Court of Auditors: EUC Report

HL Deb 08 January 2002 vol 630 cc518-50

7.46 p.m.

Lord Grenfell rose to move, That this House takes note of the report of the European Union Committee on the European Court of Auditors: the case for reform (12th Report, Session 2000–2001, HL Paper 63).

The noble Lord said: My Lords, noble Lords may wonder how it is that a report which was published on 25th April 2001 must wait until 8th January 2002 to be brought to the Floor of the House for a debate. At least the debate is being held on a Tuesday rather than on a Friday. A general election, an 11-week Summer Recess and the events of September 11th of course must be taken into account. Nonetheless, I hope that the Leaders Group, chaired by my noble and learned friend the Leader of the House, which has been looking into the procedures of the House, including its scrutiny role, will have fully recognised that where the report of an inquiry is deemed important enough to be brought to the Floor of the House for debate, business managers have a duty to ensure that the debate takes place before the passage of too much time renders it irrelevant.

I am deeply grateful to every member of Sub-Committee A for the hard work put into a very complex inquiry. Some members had specialist knowledge and direct experience of working with the Court of Auditors, and this was of particular value to us. We took evidence from a wide range of witnesses: from eight of the 15 members of the court, from the European Commission, the European Parliament, from our own Treasury and from the National Audit Office, from our permanent representation in Brussels, to whom I wish to express my thanks for their great help in making arrangements for our visit, and from a number of individual experts well versed in the ways of the European Union's audit process.

I should like to pay special tribute to the Clerk of our committee, Anna Murphy. This was her first inquiry on becoming a Clerk. While I felt that truly we were throwing her into the deep end with such an inquiry, she took to it like a duck to water. Since we had no specialist adviser, her role in the drafting of the report was crucial and she played it with the skill of an old hand. We are very much in her debt.

Perhaps I may also thank the Government for their response to our report, even though I do not agree with all of it. Nonetheless, it is a thoughtful and comprehensive response and, as always, I am delighted that my noble friend Lord McIntosh of Haringey will be the Minister who is to reply this evening. By now I can scarcely imagine a debate on a Select Committee report prepared by Sub-Committee A without him, but I would not blame him if he thought otherwise.

Our inquiry was prompted by a growing concern that current problems relating to the structure, functions arid methodology of the Court of Auditors would surely be accentuated by the enlargement of the European Union. Enlargement will pose many challenges for the court, not least among them the greater cultural diversity in its working environment and the substantially greater expenditures and revenues to be audited. For that reason, the court needs to be properly equipped to meet the challenge—and the court knows it. Changes are already under way. However, the question is whether they are the right changes. That is what we decided that we wanted to find out.

As reflected in the report, we set about examining the court's structure and organisation and evaluating their appropriateness. We looked at the complex inter-institutional system within which the court is expected to operate and to fulfil its audit functions. We explored its audit methods and its role in the prevention of fraud. We examined, and found compelling, the case for a one-off external management audit of the court itself. Finally, we took a good look at the likely impact on the court of the internal audit reforms which Commission Vice-President Neil Kinnock was in the process of implementing within the Commission.

A number of noble Lords who will be speaking in the debate will delve into more of the detail of this inquiry. I shall content myself with an overview of the principal conclusions that we reached.

Even if the enlargement of the European Union was not imminent, the present structure of the court needs an overhaul. One court member per member state is an unsatisfactory arrangement in a union of 15 states. With 20 states or more it will prove hopelessly unwieldy. National representation is a sine qua non for any EU institution, but to improve the court's efficiency that representation ought, as we state in paragraph 33, to be at the level of a part-time non-executive board to which a highly qualified chief executive, supported by a large audit staff, would report. In paragraph 34 we suggest how the present shortcomings in the method of recruiting audit staff should be addressed. The introduction of a "chambers" system, sanctioned in the Nice treaty, is not, in our view, radical enough to solve this problem. I believe that the noble Lord, Lord Sharman, a member of our committee, will be expanding on the need for the crucial reform we are advocating.

In their response, the Government have noted that there are other ways of combining the representation of all member states with a focused management structure and cite the example of another Luxembourg-based EU institution, the European Investment Bank. None the less, we feel strongly that the structure proposed in this report better responds to the EU's needs for improved audit efficiency. Of course I welcome the Government's statement that our proposal is, an interesting one and a useful contribution to the wider debate on the effectiveness and legitimacy of the EU institutions which will lead to the IGC planned for 2004". But it is more than that. It is, in our view, really the only solution to a problem that is seriously undermining the court's effectiveness.

With regard to the court's published output, we were impressed by the number of witnesses who saw greater value in the court's special reports on specific sectors—recognising, of course, that there are variations in their quality—than in the court's annual reports. The court itself acknowledged to us the past deficiencies of the annual report, and we were pleased to note that more attention is now being paid in them to the follow-up of previous court observations.

Nevertheless, the court remains reluctant to get into political battles with other Community institutions or member states. This will continue to inhibit it from really throwing the book at those who take no action after errors have been identified. If there are counter pressures on court members—and we have evidence that there were—that is one more cogent argument for moving towards an entirely professional and independent court executive.

We share the view of many that the major problem with the court's annual report has been with that component known as the "DAS", the French acronym for the statement of assurance on the reliability of the accounts and the legality and regularity of the underlying transactions. This was based on the audit of a representative global sample of underlying transactions. The problem was that the methodology used to arrive at an opinion, which we fully describe in paragraph 51, produced an error rate estimate which was invariably taken to be a precise enough measure of irregularities—which in fact it was not—to allow definitive conclusions to be drawn and recovery action by the Commission to be triggered. Worse still, it gave the media the opportunity to trumpet inaccurate and exaggerated claims of massive fraud against the Community budget.

Starting with the 1997 annual report, the court has progressively supplemented the DAS with more detailed and specific assessments of each category of the EU's financial perspective. What was once a "top down" system of assessment is becoming, as the court and the Commission disaggregate, a system which can provide far more, and far more useful, information, with a consequent enhancement of public accountability. We welcome this in our report, as indeed do the Government in their response.

As noble Lords will know, the responsibility for approving the accounts of the preceding financial year relating to the implementation of the budget—known as "granting the discharge"—rests with the European Parliament, acting with the aid of a recommendation from the Council and the court's annual report. The court will have discussed its audit findings with the audited bodies in a procedure known as the procédure contradictoire. Both this and how the recommendation to the Parliament is eventually reached are described in paragraph 56. We shared the view of the noble Lord, Lord Williamson of Horton, that a major advantage of the procedure is that it ensures that the Parliament, through its budgetary control and the plenary sessions, can play its proper financial role.

But we and almost all witnesses, including the noble Lord, Lord Williamson, were agreed that the procedure was too protracted, that it alienated the Parliament and that it could lead the public to believe that the long drawn-out process merely served to give time to the parties to fudge the audit. The Government share our concern over too protracted a procedure but warn against speeding it up too much for fear of a botched job. My noble friend the Minister will no doubt refer to some possible alternative remedies.

Although 80 per cent of the budget is administered by member states, the Commission still has to take responsibility for its implementation. Even so, Ministers in Council ought, in our view, to manifest a greater interest. The almost perfunctory Council recommendations for discharge tend to leave the impression that the Council wants to avoid being accused of using the Commission as a whipping boy for the failings of the national administrations in their administering of 80 per cent of the budget. My noble friend the Minister will, I hope, explain why he feels that we are being less than fair to the Council in this regard.

But that is only one aspect of our concern about the Council's attitude. The court president sought to assure us that dialogue between the court and Council officials had, in his words, "increased enormously", but we remain deeply unhappy with the Council's seeming indifference to the whole process at a time when the public's perception of the management of Community funds is as low as it is.

The internal audit reforms under way in the Commission, particularly the tightening of control mechanisms and the simplification of regulations to reduce errors and irregularities, can reduce the potential for fraud and prompt more robust follow-up through the system on the court's observations. At the same time, the Council, at ministerial level, would do well, to put it politely, to focus more seriously on the court's progressively more informative and authoritative annual reports before reaching for the discharge recommendation button.

Given what we call the "80 per cent paradox", the need for minimum standards of financial control in the member states is paramount, as our report insists. Differences between systems can be justified as long as each is effective. But that said, we prefer the delegated financial control system as used in this country, and we welcome the Commission's move to embrace it.

With respect to audit methods, the court, of course, has to cope with a cultural diversity, which enlargement can only increase. The solution seemed to us to lie in getting the national supreme audit institutions—the SAIs, as we call them—to share as far as possible with the court and each other a common audit methodology, similar competences and equal statutory rights of access, the last being a matter on which the UK has lagged behind but on which my noble friend the Minister is in a position now to reassure us. In general, however, we are encouraged that the SAIs are now much more attentive to the way national administrations implement the Community budget.

