European Commission: Internal accounting controls, August 2002

In a year when American firms such as Enron and Worldcom have hit the headlines with accounting scandals, media attention shifted to the European Commission in Summer 2002 with allegations that its internal accounting system is unreliable and insecure.

The claims, which suggest that not only are the European Union's accounting books open to fraud but that the European Commission itself tried to cover up the irregularities in its accounting control, hit the headlines when a report by the European Court of Auditors was linked to the Financial Times.

Background

Questions over the EU's accounting system first rose to the fore in 2002 when Marta Andreasen, the European Commission's chief accountant was sacked in May, only four months after taking the position. The A2 grade official refused to sign off the EU's 2001 accounts and openly criticised the European Commission's accounting system for failing to use the generalised double entry book-keeping system. Andreasen also alleged that computers used by the European Commission are not secure enough and that the book-keeping is not supervised by qualified accountants. At a conference hosted by the British conservative MEPs in London to highlight the potential EU accounting problems, Andreasen is reported to have said:

"Unlike the issues surrounding Enron and Worldcom, where you can at least trace transactions and accounts, you cannot do so within the EU accounts as there is no system in place for tracing adjustments and changes to figures presented. Fraud can therefore lie hidden within the system, undetected and untraced".

Chris Heaton-Harris, Conservative Spokesman on Budgetary Control, also issued a statement to coincide with the conference. He recalled the problems of the previous European

Commission, which were highlighted in 1999, and questioned why Marta Andreasen had not been promoted for seeking to resolve some of the accounting problems rather than sacked. He added:

"These are the most serious accusations to have emerged since the Old Commission's dismissal back in 1999 and come at a time when the news is full of the commercial world's accounting failures".

Marta Andreasen is believed to have used the systems within the European Commission to raise the many problems she began to notice soon after starting work in January 2002. It has been suggested that these were at first ignored and then various individuals in the Commission put pressure on Andreasen to keep quiet, implying that if she acted otherwise she would lose her job. Eventually, Andreasen decided to write to the President of the European Commission and she then found that her accounting responsibilities were removed and she was demoted to an admin job. It was at this stage that she wrote to Members of the European Parliament to inform them of the problems.

Following this action, a disciplinary procedure was launched against Andreasen for non compliance with staff regulations. The validity of Andreasen's allegations was further questioned when it was later revealed that Andreasen had been sacked from her former position as head of the accounting division at the Organisation for Economic Co-operation and Development in December 2001.

Auditors' View of European Commission's accounting system

However in June 2002, the European Commission's chief auditor backed Andreasen's criticisms of the institution's accounting methods claiming that there was "a strong convergence of views" on the points made by the sacked accountant. Jules Muis, head of the European Commission's internal audit service said:

"The problems identified by Mrs Andreasen are also problems identified by the Commission. We agree that there is a problem in the accounting system".

Then, a leaked report to the Financial Times in August 2002, also suggested that Marta Andreasen's allegations may have been founded. The report, prepared by Colin Maynard, a director of the Court was sent to the European Commission in February 2002. While European Commission officials have suggested that the working paper will never be published because "it contained inaccuracies and the tone of the language was inappropriate", the Financial Times did reveal some details in the report" it does highlight a number of problems with the European Commission's accounting system. In essence, it suggests that the system lacks security and reliability, does not take account of "generally accepted accounting standards, mainly double-entry book keeping". The European Commission uses a system known as Sincom to process accounts worth €1-2 billion of taxpayers' money each month. In both its annual reports for 1999 and 2000 the European Court of Auditors criticised the system and warned the European Commission to resolve the problems. However, the European Commission had previously failed to take any remedial action until the latest spate of criticism.

On 24 July 2002 the European Commission issued a press release which outlined the European Commission's increased efforts to modernise its accounting system. It said it would soon issue a detailed which would allow the European Commission to take a decision by the end of 2002 on the options for development, the proposed calendar for implementation and the projected costs.

Speaking about the development Michaele Schreyer, European Commissioner for the Budget, declared that:

"the Commission's accounting framework is based on cash accounting and is moving, in common with public administrations in some member states, towards more commercial-style (accrual) accounting practices required by the new Financial Regulation to be put in place for the year 2005".

The modernisation of the accounting system is expected to involve the evolution and proposed revision of:

• the accounting rules especially on how the generally-accepted accounting rules of the business sector can be implemented for the EU and the stages towards full compliance; and
• the computer system, which was designed for cash accounting, and in particular the chosen computer system architecture together with the resources and timetable for development.

Detailed development of both the accounting framework and the system should be launched in 2003 with the relevant testing and implementation phases beginning in 2004. The functioning of the current SINCOM2 system is also expected to be improved in 2002 and 2003.

However, it remains to be seen whether the European Commission can modernise its accounting system enough to shake of its critics who quickly refer back to the problems of the Santer Commission. While the doubts remain anti-EU groups are seizing the opportunity to question the powers of the European Union. TEAM, the European Alliance of EU Critical Movements issued a press release on 2 August 2002 in which it questioned whether the European Commission could be trusted, saying:

"The latest accusations of budget fraud within the EU and harassment of former chief accountant Marta Andreasen shows that the Commission can not be trusted. An institution which has no control over its spendings can not claim increased powers. This needs to be taken into consideration when discussing the future roles of the EU's institutions".

With the EU set for enlargement in 2004 an even greater amount of money is set to pass through the EU's books making it clear that the European Commission needs to tackle the problems with its accounting system with some urgency.

Further information within European Sources Online:

European Sources Online: Topic Guides
	The European Commission
	The budget of the European Union
European Sources Online: European Voice
	06.06.02:	Accounts row official hid prior sacking
	20.06.02:	Auditor backs sacked official's claims
	04.07.02:	Finance safeguards are "seriously weak", says chief auditor
	25.07.02:	Legal chief advises Kinnock to let Andreasen address MEPs
European Sources Online: Financial Times
	18.07.02:	Controversial accounting officer petitions MEPs
	25.07.02:	Commission comes under fire from its own top officials
	01.08.02:	Brussels turns on softly spoken accountant
	01.08.02:	EU controls over budget slammed as unreliable
	01.08.02:	Account control problems under merciless spotlight
	02.08.02:	Kinnock faces flak for disciplining accountant
	02.08.02:	Kinnock accused of gagging accountant
	02.08.02:	Held to account
	03.08.02:	More tales of fraud

Further information can be seen in these external links:
(long-term access cannot be guaranteed)

EU Institutions

European Commission
DG Press and Communication
	Press Releases:
		24.07.02: Modernisation of the accounting system: the way to an integrated accrual accounting framework system
	Speeches
		24.07.02: Commission achievements and internal management and control systems in 2001 [SPEECH/02/355}
	Internal Audit Service
		Organisation Chart
		Verstehen themes
	European Anti Fraud Office
	DG Budget
		Organisation chart
		Mission
		Management of the Union's Budget
		Working Paper: Accounting framework for the European Communities - Modernisation of Accounts
	DG Press and Communication
		Press Releases
Miscellaneous Sources
TEAM (The European Alliance of EU Critical Movements)
	Homepage
	Press Releases
		02.08.02: Budget fraud shows the EU Commission cannot be trusted

News Sources
BBC News
	01.08.02:	EU accounting row
	01.08.02:	EU hit by accounting allegations

Further and subsequent information on the subject of this In Focus can be found by an 'Advanced Search' in European Sources Online by inserting 'European Commission accounting controls' in the keyword field.

Helen Bower
Compiled: 23 August 2002

Overview of the controversy surrounding the European Commission's internal accounting system.