IAS Conference 2002
The topic of the 2002 Verstehen Workshop: “The search for a Single Audit Concept in Europe ”, emerged from the 2001 Verstehen Conference. The need for debate arises from the a situation where the Commission has responsibility for implementing the budget and yet over 80% of EU funds are managed, controlled and spent by Member States, Candidate Countries and other partner countries. In addition, beneficiaries and managers of EU funds are subjected to multiple and overlapping audits by European and national bodies, and a myriad of procedural and financial requirements. It is clear that under the present un-orchestrated architecture, a guarantee as to the regular, efficient and effective use of public resources is not possible. Additionally, recent changes in EU financial management were triggered by the necessity to restore public confidence. In order to prevent future control mishaps, it is vital that the audit community continues the process of rethinking the functioning of control and audit in the EU. The conference organisers thought that an open dialogue between concerned parties on the concept of the single audit would be an important driver for positive convergence of controls, audit and reporting standards in the public sector in Europe. Single audit assumes a coherent and integrated control and audit architecture for EU funds at both the European and national levels, which in turn, leads to more transparency and accountability. To help focus the proceeding the organisers developed a Working Theses (link to theses).
This conference gave speakers representing a variety of the European, national and academic perspectives the opportunity to present their views and discuss the viability of single audit as a solution framework. It also was designed to serve as a catalyst for progress on this critical subject. This event brought together over 200 participants from all over Europe representing international and national organisations and associations, NGO's and the European institutions as well as the private sector. The speakers included senior representatives of the European controls and audit community (the national audit courts, national administrations and European Institutions); Mr. Ian Ball, the CEO of the International Federation of Accountants and Ms. Stéphanie Flizot, Maître de Conférences at the Université de Paris. (Link to speakers and to participant list).
The Verstehen workshop consisted of two sessions, each of which was opened by a keynote speech followed by statements from panel members and a question and answer session. Participants were also given the opportunity to register their opinions on key issues using electronic voting equipment. The voting results are presented separately. (Link to voting results). A synopsis of the workshop speeches and discussion is provided separately (link to synopsis).
Overall there was strong agreement about both the benefits and importance of a clear and coherent "single audit” concept and there was wide acknowledgment of the preconditions and barriers to its introduction. The only real dissonance came from national audit courts, questioning the need and rationale of their involvement in the assurance process of European funds, beyond their present national remit. The workshop proceedings did add texture and depth to the workshop theses, as described below.
Benefits of Single Audit
In terms of the benefits of single audit in Europe the following points were raised: Efficiency. As the single audit approach requires planning and coordination of audits it promotes efficient and effective use of audit resources - it reduces duplication of audit work and introduces process simplification. It was emphasized that the integration of financial controls allows the upper levels of control to make use of controls undertaken at lower levels. It may also be possible to use the same population of transactions to test the adequacy of controls over funds; and it will sometimes be possible to simultaneously test internal control over financial reporting, compliance, and compliance requirements. Other gains mentioned included the integration of financial controls in some EU Member States, and the potential for addressing concerns about resource bottlenecks.
Quality Improvements. In the US, single audit resulted in uniform requirements for audits, which in turn resulted in quality improvements in the financial management of state and local governments. It helped foster fundamental financial management improvements and strengthened accountability in entities receiving funds. The repeated exposure to a structured audit process promoted discipline in accounting practices. The problem experienced in the US is how the Federal government can digest the avalanche of information emerging from the process. Increased Transparency and Accountability. A speaker from the European Parliament emphasized the single audit will increase transparency and accountability and this is important as we need to demonstrate to the European taxpayer "value for money”.
Identification of Systemic Problems. The single audit can find systemic problems with an entity's management of its funds.
Moves Us Closer to an Assurance Statement. The speaker from the European parliament felt the single audit approach will move the Commission closer to a warranty on the use of funds and that progress towards this objective must remain the measuring pole for the Commission's performance.
Other benefits included that single audit will result in a more standard and transparent risk assessment approach and a more “proactive preventative controls approach” as the single audit emphasizes correction of control weaknesses.
Preconditions and Barriers
The speeches and debates demonstrated there was agreement on the preconditions and barriers outlined in the theses and they provided additional insights as described below. Speakers did emphasise the importance of clear ownership and responsibility with one speaker stressing that expenditure programmes at the outset need to be designed to provide clarity about the objectives and outputs, identify specific responsibilities and establish performance measures. Accrual accounting was mentioned as a necessary precondition. These actions would result in increased accountability and establishing targets against which the efficient and effective use of funds could be gauged.
In terms of recipient organizations, one speaker felt a capable management must be in place in the recipient organizations and that this included financial management. His point being that strengthening the audit and controls systems was not substitute for sound management. In terms of the Commission's role, parliamentarians felt that the Commission should play a key role even in the case of decentralised expenditure where the government or central body has a management responsibility. A speaker felt that partnership and cooperation were important and that the Community needed a natural system of checks and balances. A speaker from the European Court of Auditors stated that the Commission has the prime responsibility for the development of an integrated and effective EU internal control system.