We found to our consternation, which is also the Government's consternation, that the member states and the Community's institutions share no common definition of fraud and irregularity. This needs to be, and can be, quickly resolved.

With further reference to fraud, we came down strongly against relying on the court's work to be the main line of defence against it. The potential for fraud will best be reduced by a much greater simplification of the systems and regulations relating to expenditures of Community funds. We warmly welcome in our report the attention being paid to this by the Commission in the areas of structural and agricultural funding. We fully understand the European Parliament's frustration at having no official figures on which to assess the extent of error, irregularity and fraud. If the court has them, and their accuracy can be vouched for, it should publish them.

Much of what we learnt in this inquiry led us to the conclusion that the time was ripe for an external management audit of the court to help determine how appropriate its structures are as it enters its second quarter-century. I am pleased that the Government feel that such an audit could provide a useful contribution to the debate in advance of the 2004 IGC. I hope it is more than just a useful contribution to the debate; it is something that really needs to be done.

I come finally—and I apologise for the length of this introductory speech—to the changes in the Commission which should make the internal audit more effective. We welcome these changes—they are reviewed in paragraphs 97 to 103—and were reassured by Commissioner Kinnock's determination to see that the functional independence of the Internal Audit Service and the audit capability within each directorate-general would be inviolate.

We encountered differences of opinion on whether the removal of the system of prior financial approval by a financial controller was sensible. With certain provisos, we come down in favour of a move away from the ex ante system of control. We agree with the Government that responsibility for financial management is better delegated to those who decide on how the money is spent—namely, to the directors-general.

A few witnesses feared that the reforms would enable the Commission to keep the Court of Auditors at a distance. We are sure that these fears will prove unfounded. The court remains treaty-bound to carry out the external audit of the Commission, and we see these reforms as a means of improving working relations between them, not least through the sharing of best practice so that the Community's financial management is improved overall.

This was a long and complex inquiry, but I believe that we came to a set of conclusions which make sense. Some of them are radical—notably our conclusions on how the court could, and should, be better structured, staffed and governed. As I said at the outset, the court's current structural and functional problems can only be accentuated by enlargement. Time is therefore not to be wasted. I am glad that Her Majesty's Government are taking these and our other proposals seriously. The opportunity afforded by the 2004 IGC to equip the court to meet the challenge must not be missed. I beg to move.

Moved, That this House takes note of the report of the European Union Committee on the European Court of Auditors: the case for reform (12th Report, Session 2000–2001. HL Paper 63).—(Lord Grenfell.)

8.2 p.m.

Lord Bruce of Donington

My Lords, I congratulate the chairman of the Select Committee and its members on the considerable amount of work, some of it tedious, that they have undertaken. If it is possible to agree with a Select Committee report on a matter of this kind, I am in full agreement with it, and indeed congratulate all the committee members on their work.

Your Lordships will recall that I have had reservations in the past about the presentation of Community accounts and their audited approval. I have often criticised the way in which the audit report of the Court of Auditors has, for some obscure reason, to be published with the Commission's replies to it, as distinct from having the audit report made directly available publicly. It is not the practice in this country. It should not be the case that a report can be published only when those who are perhaps criticised in it are given an opportunity to reply in advance to questions raised. I repeat that it is not the British practice. That in itself does not make it undesirable, but from an auditor's standpoint it puts the auditor in an impossible position.

The functions of the European Court of Auditors have been dwelt upon in the report that is before the House. They have aroused a certain amount of interest—not as much as they ought to have done, but some nevertheless. I was, therefore, intrigued to find that a government response to the Select Committee report had been published on 16th July 2001 among Government Responses to House of Lords Paper 13. I refer to pages 33 to 38 of the Government Responses. I thought that I should take a look at them before taking part in this debate.

I find overwhelming involvement of the domestic Civil Service in the response—which is in the form of a letter from Ruth Kelly MP, who was appointed Economic Secretary to the Treasury some months ago. It was published 37 days after her appointment. I refer to the response because I am a little troubled by the position of political Ministers in dealing with their own Civil Service.

This is a document of some importance and warrants critical ministerial attention at political level. It is not sufficient that it should be so dominated by the Civil Service as to be virtually ignored by the political establishment. I have good reason for saying this. At page 35 of the Government Responses, in the middle of a sentence, there is a queer little insert in brackets: (I sent a copy of this document to the Scrutiny Committees of both Houses on 9 May this year)". "I"? I thought that this was a government document. Again, in the penultimate paragraph of the response we find the following words: We urge Her Majesty's Government to give this, and our other proposals, serious consideration in light of the opportunity afforded by the Inter-Governmental Conference, now set for 2004, to equip the Court to meet the challenge". It looks as though the Government are "urging Her Majesty's Government"—

Lord McIntosh of Haringey

My Lords, perhaps my noble friend will permit me to point out that he is reading from the committee's report to which the Government are responding.

Lord Bruce of Donington

Yes, indeed, my Lords; that is part of my case. I sincerely hope that the Government will in fact read the report. I say that because, on the evidence, they have not even involved the political members of the Government in the publication of the response. This is quite indefensible.

I respectfully suggest to the House that it is necessary to return to the appointment of the Court of Auditors and to the amendments that were incorporated in the Maastricht Treaty, as amended at Amsterdam. Article 248 of the treaty says: The Court of Auditors shall provide the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions". That is it: it defines the role of the Court of Auditors with some precision—nothing more, nothing less. Any idea that the treaty can be circumvented in any way to vary from that is, of course, right out of the question.

In the same way, it seems as though items that appear in treaties are not properly perused by the political chiefs of the civil servants who are actually responsible for the production of these documents. At present, we have an entirely different situation: we find that practically everyone, bar the kitchen stove, is involved in obtaining the statement of assurance that is required by the treaty. Indeed, it seems that you can be anyone at all, without any authority and that no one will argue about the situation.

More ominously the same applies to the definition of the word "fraud". It is said that fraud is an irregularity that is officially frowned upon in the Commission and in all quarters of the European Union. However, in point of fact it is ignored. There is a pretence that it does not exist in any identifiable form. I defy anyone who reads the report to reach a different conclusion. I shall give the House an example of a fraud that is still going on with the approval of members of the European Parliament and also of other parliaments. I have in mind the tobacco fraud. In the last budgetary year, no less than £604 million was spent in conducting transactions, particularly in Greece, which everyone knew—and, indeed, still knows—are fraudulent, but no one dares say so because someone is afraid of offending someone else.

This kind of attitude becomes all pervasive, and the committee's report gives too many examples. I should like to draw your Lordships' attention to pages 44 and 45 where we find outlined in very great detail all the steps required to obtain, as the French would more dramatically put it, a déclaration d'assurance—because they like to have declarations rather than statements—and exactly what happens. Before any kind of matter goes to the final Council for approval it will have gone through a whole series of stages, which will occupy quite a number of weeks or months. The report will go through a whole gamut of departments before it can finally be drafted; for example, it goes to the civil servants of the Treasury, and it goes to the civil servants in COREPER. Indeed, the process is specifically designated as such. There is no question of there being any personal involvement by politicians in these reports. Each report is discussed at all levels by civil servants. There is nothing wrong with that—indeed, I have no objections in that respect—but there is no visible sign of real ministerial interest or concern.

This is the very simple case that I want to put to the House. Finance is an extraordinarily important item in the whole of the operation of the European Community. It gives enormous power to the Commission, which appears before the Budget Control Committee. That committee does an excellent job in so far as it is able, but throughout the process there is a network of civil servants through which everything must pass before the matter is finally agreed by the Council and the European Parliament. If noble Lords care to refer to pages 44 and 45 of the report, they will find that what I have said is abundantly justified. I shall give the House an example. In evidence, on page 45 of the report, Mr. Ilett, the Financial Counsellor, United Kingdom Permanent Representation, says: The Commission participates in this discussion all the time. The Commission will [always] be there in the working group. The Commission is always present at Coreper. The Commission will be defending itself … making suggestions, participating in the dialogue all the way through". He was then asked by the noble Lord, Lord Tomlinson, whether the Court of Auditors would also be present, and he gave a firm "yes" in response to that point. Each chapter is presented with the comments of the court and the replies of the Commission.

No proper and honest business will be carried out unless members of the political side of things take control of what is being done in their names. I am afraid that one is not encouraged by the evident willingness of governments to accept the assurances of a Commission whose troubles were recently reported upon. It is no good at all that it should be allowed to rule the roost for the sake of universal peace and lack of argument among the European rulers at whatever level—be it the European Council level, whose duties still remain to be defined. I defy anyone to say what legal status the European Council has. It means that politicians, especially Members of this House and of another place, must show a greater interest in these matters. They must carry out their own research and arrive at their own conclusions, rather than take things for granted on the basis of the documents being initialled by senior civil servants. They must make their civil servants have some regard for the desirable aims that ought to be achievable, and for the political force at the top level that ought to be there whenever necessary to enforce them.

