In the latest in our ‘all you ever wanted to know but were too afraid to ask’ series, we look at the EU’s powerful yet complex institutional setup
This article was first published in the January 2016 UK edition of Accounting and Business magazine.
The EU’s writ runs across 28 countries and affects over 500 million people. Yet despite the its undoubted power and influence, the EU’s controlling institutions are poorly understood by the general public – and by many professionals for that matter. When it comes to transparency, the EU is often its own worst enemy.
Designed to reconcile the interests of national governments and citizens in a culturally, legally and socially complex continent, the EU has grown organically and luxuriantly, sprouting agencies, committees and tribunals along the way. Without cathartic elections triggering abrupt changes of power, the EU has never had a deep-cleanse – no powerful figure or party has scrapped institutions that may have outlived their usefulness. However, plenty of EU institutions are still relevant and important. This article looks at some of particular interest to accountants and auditors.
The European Court of Auditors is the Luxembourg-based financial watchdog that audits the EU budget and spending, and advises the European Parliament on whether to accept accounts as being right and proper. It has not always done so – indeed, it has regularly refused to give EU accounts as a whole a clean bill of health. Sometimes the court homes in on specific bodies – for instance, criticisms of the European Medicines Agency accounts in 2010 led the parliament to postpone approval until it had received reassurances about reforms to financial controls. The court also regularly releases detailed analysis on specific EU programmes and policies, assessing their cost-effectiveness and financial controls.
The European Parliament’s committee on budgetary control is the key body that reviews the Court of Auditors’ advice and decides whether members of the European Parliament (MEPs) should approve EU accounts. The committee has been critical of EU accounting procedures in the past and has prompted the full parliament to refuse to accept the EU accounts every year since 2009. Most recently, it asked MEPs to refuse to accept the 2013 budget because the European Commission had not supplied the documents it had requested. The committee stages workshops, studies and debates with the goal of improving accounting transparency within the EU. And it makes recommendations on improving good financial practice for all EU institutions, including the parliament itself.
The European Commission’s directorate-general for budget is the branch of the EU executive responsible for preparing, managing and recording the budgets and spending. It has around 500 staff and prepares annual and multi-annual budgets – the EU plans medium-term spending over seven years. It reports on budget implementation, manages the European Commission’s treasury, operates financial IT, prepares the annual accounts and handles budget discharge liaison. It manages income as well as expenditure – notably, making sure that the EU receives dedicated ‘own resources’, such as import duties, from member states.
The EU’s anti-fraud office is known by its French acronym OLAF – L’Office Européen de Lutte Antifraude. OLAF is organisationally part of the European Commission but operationally independent and investigates fraud in any institution of the EU, including agencies. Its inquiry reports can lead to internal disciplinary proceedings, and loss of contracts and jobs. In extreme cases, OLAF refers cases to national prosecutors to launch criminal proceedings. OLAF often responds to whistleblowers and has a code of conduct for alerting suspects to inquiries.
The Economic and Financial Affairs Council (Ecofin) is the EU’s key decision-making body for financial legislation; it is made up of representatives of the EU member states, who vote on the European Commission’s proposals. It is responsible for economic policy, tax matters, financial markets, capital movements, and economic relations with non-EU countries. It prepares the EU’s annual budget and controls the regulations for the EU’s single currency, the euro. Ecofin does not really exist constitutionally, being merely a meeting of the EU Council of Ministers when financial and economic matters are under discussion. But when an Ecofin meeting is held, it is the EU’s finance ministers who usually participate, underlining its power and importance.
Financial reporting standards
The European Financial Reporting Advisory Group (EFRAG) is charged with helping develop International Financial Reporting Standards (IFRS) to reflect European interests and views. Ultimately this smoothes the passage of IFRS into EU accounting legislation – an essential process since 2005, when IFRS became mandatory for EU-listed entities. EFRAG provides the European Commission with technical advice on whether a new IFRS can be endorsed.
The International Accounting Standards Board (IASB) is not part of the EU institutional line-up. But because EU legislation refers to IFRS and insists that the standards are used by a large number of companies for their accounts, it has been effectively co-opted into the EU system. After being vetted by EFRAG, a new IFRS is passed to the European Commission, which consults with the European Parliament, the EU Council of Ministers and the EU’s accounting regulatory committee (ARC) before issuing a regulation, writing a new IFRS into EU accounting legislation.
The decision-making system for approving EU laws can be Byzantine in complexity, reflecting the difficulty of reconciling the interests of 28 member states and eight political groups in the parliament, as well as promoting unity within the union.
Most EU primary legislation goes through the ‘ordinary’ procedure: the European Commission proposes a regulation or directive, which must be approved by both the Council of Ministers (representing member states) and the European Parliament (representing electors). This procedure is followed for EU accounting law legislation, for instance. However, for a limited range of policy areas – including taxation – the parliament has only a consultative role. The decisions here are made by the council alone; and for taxation policies, unanimity is required.
Because of the difficulty of securing unanimity between 28 member states, an ‘enhanced cooperation’ procedure allows a minimum of nine to agree a rule; it has the status of EU legislation and can be enforced, but only in participating member states. An example is the proposed EU financial transaction tax, which has been resisted by the UK but will apply in France and Germany.
Sometimes, primary legislation allows the European Commission to pass its own secondary regulations – such as making a new IFRS compulsory for EU-listed companies.
Keith Nuthall, journalist
"The Economic and Financial Affairs Council is the EU’s key decision-making body for financial legislation"