In terms of the role of the Member States, a speaker from the European Parliament observed that although the Commission alone is responsible for the correct implementation of the budget, over 80% of the European public funds are administered by the Member States and the majority of problems have their origin in the Member States. National bodies are obliged to carry out controls and audits in accordance with their national systems, this results in the application of different methods and standards. The speaker firmly requested that the Member States actively co-operate in the framework of the discussion of a more uniform audit concept for Europe. Some felt that straightening out the relationship between the Commission and the Member states is an essential precondition to the successful implementation of the single audit concept in Europe. In describing the Courts role, a speaker representing the European Court of Auditors stated that the Court will always maintain its independence, it will ensure that its views on the control and audit system is communicated effectively, and indicate where improvements in the system should take place. In addition, he pointed out that the Court intends to place more emphasis on the examination, evaluation and audit of the systems performance as a whole.
Thus, the speakers agreed with the premise that clear roles and responsibilities were a key precondition. A logical next step would be to work towards defining more clearly key preconditions, and then reaching agreement on the roles and responsibilities.
In terms of “willingness to cede existing traditions, putting the interest of the whole above the interests of the parts”, it was accepted that single audit will require a mutual reliance on each others audits, and that within an internal control system the final beneficiaries of Community funds should be subject to a single internal control audit rather than multiple and uncoordinated audits. Some speakers felt that a key element was the implementation of assurance statements submitted by the different organizations involved. This would clearly require appropriate mechanisms, resources and willingness to commit to take into account the “interests of the whole”.
One workshop thesis stated that “up-front recognition of the importance of a common controls and reporting and ... the will to make it work” were important preconditions and barriers to establishing single audit in Europe. Speakers recognised this, and called for establishing a conceptual coherence and adoption of common audit approaches. It was understood that the approach has to be based on accepted principles and standards including a focus on the efficiency and effectiveness of the organisation or program as a whole, rather than a focus upon individual transactions alone.
Speakers elaborated on the barriers, emphasising that they had to operate within the subsidiarity and partnership principles. It was acknowledged that there is an issue of institutional competition and concern about the impact single audit could have on independence. It was also felt that an improvement of control over Community funds could come through greater awareness of national authorities of their responsibilities in this area. However, it was pointed out that national constitutional (legal) barriers might be very important obstacles that must be overcome for single audit to be implemented.
The Maastricht Treaty reinforced the position of the European Court of Auditors by establishing it as the fifth Community Institution, and the Amsterdam Treaty added a reconciliation phrase indicating that European and national audit Institutions are to cooperate while respecting their mutual independence. Nevertheless a speaker feared that most national audit and verification organizations do not want to “do the work” of the European Court of Auditors; or they are afraid of eventually having to perform controls at its request. It is therefore clear that tensions between the central European bodies and the national bodies are real and will need to be addressed. The lack of harmonisation, and the fact that there is no common methodological framework, was recognised as a major barrier. One such aspect was the incompatibility of national and Community level external audits and that differing requirements of internal and external audits resulted in additional complexity. It was also pointed out that there is no harmonisation in the current audit systems, or in the methods of verification applied at national and Community levels. Establishing a common framework would facilitate the integration of controls and result in philosophical and methodological familiarity; this could be developed through the national certifying bodies. This integration would introduce a functional reliance on controls in the architecture where the upper levels of control can make use of controls undertaken at lower levels. It was also pointed out that it would be necessary in a multi-layered system to ensure competencies at all levels, as entities in the structure are mutually dependent.
In terms of the “will to make it (single audit) work” this was clearly seen as a critical factor in the implementation of single audit. The EU Parliamentarians strongly endorsed the single audit approach and they feel a high degree of obligation to the citizenry to be able to provide an assurance that funds are used for the intended purpose. Most national audit bodies were less enthusiastic/optimistic about the introduction of single audit as barriers such as potential loss of independence, the need for mutual reliance and the need for developing appropriate legal and political instruments were seen as formidable. It was recognised that a key factor in introducing the single audit in Europe is establishing incentives that can effectively handle the fact that audit objectives and interests can differ and an adverse audit report can lead to withdrawal of Community funds.
Ensuing Debate/Next Steps
The workshop did result in the identification of additional benefits and barriers, speakers presented their perspectives and concerns and they deepened our understanding (Verstehen) of single audit in Europe. No doubt audit professionals will continue to debate issues at the micro level and this is will bring clarity and convergence of views.
It was clear from the workshop proceedings that driving forces (such as an increased desire to demonstrate “value for money” and the risks associated with a system in which over 80% of EU funds are managed, controlled and spent by Member states, Candidate Countries and other partner countries) will increase the pressure for systemic changes in the audit framework in Europe. The fact that both the European and national level entities are accountable to the same EU citizenry means they have a common interest in mapping out a path towards a framework with a rationalised and efficient and effective system of control that can give “adequate assurance” that funds are used for the intended purpose. All concerned recognize that it will take commitment and leadership to make this happen. The alternative is a patchwork of audit systems that leaves the EU exposed to major control breakdowns, which will result in misuse of EU funds or fraud. The associated reputational risks are so great they require a proactive solution. Many speakers looked to the Commission and the European Court of Auditors to take a leading role in moving towards the implementation of single audit in Europe. This was especially true of the EU parliamentarians. In the closing speech the Chairperson of the Budgetary Control Committee of the European Parliament underscored the importance of the single audit in Europe when she asked herself whether this topic should not be appreciated in view of the European convention as both were concerned with architecture and relationships. She felt that the European institutions should be regularly informed on progress, deal with the obstacles and give creative suggestions and solutions. The speaker called for quick progress so that during the forthcoming EU enlargement the administration of European tax funds in the new Member States will be subject to the same audit system.