8.20 p.m.

Lord Renton of Mount Harry

My Lords, I confess that I am a little nervous when I find myself being congratulated by the noble Lord, Lord Bruce of Donington, because I am normally on the opposite side of any argument that he makes about the European Union. However, on this occasion, as a past member of Sub-Committee A—I am now out to grass after four years on the committee, but I hope that I may climb back into it again at some stage—I accept his congratulations with pleasure. I shall pass them on particularly to the noble Lord, Lord Grenfell, and to the Clerk, because they and we have produced a report that is thoroughly competent and mercifully brief on a subject that no one would say was immediately of great dramatic interest.

It could be said that for your Lordships to be considering a report on the Court of Auditors at the moment is rather like a householder wondering whether his central heating is working when a hurricane is approaching that will remove his roof. I speak of the current debate on whether we should join the euro and when the Government will have the courage to hold a referendum. That said, it was a worthwhile exercise and I strongly agree with the remarks of the noble Lord, Lord Grenfell, about our principal recommendation, in paragraph 33 on page 12, which says that the ECA, would best be served by the impartial appointment of a highly-qualified chief executive, supported by a large team of audit staff, reporting to a part-time, non-executive board of representatives from each of the Member States". What is the background to that recommendation, which the sub-committee discussed in great detail, poring over every word? In my book, it is simply that the constitution at the top of the ECA is wrong. A top management structure with 15 members, one drawn from each state, each acting as executive directors with their own cabinet and their own special interest but with no requirement for any professional accountancy or auditor qualifications, is not capable of delivering results. As the noble Lord, Lord Grenfell, said, it is bad enough with 15 members of the Community, but when that figure increases to 25—perhaps by 2005, which is only three years away—the accession of another 10 will make that top management structure even more incapable of dealing with the complex accountancy of the European Union and doing so bravely and independently.

That is not surprising and there is nothing for the ECA to be ashamed of. The court has been in existence for 24 years and has done a valuable job. It has taught a lot of lessons to the Commission, which would acknowledge that the ECA has led it a long way on the path of competent modern accountancy. It is worth remembering that the amount of expenditure that the ECA has to audit has increased tenfold, from 10 billion euros a year when it was founded to 100 billion a year now. Given that growth in the court's task, it is appropriate for the top management structure to be thoroughly reviewed, hence our recommendation in paragraph 33, which is repeated in paragraph 67. It needs an entirely professional and truly independent chief executive with a qualified auditing staff working under him, reporting to a part-time non-executive board.

It is worth reminding your Lordships of the comments of one of our witnesses, Mr Carey, who is a past member of the court. His suggestion, recorded on page 110 of the report, was that the non-executive board should be composed, ex officio, of heads of national audit offices from each of the countries represented. I accept that that is a very radical suggestion and that it goes against the patronage tradition of European Union bodies. It is not at all unusual to find a politician who is half way to retirement sitting on the ECA court and having a very pleasant time, with a large staff around him or her.

I urge the Minister, who is the Admirable Crichton of debates on Select Committee reports—he sweeps everything up so beautifully—to think very carefully about Recommendation 33. I feel more strongly than the noble Lord, Lord Grenfell, that the wording of the Government's response is not sufficiently strong or encouraging. I think that the noble Lord, Lord Bruce of Donington, would be as worried as I am by the clear civil servant language of the comment that our recommendation of an independent chief executive is an interesting proposal and a useful contribution to the wider debate on effectiveness. My goodness me, I hope that we can urge the Minister to come out with something a good deal stronger and more virile than that tonight. Let him say that he agrees with us and that the Government will adopt the idea and press it very hard at the 2004 Intergovernmental Conference. Bully for him if he manages to make such a brave statement. Knowing and respecting him as I do, I am sure that he will.

There are other words in the Government's response that are, to say the least, interesting. It says: Consideration should be given to how such a change in the court's internal structure might affect its relationship with other EU institutions". There is a whole abracadabra hidden in that sentence that I shall explore as my second point. One thing that I learnt from serving on the committee under the noble Lord, Lord Grenfell, was that the spending of EU funds is devolved to national authorities to a large extent. Some 80 per cent of all spending is managed not by the Commission but by national authorities. We touch on that in paragraphs 44 and 45 of our report. I shall quote from page 40 of the written evidence. A current member of the court, Mr Wiggins, said in answer to a question from the noble Lord, Lord Tomlinson, about the common agricultural policy: We issued our own opinion about Agenda 2000 which pointed out that the Commission's assumptions about the costs of extending the policy in Poland, Hungary, etc., appeal to have been grossly under-estimated. Most of the things that we have said in the field of agriculture amount to 'what you need to do is to reduce prices so that you can reduce the cost of the policy and you can then reduce the extent of the temptations to fraud and irregularity which arise from it.' If not fraud and irregularity, the inducements are uneconomic behaviour, encouraging people to cultivate perfectly useless crops in order to get undeserved area aids for them and that sort of thing". I found that a very telling comment from a member of the European Court of Auditors. It leads on from auditing expenditure to auditing commitments. That is the other point that came to us in our inquiry. The ECA audits expenditure. It has not previously become involved in auditing commitments. However, Mr Wiggins is clearly worried about the issue, as he should be.

Those are the points. What if the commitments that will be made on the costs of extending the CAP to Poland, Hungary and other countries are grossly under-estimated? If prices are subsequently reduced, the cost of extending the policy will be reduced, and the temptation to commit fraud and other irregularities also will be reduced. That seems to sum up very well the necessity for interdependence between the various institutions that are connected to the EU in relation to the spending of money. The issue needs to be clarified and examined very carefully either before or during the 2004 IGC. What we are very unclear about in relation to many aspects of the issue is the competence of Brussels versus that of Luxembourg and Strasbourg, and the competence of the European Parliament versus that of national governments and the Länder.

I believe that that should be a very big issue at the 2004 IGC summit, and I should very much like to see an increasing role for the European Parliament in addressing it. However, I also think that it is an issue to which governments should pay particular attention.

8.31 p.m.

Lord Sharman

My Lords, I congratulate the noble Lord, Lord Grenfell, on his chairmanship of Sub-Committee A which produced the report. I should also declare an interest as a member of that sub-committee: I am a former auditor and have other interests that are disclosed in Appendix 1. I also thank the Clerk, who did an outstanding job with a very difficult subject.

In the few moments that I propose to speak, I shall concentrate on the court's role and structure. As I made clear in the report that I issued last year on audit and accountability in UK central government, I think that it is common ground that at the core of any system of accountability there needs to be a strong function of scrutiny or audit. That function has to have three distinct qualities: it needs to be strong, it needs to be independent and it needs to be effective.

The report shows that the sub-committee examined the Union's supreme audit institutions. I think that it is worth bearing in mind that we in the UK are used to the audit function being performed by an auditor-general. In other parts of the Union, that role is performed by a court that in many cases has a judicial function. The strange thing about the European Court of Auditors is that it is neither a court—it has no judicial function—nor are its members auditors. I think that only one of the court's members has some experience of audit.

That body, which is not a court and does not have auditors in its top executive management, has as its role the duty of examining the Union's revenue and expenditure accounts, which it must ensure are lawful, regular and the subject of sound financial management systems. It must also issue a statement of assurance, which involves examining Union institutions—the bodies set up by the Union—and Union funds, whether they be spent by national, regional or local administrations. Its access, certainly in the UK and in some other member states, is far deeper than that of the supreme audit institutions of those member states. I am encouraged to see that many of the member states, including the UK, are taking action to bring access levels for their own institutions into line with those for the European Court of Auditors.

I hope that I have made it clear that I believe that the court should be absolutely pivotal to the accountability systems within the Union. As the report shows, however, the procedures and processes, and particularly the procedure for clearance of reports, are slow, cumbersome and bureaucratic. If one had tried to design a system to slow down the auditor, one could not have done better than to put in place such procedures. We hear much about the need for reform of the Union's institutions. This is a suitable case for treatment. I had hoped that the negotiations on the Nice treaty would provide at least the first opportunity to tackle the matter but, sadly—as in so much else—I was disappointed. The results have all the hallmarks of the very worst type of compromise: we end up with one member for one state.

Currently there are 15 members, and potentially there will be 20. What does it do for us when each of those members is a member of an executive management board? Apart from the notion of jobs for all, to which the noble Lord, Lord Renton, referred, it absolutely hits at the heart of the issue of independence versus representation. I submit that we cannot have a truly independent body when it has a representative from every member state. It is fatuous to believe that member state representatives will not take some heed of what is happening back home. After all, some of them will need jobs when they return to their home country.

