The European Court of Auditors before the Maastricht Treaty: the problem of uneven audit coverage (1977-1993)
Tire Treaty of Brussels (1975) placed tire following responsibilities on the newly created European Court of Auditors: to examine the accounts for all revenue and expenditure; to examine whether all revenue had been received and all expenditure incurred in a lawful and regular manner; to examine whether financial management had been sound. The newly constituted Court immediately judged tire examination of all revenue and expenditure to be impracticable. Because of the limited staff resources available, attempting to examine all transactions, or even a substantial proportion of them, was not possible; nor was it desirable in tenus of cost effectiveness. Still, the ECA wanted to find a basis for its work that would demonstrate its capacity to fulfil its obligations and satisfy the legitimate expectations of independent, external financial control fr om the Parliament, Council and public opinion.
This first challenge was solved at an early stage (late 1978) through the adoption of the ‘systems approach’. Under the leadership of the Dutch Member of the Court, later the ECA’s President, Mr André Middelhoek, a first reflection document on ‘The Court’s approach to its audit responsibilities’ was submitted to the college of auditors (ECA 1978). That document proposed that the ECA examine systems and procedures, and assess how they work in practice through compliance and substantive testing. The ‘systems approach’ would allow auditors to rely on existing information in order to detect weak spending areas and concentrate their efforts on them.
The method that was advocated chew on internationally accepted standards (Stephenson 2017); yet, observers and stakeholders alike soon judged the approach as insufficiently uniform. While the Treaty required full audit coverage, the systems approach seemed rather uneven. A former member of ECA staff criticised the ECA’s ‘patchy audit coverage’ from his position at HM Customs and Excise:
[t]he difficulty of switching staff between audit sectors even temporarily means that in some fields there is ‘over-audit’ and in others ‘under-audit’ ...
Failure to follow through here will not only do the Community’s financial watchdogs a general disservice, but will also expose the Court to serious and more specific risks of missing major systems deficiencies.
Along similar lines, the UK House of Lords, a rare example of a national institution closely watching the ECA and its activities, held an enquiry on ‘Fraud against the Community’ in 1989. The fight against fraud, although outside the scope of the ordinary audit procedures, played a major role in all the proposals for strengthening the powers of ECA.7 The Committee on the European Communities recommended that
the responsibilities of the Court of Auditors should be revised and the external audit function should be replanned and defined so that the Court can discharge properly the responsibilities placed upon it by the Treaty [...] so that all the operations in the Member States are adequately covered.
(House of Lords 1989: 28)
The committee first voiced the idea that the ECA issues a ‘formal opinion’ as to ‘whether the annual accounts show a true and fair view (or present the position fairly)’ (ibid.), in line with its treaty mandate. Such an obligation to give an opinion is a valuable discipline that gives a defined prupose to the audit.