the ECA’s claim that its audit remit should be extended to all bodies set up by the EU to implement EU policies—such as the European Defence Agency and the proposed European Monetary Fund—and bodies created through agreements outside the EU legal order—such as the European Stability Mechanism and the European Investment Bank in relation to its non-EU budget operations.¹⁵⁶

In implementing its audit strategy, the ECA will be faced with difficult choices when allocating its audit resources—about 400 auditors, currently devoted for a significant part, at least 40%—to the establishment of the annual audit opinion¹⁵⁷ which, as observed above, provides only limited assurance. This means that requests for additional staff to cope with the expansion of EU activities and finances cannot be dissociated from a review of the current auditors’ allocation. Definitely, determining how much assurance is reasonable and ensuring cost beneficial audits is a matter of judgment. A critical issue, however, is the need to avoid—notably due to resource constraints—audits in certain areas that are adversely affected by the intensity of audits in other areas. For example, as noted earlier, there is a case for extending the horizontal view and the representativity of its performance audits, requiring most likely further resources. Ultimately, the allocation of audit resources to influential audit work, adding most value to support the EU achieving long-term benefits, will represent a touchstone for ECA’s commitment to “act as a role model in financial management.”¹⁵⁸

Acting “in the Union’s general interest,”¹⁵⁹ the large discretion the ECA enjoys in setting its audit mandate requires to give it a “useful effect,”¹⁶⁰ in line with the EAV principle. There is a trade-off between the “intensity of checks on the one hand, and the benefit these procedures bring on the other.”¹⁶¹ In particular, the ECA’s relevance depends on its ability to make a difference and create value for society by responding to expectations, emerging risks and changing circumstances. In a rather reform adverse environment, the ECA can promote beneficial change by providing knowledge unavailable elsewhere, comprehensive analysis, and well-founded recommendations for improvement.¹⁶² For example, the development of the concept of “value for money” and the call for a performance culture or the introduction of an EU integrated internal control framework would not have materialized without the ECA’s input.

Against this background, this Article makes two main proposals. The first¹⁶³ concerns the ECA’s annual audit opinion. Forfeiting the dividends of the significant efforts deployed in the last twenty years to develop an effective EU internal control framework, the ECA could build its audit opinion on the operation of such framework and the management information provided by the Commission. This would provide an assessment of the internal control framework, currently outside the scope of its annual audit opinion, thus fostering responsibility at management level. It would also counterbalance the current bias towards formal compliance, enlarging the scope of the annual audit opinion to “value for money” and hence sustaining the emergence of a performance culture. Finally, the enhanced use of management information will require less ECA direct testing, thus reducing the burden on audited bodies and beneficiaries.

The second proposal¹⁶⁴ concerns the EAV of EU spending. The ECA’s broad knowledge and capacity for analysis in performance audits would allow to operationalize progressively the EAV assessment by identifying specific constituent elements bearing witness of EAV in a given spending area and develop accordingly the audit criteria that would permit to assess whether, and to what extent, EAV has been achieved. This would open up the prospect of an EAV “assurance” assessment by the ECA that would indeed “help EU citizens decide if they can trust EU institutions to deliver results for them”¹⁶⁵ and potentially play a triggering effect in enforcing better accountability from those called to action.