The second factor that the compromise ignores is the state of development of accountability and audit practice in the member states. It is just not real to believe that the systems of accountability and state audit of at least candidate states even begin to approach those of the more sophisticated Union members.

Then we come to the court's management structure, in which there are more chiefs than indians. There will be more executive board members than there are directors of the audit divisions. In turn, the audit division directors will have a large number of staff reporting to them. I have encountered many types of organisation design in my career, including pyramids, matrices and flat organisation designs, but I have yet to see an hourglass organisation design, which is what is being proposed. Heaven help those who are in the narrow part of the hourglass. It will not give us the result we want. I submit, in short, that it will not work.

I believe that now is the time to embark on that reform, along the lines proposed in the report. I too found the Government's response on the issue less than encouraging. I thought that the report's treatment of it was more than just interesting and useful; I thought that it was very good. Make the court members non-executive, fix their number and rotate them. If we do that, we shall have independence. Supervisory boards are quite common within the European Union and many people know how they work. Supervisory boards are less common in the UK; but why not have one? We should also appoint a strong chief executive. People have said that it might be difficult to do that, but the Union has already led the way by appointing Mr. Jules Muis, lately of the World Bank, as the chief internal auditor. Such appointments can be made; people of that quality are available.

We should also make the court subject to external financial and management audit. In the outside world, we often hear the cry, "Who audits the auditor?". At least in my former organisation we had someone who could do that.

We see many adverts these days under the Belgian presidency which say: "It is your Union". I like that. Let us make it so. Let us sort out this vital institution which is at the core of accountability within the Union. We should not accept the mess that the provisions of the Nice treaty left us in. We need to tackle it without delay and the Government need to lead.

8.40 p.m.

Lord Armstrong of Ilminster

My Lords, I begin by expressing my gratitude and admiration for the way in which the noble Lord, Lord Grenfell, chaired our committee and then our proceedings. It has been a great privilege to work with him and under him in this inquiry. I should like also to second his thanks to the Clerk, who did such a good job as her first effort.

I make no apology for returning to the subject to which the noble Lords, Lord Renton and Lord Sharman, majored; that is, the structure at the top of the European Court of Auditors. It is not possible to think that, as the Union develops and gets larger, an executive body of 15 now, but 20 or more later, people who are not trained in accountancy or audit can be an effective way to conduct the main audit function of the European Union. It must be right, when we come to 2004, to opt for a highly qualified chief executive and a part-time, non-executive board.

We perhaps should not get rid of national representation on that board. But I hope that, by its becoming part-time and non-executive, its ability to hold things back will be diminished. I hope also that we will consider seriously the recommendation of Mr Joe Carey that the part-time, non-executive members of the board be ex-officio heads of the national audit offices of the member countries the Union.

Previous speakers referred to the need for a highly qualified chief executive. I fervently endorse that suggestion. But the high qualification need not stop at audit or accountancy. The head of this organisation will need the qualities and experience to enable him or her to stand up to the other "big shots" in the European Union and to be impressive and convincing to both them and the European Parliament. So the qualifications will need to be more than simply those of good audit.

I am sure that the European Union needs an officer, rather like the Commonwealth Ministerial Action Group in this country, who can strike a certain amount of terror into the departments and people whose expenditure he is scrutinising. Anybody who has been, as I have, at the sharp end of a report by the CMAG and the subsequent questioning by the Public Accounts Committee knows how effective it can be. I hope that we can produce something like that in the European Union by giving effect to this recommendation of the sub-committee.

8.44 p.m.

Lord Tomlinson

My Lords, the Court of Auditors is an important and useful body; but it is by no means perfect. It is not perfect in its present format serving 15 member states, and it is quite evidently less than optimally useful for the needs of a post-enlargement European Union.

When we speak of the Court of Auditors, we sometimes use words that have more than one meaning. The court is not only the 15 members who make up the collegiate body; it is also the institution. If we look first at the 15 members who make up the collegiate body—the court—one from each member state, we get a clear view of them from the evidence of Mr Carey. When Mr Carey was asked about the role he said, I think the dominant reason was the observation that as long as you have (in my day) 10 or 12 and now 15 full-time members, each of whom is very jealous of his or her autonomy and very conscious of his status as strictly equal with all of his colleagues, and very jealous of his fiefdom (that is to say, his audit patch and the bloc of staff who work for him), it is going to be extremely difficult (in fact, it is going to be impossible) for the Court ever to adopt a rational policy towards the deployment of its resources; and extremely difficult for the Court to form a view that certain areas, certain situations, are of higher priority and more urgent priority than certain other areas in certain other situations, and to make the necessary dispositions to meet that judgment. That. I suppose, is my starting point. I found it, and I find it, distasteful as well that a body, which is supposedly a sort of arch apostle of the principles of economy and cost-effectiveness within the Community, should be run by, what shall I say, 15 over-paid, under-worked senior executives". That was Joe Carey, who did not serve out his time as a member of the Court of Auditors. He actually resigned during his tenure of office as the British member because he could not stand some of the working practices within the collegiate body. Inevitably, when we get that view of the 15 who form the collegiate body at the top of the Court of Auditors, it has implications for the institution as a whole.

A body which at the top is too politicised and in many ways under-qualified, skews the distribution of scarce resources. As the noble Lord, Lord Sharman, said, in his clear speech, consequences flow from having only one qualified auditor—the size of each member's cabinet; the size of the number of qualified staff they have to have directly working for them takes such a large slice from the small establishment of the Court of Auditors that it substantially skews the distribution. So when we speak of the Court of Auditors, we are speaking of those two stances.

I, too, want to thank my noble friend Lord Grenfell for the excellent way in which he took us through this inquiry and of course, in saying that, I associate the Clerk of the committee with those thanks. But I want slightly to disagree with my noble friend. Although he welcomed the Government's response, my welcome is slightly more muted than perhaps his, as chairman, inevitably had to be.

I am always tempted, having read the Government's response to the recommendations of the committee, to suggest to the noble Lord, Lord Grenfell, that as we are debating our future work programme, we might perhaps find an odd day for a short follow-up session with the Minister to evaluate the progress on some of the things that have been said in the Government responses to us.

When we go through the recommendations we see clearly a recommendation for changing the number of members of the court; for having a smaller court; for having a non-executive board with representatives from member states reporting and having responsibility for a highly qualified chief executive. In that recommendation there is a high degree of unanimity. But when the Government started to respond to it they proposed a system of chambers which would, go some way towards speeding up the process of adoption of the Court's reports". The first sentence of their response is very much concerned with one of the minor parts of the recommendations. They further state, Consideration should be given to how such a change in the Court's internal structure might affect its relationship with other EU institutions". However, the Government do not tell us whether they think that they should be part of that consideration. They say that the consideration should take place. However, I ask my noble friend, by whom should it be considered? Who in government is making sure that that which should take place actually does take place? Which government Minister is doing that? How is he or she doing it? That applies to a whole series of the recommendations.

I refer to the recommendations in connection with the inadequacies of the present system of the annual report and the way that it leads into the discharge procedure. We are told in the government response that, The Government will press the ECA to make full use of sectoral assessments in order to provide a clearer picture of the financial management of the different budget areas". However, that is something for the future. They will do it. They told us that when they published the report on 2nd July. In the past seven months have they begun to do that? The Government are to press for that measure, but have they used the past six or seven months productively and, if so, to what effect? It would be helpful for the committee to know that progress is being made on some of these matters rather than just having them on the agenda as items for some future, as yet indeterminate, discussion.

I refer to the question of the methodology in relation to the statement of assurance. That argument has been with us since the inception of the statement of assurance back in 1995. We are told that the United Kingdom had suggested an experts' group. But who suggested it? When was it suggested? What happened to it? All we are told is, however this did not meet with general support". But I see other member states in our Union which fight a little more vigorously for some of the things that they believe to be useful and helpful. On the basis of the response we seem merely to have rolled over because the suggestion did not meet with general support. I am somewhat disappointed with the Government's response. It could have had greater specificity.

I come to the whole question of the discharge procedure. This is essentially the conclusion of the audit process. When one has had the Court of Auditors' report and the debate on it in the European Parliament, the decision has to be made as to whether or not to grant discharge. Here we see some evidence that matters in the Court of Auditors are not being pursued as strongly as perhaps they could be. During the meeting with the Court of Auditors we had the opportunity to raise with Mr Karlsson, the then president of the Court of Auditors, the criticism that had been made and the replies that had been given. It was pointed out to Mr Karlsson that, 'The Court's audit revealed a high incidence of error due, for example, to costs or actions not meeting eligibility criteria, costs declared exceeding those actually incurred or insufficient supporting documentation'". I said, That strikes me as being for normal people who are moderate with their language a fairly stringent criticism and yet when I look at the Commission's reply"— we are told that it is important to have a long-winded procedure contradictoire in the Commission's reply in order to eliminate all the factual errors— they say 'The high incidence of errors found by the Court is not evidence that a significant proportion of Community funds are being misspent but rather that deficiencies exist in the Member States financial control of the funds which are typical of the management of any complex programme'". If that is why you have to have a long-winded procédure contradictoire, perhaps it would be better to get the discharge procedure dealt with in something more like real time rather than have long delays. When that point was raised with Mr Karlsson he immediately answered it himself as it was a presidential matter, not one for Mr Salmi. Mr Karlsson said, When it comes to nuclear defence you do not over-use it". That is how he regarded saying something fairly bluntly to the Commission, as it had been suggested to him that one ought simply to say in the procédure contradictoire that the Commission replies were frankly unacceptable. He regarded that kind of approach as being the nuclear option.

