Accountancy methodology for the EU’s
annual budget, long-criticised in the European Parliament and
elsewhere, is finally transforming itself into a pioneer in
professional standards in the domain of public services. Jeremy
Woolfe reports.

 

Year-on-year, the European Court of
Auditors has failed to give a clean bill of health to the European
Commission’s (EC) spend. However, many of the issues of yesteryear
have been healed or are well on their way to sound health for
Europe’s control budget, which runs to €117 billion ($165 billion),
or about 1 percent of the EU’s gross income.

The history of EU accountancy makes sorry
reading. The subject came under the harsh light of public scrutiny
shortly after professional accountant Marta Andreasen was appointed
as Europe’s chief accountant in January 2002 and wielded the
clean-up broom.

But, after only five months, Andreasen was
removed from her post by commissioner Neil Kinnock. This followed
her refusal to sign off ledgers dating from before her arrival.
Andreasen stated that the systems were akin to a bank leaving its
vault doors ajar.

Andreasen, a Euro-sceptic, was last summer
elected by British voters as a member of the European
Parliament.

While 2002 may have seemed bad enough for the
EU, its reputation plummeted further in autumn 2003 when the head
of the commission’s internal audit office, Julius Muis, quit his
post. He said he was “being hampered” in his investigation of the
Eurostat scandal, where senior officials were caught with offshore
bank accounts dealing with public money. Muis also blamed
“inadequate corporate culture” for his departure.

Looking up

Things began looking up when
European politicians provided a sufficiently solid mandate to the
new European accounting officer, Brian Gray.

Gray took over as head of accounting in
January 2003. A professional chartered accountant, his career
started with Deloitte and moved into EU officialdom in 1978. In May
2009, he became the commission’s internal auditor.

Gray kicked off his accountancy post with two
radical reforms. First, he set out to base the new system on
guidelines set by the International Public Sector Accounting
Standards Board (IPSASB), which focuses on the accounting and
financial reporting needs of national, regional and local
governments.

Secondly, he began to turn the commission’s
cash-based accounting systems over to accrual.

The EU appears to be well ahead of the herd on
accrual-based accounting. France, the Nordic countries and Spain
have adopted it. The UK and Belgium are on the way and while
Germany is not there, some states within the country have adopted
accrual systems. Italy follows a similar pattern.

Gray found himself facing the normal problems
associated with the public sector. While the sector has no profits
to book, it must support systems where purchases for items such as
paper clips may require up to four signatures. Software had to be
designed to cope. Public service accountants may also have to cope
with public private partnerships.

Speaking with The Accountant, Gray lists some
of the special problems faced by accountancy for the EU budget.

Firstly, there is the matter of unfunded
pensions for around 37,000 officials. Gray says he has this booked
as a liability. In 2008, it stood at €37.7 billion, pushed up by
lower discount rates (based on Government bonds in the eurozone),
from €33.1 billion the year before.

Another complexity for the EC is the
politically delicate task of evaluating sovereign debt. What do you
do if Ireland owes you money, or if the EC underwrites a loan by
the European Investment Bank to the Ukraine?

Innovation under way at the EC includes the
application of management accounting techniques to the work carried
out by officials looking after a great variety of projects.

Gray likens what he is setting up to an
aircraft cockpit. If the hydraulic pressure to actuate the
undercarriage exceeds limits, there is a red warning light that
flashes, says Gray.

He applies the same logic to crucial stages in
project progress.

“You want to know if a contract has been
signed on time, not six months later,” he explains.

For example, if a report is delayed past the
due date, an alarm will flash. This can signal warnings for due
date clearance of budgets, the signing of contracts, progress
reports, payments, and so on.

The EC’s centralised accounting system now
involves 10,000 accountancy users, plus correspondents located in
40 directorate generals, and 140 overseas delegations. The users,
not normally qualified in accountancy, have been trained to feed in
balance sheet data on the state of creditors and debtors, and
advances on grants. Pre-2005, the EC lacked balance sheet data that
is comparative with industry norms, says Gray.

Gray has a small team visiting the outposts to
check that transactions are timely, accurate and complete. Its aim
is to correct errors as they come along.

Not there yet

While the Brian Gray reforms deserve
acclaim, the EU’s lopsided budgeting remains an issue. For example,
in 2008, farm lobbies succeeded in having eight times as much of
taxpayers’ revenue given to their cause than did research and
development, energy, and transport put together.

Despite the ratio of agricultural budget to
research and development dropping from 10:1 in 2008 to 6:1 this
year, the advances in accountancy over the last few years sadly
still amount to little.