There are a number of important issues in the report and a number of important criticisms. It would be helpful to be given not just a general statement that everything is well but something a little more specific. I come to two final points on which I should like my noble friend to comment clearly. First, the Government have said that an external management audit could provide a useful contribution. Does my noble friend believe that it should provide a useful contribution? Do the Government support it? If the Government support it, how are they pressing it? Have they raised it in COREPER? Have they raised it in any COREPER working groups? Have they elevated it yet to any ministerial meeting? We believe that it is fundamentally important as we approach the next 25 years of what could be a useful Community institution.

Secondly and finally, I come to the point that was revisited in the very last of the recommendations. We raised the question of endowing the court with a highly qualified chief executive supported by a strong auditing staff. The Government's response welcomes the committee's proposals as, a most useful contribution to the debate on the effectiveness and legitimacy of all the EC institutions, including the ECA, in the run-up to the Inter-Governmental Conference planned for 2004". Is that matter specifically placed on the IGC agenda by the Government because it is primarily an inter-governmental conference, not an inter-parliamentary conference? If we are to have an IGC in 2004, the agenda will be set by governments. I hope that they will take some notice of some of the ideas and proposals which emanate from Parliament.

By and large this is a better response from the Government than we received on the previous occasion that we discussed matters to do with the Treasury, but I still think that some of the weasel words could be removed and that a little more commitment could be shown to the report, particularly if the Government are to continue to say how much they welcome the work that is done by your Lordships' Select Committees.

8.58 p.m.

Lord Shaw of Northstead

My Lords, like other noble Lords, I offer my congratulations to the noble Lord, Lord Grenfell, and to the whole committee on their report. It is a first-class report which deals with matters in a serious and thorough manner. I only hope that it has a wide audience and is referred to whenever this subject is discussed.

When I first entered the European Parliament in 1974 as a nominated member it was fairly clear that there was an urgent need to establish an efficient and respected financial regime. Obviously, when the EEC was established not everything could be expected to have been put in perfect shape. Experience and developments in the EEC were already making clear the need for change. So I found my years in the European Parliament to be an exciting period of development, particularly with regard to budgetary procedure and financial regularity. After two years of hard slog, the much-needed amended financial regulation was finally adopted in November 1977. The Budgetary Control Committee was set up in the European Parliament and the European Court of Auditors began to operate in October 1977.

I must admit that I had great hopes of a developing relationship between the Budgetary Control Committee and the European Court of Auditors, with a growing ability of the Budgetary Control Committee to examine the detailed workings of the Commission. I can say only that I was very disappointed at the time. As a former member of the PAC, I suppose that that was natural. In no way during those early years did the Budgetary Control Committee get near to developing any influential control over budgetary matters. I shall say a word about what happened later to the noble Lord, Lord Tomlinson.

The truth, of course, was that while it was a considerable achievement to set up the organisations, it was bound to take time and persistent determination to make things work effectively. Yet, as one of the witnesses indicated, if it had not been for the existence of the Court of Auditors, whatever its imperfections, the present Commission reforms would probably not have come about.

That is why the report is so timely and important. It examines the changes to the European Court of Auditors that have already taken place, as well as its developing relationship with other Community institutions. The most significant and welcome change has been the production of its special reports. The report makes it clear that they have been well received. That should be coupled with the fact that the Budgetary Control Committee has now developed into a much more effective committee than it was in my day. I hope that their relationship can develop into a really useful tool of management.

There is one change in the European Court of Auditors that has met with a certain amount of criticism. At Maastricht, the European Court of Auditors was made a Community institution. Reading the report, I noticed that one or two members seemed to feel that it is to be regretted that that has taken place. I do not agree with any of that regret. If you give people powers that they refuse to use, it is their fault, not yours. I have to admit that I originally suggested to John Major that since the Commission either ignored or belittled the European Court of Auditors, it might be a constructive contribution to the Maastricht discussions if he proposed the upgrading of the European Court of Auditors to give it more clout.

I admit that subsequent developments in the court's organisation may have been encouraged by that enhanced status. None the less, had the court had the guts to use its new status, the Commission's reforms might have been brought about much sooner than they were. Indeed, I rather agree with Mr Christopher Heaton-Harris, who said in evidence: The Court of Auditors have a huge power, because if they come anywhere near pressing the nuclear button, I am sure the Commission would shake in its boots and sort out all sorts of problems that might have been found out". Although suggesting that it would "shake in its boots" was perhaps going a little far, a reluctant and earlier sorting out might well have occurred.

The most important part of this valuable report lies in its suggestions for the future. I was glad to note the following principle: The need for the Court to be independent and to be seen as independent was accepted by all of the witnesses questioned about this". Equally, however, I was not surprised to read of the very valid doubts that were expressed about how consistent the practice of that principle was likely to be.

Although a change in the structure of the European Court of Auditors is clearly necessary, a satisfactory alternative will not be easily agreed. National and institutional interests do not always coincide with the interests of an efficient audit system. Nevertheless, the case that was outlined by the report for a highly qualified chief executive supported by a large team of audit staff who were mainly professionally qualified, is overwhelming. Perhaps I should add that I am a chartered accountant, although I have not practised for very many years.

The report recommends that the chief executive should report to a part-time non-executive board of representatives from each of the member states. That may well prove to be necessary to make the changes acceptable. However, I should not like to rule out without discussion the proposal made by Mr Carey—that the non-executive board should be composed of ex officio heads of national audit offices. The attraction of such a proposal is that, as well as representing every country, those heads of national audit offices would become involved internationally and the experience would enhance their standing in their own countries. Such a proposal might prove to be a step too far, but it should be considered and might prove to be acceptable if the status of the European Court of Auditors itself were again changed.

Incidentally, the evidence given by Mr Carey was very valuable and is entirely acceptable, particularly in view of his wide experience. I remember meeting him in ECOFIN, in relation to Treasury and PAC negotiations and during his period in the European Court of Auditors. I hope that his submission will be looked at very carefully.

As to any future changes of status, I refer briefly to the report's comment that, we remain deeply unhappy with the seeming indifference displayed at the Council's highest level to the auditing functions and findings of the [European Court of Auditors]. Given the poor public perception of the management of the Union's funds, the Council should be more concerned with the criticisms made by the ECA". My personal opinion—I have reached it very reluctantly—is that such indifference on the part of the Council is endemic and that, at least so far as concerns the special reports, those reports should go directly to the European Parliament and so through to the Budgetary Control Committee. The importance of the special reports should be enhanced and that of the annual report reduced or changed in character and purpose.

I end simply by endorsing the words of the noble Lord, Lord Tomlinson. I believe that this report is of such importance that it should be referred to again and further submissions should be taken in the light of what has happened since. I have a horrid feeling that not much has.

9.9 p.m.

Lord Williamson of Horton

My Lords, I am a member of the European Union Committee of your Lordships' House but I am not a member of the sub-committee which prepared this report. However, at its invitation, I gave evidence to the sub-committee. Therefore, my role is a little unusual in that I am on two sides at the same time.

As is customary, my evidence is annexed to the report. To this degree, some of my views are already known, but I should like to comment both on the report and on the Government's response to it. Like those who have spoken so far, I believe that the report is excellent and I want to thank the members of the sub-committee and, in particular, its chairman, the noble Lord. Lord Grenfell.

The committee does not hesitate to use the word "radical". It uses it on a number of occasions, and why not? If the national parliaments are to have any substantive influence on potential changes in the working of the European Union institutions in the perspective of the biggest enlargement we have ever seen, it is important that specialised committees in the national parliaments should be willing not only to react but also to initiate or advocate ideas for change if they believe that such change would be beneficial.

I also want to welcome the government response, particularly where it states clearly that the Government agree with the committee. But I hope that that response also goes beyond lip service to the idea that there should be a wider and deeper debate in preparation for the IGC of 2004. Like the noble Lord, Lord Tomlinson, I ask: where's the beef on this question? Even where the UK Government have not always gained support from other member states for some changes, they consider in their response that the conclusions of the committee can make a useful contribution to the wider debate. I hope that that has some substance.

I say to the noble Lord, Lord Bruce of Donington, that I am of course aware that in the European Union there are not 11 but 12 languages—11 national languages and a bureaucratic language. Therefore at times we must be rather cautious in our assessment. However, I hope that we shall have some follow-up to those points. Of course, we need to have a certain amount of patience because patience is a part of European Union life, as it is elsewhere. My own languages are now a little rusty but I am sure that there must be a phrase in all the 11 languages of the Union for "Softly, softly, catchee monkey". Therefore, I hope that we shall get there in the end.

The points on which I wish to comment relate directly to the report and to the government response. In particular, I want to comment on four of them: first, the structure of the European Court of Auditors; secondly, the relationship between the annual reports of the court and the sectoral reports and, in particular, the move towards some more specific and sectoral reports with some "disaggregation", as the committee calls it; thirdly, the requirements which result from the fact that about 80 per cent of the budget is administered by the member states but that the European Commission must ensure as far as it can that the expenditure is correct and implemented effectively, as that is the nature of the situation between the member states and the Commission and the Parliament into which the Court of Auditors must place its work; and, fourthly, the definition of—perhaps one should say the confusion between—fraud, irregularity and error.

First, I turn to the structure of the European Court of Auditors. That structure has not changed significantly since 1975. The then president of the audit court made clear in his evidence to the sub-committee, basing himself on the situation of the previous report in 1987, that the court has exactly the same structure now as it had then. As a result of the European Union's expansion, it is larger and has created one more audit group. The Court of Auditors, which now consists of a member from each member state, took the view before the negotiation of the Nice treaty that this principle should be maintained. Therefore, the number of court members—the bosses—will increase considerably as a large number of new states enter the Union on enlargement.

That is broadly the same argument which was so controversial in the discussions about the number of future members of the Commission. During those discussions some argued forcibly that there must always be a commissioner from every member state and others argued that it would be more efficient to have a Commission smaller than the total number of member states after enlargement.

These differences of approach have not been wholly resolved, despite the long discussions in the preparation of the Treaty of Amsterdam and the conclusions of the Treaty of Nice. Mr Carey, who has quite rightly been quoted, was fairly harsh in his evidence to the sub-committee. It is worth quoting again what he said. He described the court as a body, run by, what shall I say, 15 over-paid, under-worked senior executives". The enlargement of the European Union will obviously change the life of its institutions. I believe, like your Lordships' committee, that there is a case for looking again at a system of a highly qualified chief executive, supported by a team of audit staff and reporting to a part-time non-executive board of representatives from each member state. The unanimity on the point in the debate is appealing. In consequence, I hope that it appeals even more strongly to the Government. It would especially be the case if the Treaty of Nice—currently rejected in the Irish referendum—were not ratified. The system of "chambers", which is a half-way house, would then not come into effect anyway. We need seriously to consider the committee's proposal in relation to the structure.

Secondly, I welcome the audit court's recent greater emphasis on sectoral or specific reports which it has spread over the year. I agree with the evidence of Mr Karlsson, the then president of the court, that this can give the budgetary and discharge authority the possibility of following more deeply the situation in different programmes on the European budget. These programmes are very different. The way to improve financial management in the member states and the Commission may not be the same in every case. Obviously, the intention is to improve the rating in each sector.

The United Kingdom Government agree with this new sectoral approach. It is certainly good to move the emphasis away from an overall direct statement of assurance—the so-called "DAS" introduced in the Maastricht treaty—since aggregated figures of errors in the financial management of member states and the Commission were sometimes understood wrongly by the press or other commentators as referring to fraud. That misunderstanding still bedevils arguments about the financial management of the European Union's budget. In addition, the aggregation did not direct attention towards practical improvements. I note that the United Kingdom Government also indicate that there have been instances of dispute concerning the audit court's methodology.

Thirdly, the committee's report rightly deals with the question of the Court of Auditors' relations, not only with the Commission but with the member states and their national auditing bodies, since most of the EU budget is administered by the member states. The committee continues to feel that the Council of Ministers does not give sufficient attention to the audit findings in preparation for the discharge. The Government, on the other hand, feel that there is clearly significant ministerial involvement in the consideration of the annual report. That part of the government reply perhaps goes slightly into bureaucratic language. However, the Government are right to indicate that there has been an increase in the attention given by Ministers. That was also expressed by Mr Mingasson, of the Commission. But is it enough? And are the problems in individual member states sufficiently identified and transparent?

Fourthly, the committee has done well to draw attention to the problems which arise from lumping together errors, irregularities and fraud and the apparent lack of agreement among member states and institutions on definition. The remit of the Court of Auditors, which covers the European Community's income—for example, the customs duty collected on imports into the United Kingdom from third countries—as well as its expenditure, is to examine whether all revenue has been received and all expenditure incurred in a lawful and regular manner, and whether the financial management has been sound. It reports on cases of irregularity.

Of course, in looking at financial management, auditors can sometimes indicate a risk of fraud. Indeed, that is one of the most valuable results of an audit, and the European Court of Auditors has a vital role in that respect. But fraud itself is more the domain of the policeman. Most of the auditor's work concerns the detection of errors or accounting irregularities or the reliability of financial systems. That is why it is important to avoid a public misapprehension that an error rate describes fraud.

It has been a long struggle to improve financial management in the Commission, to reduce errors and irregularities and thus to reduce the risk of fraud. The latest moves on the internal audit system are much to be welcomed. But I do not believe that fraud itself is such a widespread or especially marked problem in the administration by the member states of the European Union budget. In my view, corruption is almost non-existent.

I return finally to a theme that I have stressed for many years but with only limited success. One of the best ways to reduce the risk of fraud is to tackle the risk at an earlier stage by an even greater effort to reduce the complexity of programmes and the volume of secondary legislation, by an even greater devolution to the administration of member states and, most importantly, by the abolition, or at least reduction, of relatively minor schemes run directly from Brussels. All of those changes are possible, but I doubt that they are given sufficient priority.

I have tried to pick out a number of points from the report that I find of value. It is a great report and I hope that it continues to influence government thinking. The audit function itself is essential and, as long as the court continues in its present form, both the Commission and the member states must seek to draw the maximum benefit from its work to improve financial management and avoid errors and cases of irregularity.

9.22 p.m.

Lord Lea of Crondall

My Lords, I should like to make two brief comments in the gap before the noble Baroness, Lady Noakes, speaks. I was abroad and did not know whether I would be able to get here, so I did not put my name down to speak.

As a member of the sub-committee, I have one or two reflections on subjects that have been covered. I should like to put my finger on a couple of dilemmas, because we have been stimulated by an excellent overview of the report by the chairman, the noble Lord, Lord Grenfell, and all of the subsequent speakers.

We must say every time that the European Union is sui generis. It is much more complex than any other organisation—with respect, it is more complex than the territory examined by the noble Lord, Lord Sharman. That is because there is the strange balance between the Council of Ministers, the Commission, the Parliament and the European Court of Auditors at one level, while 80 per cent of expenditure is made within member states, in a culture in which the member states' own expenditures constitute 95 per cent of the moneys being spent in the member states. So the culture is member state-driven.

That leads me to make one point that has not yet been made. Mr Carey's recommendation that the National Audit Office should be made ex officio the new first tier of a two-tier board may be jumping from the frying pan into the fire if what we want is a more arm's length scrutiny of the cultures of the member states. The Kinnock reforms are perhaps as relevant to that as are what we have been able to identify.

My second point is that if we ought to be looking more at the member states because that is where the expenditure is made, why do not we not look at our own navel and ask what would be the procedure in national parliaments such as ours for considering common agricultural policy expenditure in a new way? What would be our procedure if we in this House were to consider expenditure from the structural funds? That is the logic of all the money being spent within the member states.

Finally, I have some sympathy on one point with the noble Lord, Lord Bruce of Donington. I believe that there is something over-incestuous about the way that COREPER would be looking at the criticisms made before going to the Council of Ministers and how to handle them. Although one does not want the European Court of Auditors to be totally at arm's length, we have to be aware of the danger of an incestuous relationship within the structure of COREPER, which inevitably is the vehicle for getting to the publication stage of some of these reports. I believe that the work needed before Berlin means we have time to get matters right, but not all that much time, because matters have to be thoroughly dealt with this time.

9.26 p.m.

Baroness Noakes

My Lords, perhaps I may begin by joining other noble Lords in congratulating the noble Lord, Lord Grenfell, and his committee on their report on the European Court of Auditors. It is much to the committee's credit that it has tackled the important topic of the Court of Auditors. There is much in the report which we on these Benches support.

Audit is a subject which does not quicken the pulse. The headlines, "Auditors give clean audit report" or "No financial management problems found", are about as compelling as, "Small earthquake, no one injured". Doubtless, there are many in the Commission who would long for that relative anonymity, because what we have in Europe is a financial mess.

For example, the annual accounts of the Commission have not been given a clean audit report for many years and the time taken over the whole discharge procedure, as the noble Lord, Lord Tomlinson, pointed out, is excessive. But despite these manifest problems, the Council has never recommended to the Parliament to refuse a discharge. The committee's report rather coyly refers to this at paragraph 62 as throwing, a curious light on the institutions of the community". I suggest that the committee is too polite. It should have said in terms that this is yet another example of the harmful processes of the European Union. As long as the financial management and accountability processes lack rigour, as so well documented in the committee's report, we should all be sceptical of ever closer union.

But it is not just the Commission's own financial systems which have been condemned. Many of the problems lie with the 80 per cent of the budget which is managed by member states. But here too the Commission and the Parliament are implicated. Almost everything done in the name of the European Union is unbelievably complex, and with complexity comes the likelihood of error and the opportunity for fraud.

We in this House often criticise the things which come before us for their complexity. The problem exists in spades in Europe. We look to the Government to be pushing for simplification in Europe, and I hope that the Minister will tell us today what the Government are doing to get a new approach in Europe which avoids complexity and pursues simplicity as a virtue.

There is clearly fraud, irregularity and error in the way that European funds are spent, with a rate as high as perhaps 8 per cent. But neither the Commission's own system nor the annual report of the Court of Auditors sheds much light on how much is involved and where it occurs. Indeed, as the committee's report points out, there are even semantic debates about what constitutes fraud or error.

That is intolerable. We do not spend time in this country on such debates. The task of management, in this case the Commission, is to establish and operate control systems that minimise the risk of fraud or error. Of course, that includes, where necessary, ensuring that the systems which exist in member states are adequate to the task. The task of auditors is to check on those systems, find and quantify any material problems and report on those problems. In particular, cases in which funds have disappeared, due to fraud or error, should be unambiguously reported.

In this country, we are fortunate that we have a well understood system of responsibility and accountability and well developed public audit. If something goes wrong, we can rely on our Comptroller and Auditor General to tell us how it is. Why should we accept anything less in Europe? Why are not the Government yelling from the rooftops about it?

The European Court of Auditors cannot bear the whole burden of auditing European funds and must, as the report states, rely on local supreme audit institutions. In general, we should be proud of the United Kingdom's role, but, as the committee gently points out, the Comptroller and Auditor General's hands are still to some extent tied behind his back with regard to access. That is an unnecessary blot on the United Kingdom's role in European auditing. The Government's official response to that part of the report is weak. For almost as long as I can remember, there have been calls for the Comptroller and Auditor General to be able to follow public money. For as long as I can remember, the Treasury has dragged its feet. Your Lordships' House raised concerns about that during the passage of the Government Resources and Accounts Act 2000, which allowed for some new powers—fully in the hands of the Treasury, of course. However, the Government put off the evil day by setting up another review and another steering group.

The noble Lord, Lord Sharman, produced his report last February. What have the Government done since then? It would appear that they have sat on their hands. We still do not have a government response. The Government's response to this committee's report is to say that the response to the report of the noble Lord, Lord Sharman, will be made—to use a well honed formula—in due course. That is not good enough; the issues are straightforward and have been in the public arena for many years. They were well summarised in the noble Lord's report last year. As a minimum, the Minister should say when the Government will give their response to that report.

It is plain that the European Court of Auditors is groaning under the weight of having to reconcile the 15 countries represented on it. The court describes itself as being independent from the other European institutions and from the other member states. I have no reason to doubt the integrity of the court or of those who work for it, but, as the noble Lord, Lord Sharman, said, the institutional arrangements have put representation ahead of independence. If we were to start again and say that the primary design consideration of the court was independence and that representation was a secondary consideration, we would not design the court as it is.

The court should be fixed on its main goal, which is the delivery of a high quality, independent audit service. Having 15 members with equal status is a recipe for confusion and lack of focus. The proposed system of chambers is not a rational response, because it would continue to place representation ahead of independence in the pecking order. It would be a rational response to have the Court of Auditors professionally run, with an oversight or policy board giving due—but not undue—weight to the need for representation. The committee was right to propose that.

As my noble friend Lord Renton said, the Government's response has not been strong enough. They said that they would allow the idea to contribute to the discussion at the 2004 intergovernmental conference, in the same way as they would do with the committee's other good idea, a management audit. But as the noble Lord, Lord Tomlinson, pointed out, the Government should know that without determined advocacy those ideas will disappear into oblivion, and we might well conclude that that is where the Government want them to go.

The committee rightly pointed out that the current arrangements are not fit for purpose with 15 members. Enlargement will make the current arrangements unworkable. The Court of Auditors can only suffer if it has to reconcile yet more cultures and emphases. The Government have a duty to push our partners in Europe to ensure that all of Europe's institutions can cope with enlargement and promote necessary reform. It is curious that a Government so committed to modernisation in this country, even in areas where none is necessary, should be so coy about necessary reform in Europe.

My final topic is the need for the Court of Auditors to have more professionally qualified auditors. I am in good company here today with my noble friend Lord Shaw and the noble Lords, Lord Bruce and Lord Sharman, because we are all chartered accountants. For the record, I declare that and my involvement with the council of the Institute of Chartered Accountants as an interest.

I find it odd that members of the Court of Auditors do not have to have either a professional qualification or recognised experience in government auditing in one of the SAIs. I find it even more odd that professional qualifications are not de rigueur among the court staff. But most odd is the Government's response, which seems to say that all is well. The Government believe that the qualifications in audit and/or accountancy are important but on a par with knowledge of the European Community and its institutions. That is a response generated from a Civil Service dominated by the cult of the generalist. I am disappointed in the Government for showing so little appreciation of the ethos and skills of professionally qualified auditors.

The report of the committee is a valuable one and it is one which should resonate with all sides of the debate on Europe. I hope that the Minister will be more enthusiastic in his response today than the Government's official response to date.

9.37 p.m.

Lord McIntosh of Haringey

My Lords, I have no hesitation whatever in joining all noble Lords who have congratulated the noble Lord, Lord Grenfell, and his committee on a most valuable report. Considering how quickly it was produced in the period before the election—or rather the period before the election was anticipated—it is remarkably thorough and well argued.

On similar occasions I have been criticised for the delay and inadequacy of government responses to Select Committee reports and I was grateful to the noble Lord, Lord Grenfell, saying that the Government's response was "thoughtful and comprehensive". Although other speakers did not go quite so far, I had better rest my case on what the chairman said. It is also true that despite the intervention of a general election, the response was produced within three months of the publication of the committee's report. Again, that is not unreasonable in the circumstances. As regards the timing of the debate, that is a matter for the usual channels and not for myself as a mere spokesperson on behalf of the Treasury. I have no usual channels capacity when I address the House today.

It is an important and timely report and it is one which deserves the full and well-informed debate that it has had. It is important to put it in context because the Government, like the members of the committee, believe that the European Court of Auditors has a key role in promoting improvements in financial management. The Government, and all governments during the past 25 years, have supported the work of the ECA and have sought to increase its powers and effectiveness. I shall be commenting about that later on.

The findings of the ECA have had a good effect. They have led to improvements in financial control procedures both in the Commission and in the member states. However, as has been pointed out during the debate, that has come about to a considerable extent through the publication of special reports and, for example, through the initiative to set up OLAF, the anti-fraud office. That came about through an ECA report. It has been pointed out several times during the debate that with enlargement, the ECA's role will become more important. European taxpayers' money needs to be spent as intended and good value for money will have to be assured.

The most important issue to have emerged in the debate—it may not be entirely the most important issue, but I shall treat it as such because that is what noble Lords would have wished—is the structure of the European Court of Auditors. The noble Lord, Lord Renton of Mount Harry, went so far as to question whether, under its present structure, the European Court of Auditors is capable of delivering results. I think that the test of that should be on the quality of the annual report as well as the special reports rather than on assumptions based on the structure itself. Almost any structure can be made to work under certain circumstances, although it certainly is not the case that the Government agree that the current structure is ideal, not least because it will be virtually impossible to maintain after further significant enlargement.

The system of the chambers proposed at Nice, which has not yet been implemented, was described by the noble Lord, Lord Williamson of Horton, as a "halfway house". We think that it would be an improvement on the present system, perhaps not in every respect but in the sense that it would speed up the processing of the court's report. Furthermore, it would lead to some diminution of a problem which clearly exists; that is, of shutting the stable door after the horse has escaped.

I was challenged to say more about the proposal for an independent chief executive. That is an interesting contribution to the debate. Would "welcome contribution to the debate" be any improvement? I am in some difficulty about this. The noble Baroness, Lady Noakes, wishes that the Government would "yell from the rooftops". I do not think that negotiating with 14 other members of the European Union is best conducted by yelling from the rooftops. We have to argue our case as effectively as possible from a strong negotiating position. I believe that I can show that we have done that in the past and that we shall do so in the future. However, we will not achieve much by yelling from the rooftops.

In particular we shall not achieve much by declaring that the British way of conducting audit is the only conceivable way. I draw that conclusion from certain comments that have been made during the course of our debate. After all, there is a major difference between the way in which Britain and, to some extent, Ireland conduct audits as compared with other European countries. For them, these are legal matters to be resolved in the courts. These may not be the ways in which we wish to do things—I do not argue that we should adopt their ways—but they are ways of carrying out these procedures. They have supreme audit institutions and they have their own standards which must be complied with by the European Court of Auditors. It is necessary that we acknowledge the way others conduct audit and, indeed, that it works.

If that were not the case, firms such as KPMG would not be able to set up European practices—to choose an example at random. Such practices cover many European countries and use local European staff. If it were possible only to work using the rules laid down by the Institute of Chartered Accountants, such developments would not be possible.

Of course the problem of 15 executive directors will not go away and will get worse. Of course the issue of whether there is to be an independent chief executive, who will have responsibility for choosing his own professional staff—and even Mr Carey did not quite say that—will have to be considered. At the same time, the court's relationship with other institutions of the European Union has to be considered. Noble Lords seemed to think that that was not a serious argument. I point to what Neil Kinnock said in describing his new procedures for internal audit and I ask whether it is self-evident that the committee's proposals would fit in well with those.

As to the issue of enlargement, I agree very largely with the noble Lord, Lord Renton, but I have to remind him that proper financial controls are a precondition for any applicants becoming members of the European Union.

I have great sympathy with what the noble Lord, Lord Sharman, said about the hour-glass model of management. It is very dramatic. I certainly agree that we have to have a strong, independent and effective audit procedure. I have used the word "strong" and the noble Lord, Lord Sharman, has used the word "strong"; clearly the depth of access for the auditors is an essential consideration. That is a consideration the noble Lord contributed to this debate in the report he produced last year. In answer to the noble Baroness, Lady Noakes, our response will not be "in due course" but in the next few weeks. We have to do what the noble Lord, Lord Grenfell, asked and look at alternatives. We have to negotiate with our fellow members in the most effective way that we can.

I have spoken already about the staff and their skills and about the different systems of financial control compared with the United Kingdom. Clearly we need to have in our ideal court of auditors or ideal audit department a wide variety of skills, including of course, very heavily, professional audit skills. But why not have, as in the National Audit Office, a staff qualified not only as auditors and accountants but as economists and operational researchers? I challenge the view that membership of a particular organisation is equivalent to maintaining standards. The best international standards have an important role to play. They can help to reconcile the different ways in which member states organise their professions.

There has been some debate about the DAS, but I noticed that the committee shied away from advocating its abolition. DAS covers the reliability of the accounts and the legality of the underlying transactions. It is the only document which gives an overall view of the standard of management of the EC budget. Some of us have very significant doubts about the sampling procedures on which DAS is based—I certainly do personally—but that means that we should seek all the more to support the ECA in its efforts to improve its usefulness and to develop it into an instrument for analysing management and control systems.

Clearly, as provided for in Nice, there should be a greater use of sectoral assessments. There has been a greater use of sectoral assessments and this makes it possible for DAS, instead of being a negative assurance, to be more positive and to make specific recommendations to the Commission.

The United Kingdom has already suggested an expert group to consider ECA methodology and the DAS process—in other words, something similar to what the noble Lord, Lord Tomlinson, calls an external management report. Unfortunately, so far we have not succeeded in achieving agreement to that, but it is important that we should continue to press the proposal as heavily as we can.

There was—properly—some debate about issues of fraud and irregularity and some concern in particular from the noble Lord, Lord Williamson, about whether there are proper definitions. Council Regulation 2988/95 defines irregularities both as simple omissions due to errors or negligence and also as intentions and deliberate acts. But that divides into fraud, which is intentional acts or omissions, as well as incorrect or incomplete statements. A genuine payment made after a closing date for claims represents an irregularity, but import of goods under false papers is definitely fraud.

The Government have pressed, and continue to press, for a reduction in the unacceptably high level of irregularities. We believe that we are making some progress on the matter, particularly—this is the valuable point made by the noble Lord, Lord Williamson—through simplifying the systems and regulations. We have been a strong advocate of simplification. The noble Baroness, Lady Noakes, raised the point as well. A proposed new financial regulation is being discussed by the Council's budget committee, a much more simplified document than its predecessor, which originated, I learnt to my horror, in 1977. The new regulation to improve financial control in the structural funds came into force in 2001 and there have been reforms in the CAP regulations. I agree with the noble Baroness, Lady Noakes, and the noble Lord, Lord Williamson, that this is the way forward.

Clearly, there is still concern about the issue of the discharge of the budget, and indeed about the fact that it takes so long to go through the whole of the audit process. I understand the impatience expressed by the noble Lord, Lord Bruce, as I do the impatience of all noble Lords on this matter. But all auditors have to have a dialogue in order to remove factual errors before publication.

As to the issue of the report being published together with the Council response, that is required by Article 248. It is required to be forwarded to the other Community institutions together with the replies of those who have been audited. That is not so different from the way in which audit proceeds in this country.

Again, there was the issue of an official response from the member states being required at an earlier stage. That was discussed at a recent meeting of the group of personal representatives of finance Ministers. Indeed, this has come to pass. The Commission asked for an official response to the latest report by 20th December last year. One of the few countries to achieve that was the United Kingdom.

I was challenged on what we have done since we responded to the report and what we intend to do in the period between now and the next IGC in 2004. The noble Lord, Lord Tomlinson, challenged me on what we have done in the past seven months. The evidence for what we have achieved lies in the improved sectoral information in the 2000 report which was published in November last year. That is evidence of strong pressure, not merely over seven months but over a longer period.

As for the period between now and 2004, I believe that the Prime Minister set out our targets most clearly in his speeches both in Warsaw in October 2000 and in Birmingham in November 2001. He has talked about the delivery of results not on abstract issues but on issues that concern people. We are mandated by Laeken to do just that. I believe that value for money and probity in European financial matters falls into the category of issues that can, and should, concern people. That is why we have a convention starting in March of this year, which will be chaired by former president Giscard d'Estaing and which will continue until the middle of 2003. It will be an inclusive convention, and one that will include the applicant countries, as well as civil society representatives and representatives of national parliaments. It will not produce a draft treaty text, but options for a new treaty. It will also be ready in good time for the preparation of the IGC agenda.

Lord Renton of Mount Harry

My Lords, out of interest, can the Minister tell the House whether the Government were actually in favour of the appointment of Valéry Giscard d'Estaing as chairman of this most important committee, or whether they would have liked to have seen someone slightly younger in the post?

Lord McIntosh of Haringey

My Lords, I do not believe that to be a relevant question. I simply reported the appointment as a matter of fact and stated that this is what is proposed. I cannot see how that has anything to do with the European Court of Auditors. I simply seek to give information to the House in order to give flavour, if you like, to the proposals that are before the European Union.

The period between now and 2004 will not be wasted. The Government are grateful to the sub-committee and to the European Communities Committee for their work. It will be evident from what I have said that we take their conclusions most seriously.

9.57 p.m.

Lord Grenfell

My Lords, perhaps I may indulge for a moment in a military analogy. I sometimes feel that the role of a chairman in the debate on a Select Committee report is rather like that of a platoon commander who goes over the top waving a service revolver, but who is happy to he accompanied by comrades with much heavier weaponry. In this instance, my colleagues have used their weaponry well in focusing on some of the really important issues in our report. It has been a very good debate. I should like to thank all those who have participated in it for showing that there are expert views to be brought to bear on a matter of this importance. We have had a model debate of that kind.

I am most grateful to my noble friend the Minister for his response. If I say, again, that I thought his response was thoughtful and comprehensive I should probably be over-egging the pudding. But, in any event, it was a helpful response in many ways. The important message that has come across from this debate and which, in a sense, is a generic message, is that scrutiny of the executive does not end when the debate is concluded. My noble friend Lord Tomlinson was absolutely right to say that this is the kind of issue on which we ought to carry out some follow up so that we can see what the Government are going to do and how words will be translated into deeds. I am not sure that we expect the Government to be shouting from the rooftops, but we want them to do a little more than just whispering through the letter-box. I want them to really make a point. For a Government who wish to be, and claim to be, at the heart of Europe, I believe that evidence of the kind of attention that they should be paying to the reform of the European Court of Auditors would give some substance to that aspiration. I strongly encourage them to ensure that our proposals are seriously pressed on our European Union partners so that the reforms that we feel are essential are carried through.

On Question, Motion agreed to.

House adjourned at ten o'clock.